The paradox of “rationality” — and how to make better decisions
I hate shopping malls.
I can think of nothing worse than spending hours wandering through a maze, filled with slow walkers and tantrum throwing children.
As much as I try avoiding eye contact with the gypsy mall vendors, flogging $9.99 iphone cases and fidget spinners, they always seem to lure me in.
Let’s not even begin with the chuggers..
I can’t believe people still shop at shopping malls, anyway. They must be bored and have a lot of spare time on their hands.
I am clearly not what Westfield consider their target customer.
I buy clothes once every 6 months, in the event my younger brother doesn’t have any ‘hand me ups’. I favour the local butcher and grocery store over Woolworths and Coles. I stream movies instead of venturing to the cinema. I don’t own a car. My house is furnished by St. Vinnies.
Most people label me a tight ass. I disagree.
Rather than buying what I regard as ‘doodads’, my spending habits are on the bare necessities:
In that order.
Once every, say 6 weeks, I’ll select the 4 to 5 most interesting titles on that list and order them. Although I already have piles of interesting and unread books on my bookshelf, I cannot resist temptation to procure more. There is nothing quite like receiving parcels of knowledge delivered to my office, ready to be consumed — or left for another day.
Hardcover books are the best. The timeless format which was once thought to be disrupted by its digital successor, E-books.
Although E-books are
- Lighter (intangible);
- Better for the environment; and
— I’ll still opt to buy the physical version.
Even more bizarrely, I’ll pay a premium for hardcover.
I spent close to $3,000 on books last financial year. That is a meaningful sum of money.
Many people question my spending habit.
I am often asked,
- Why hardcover books? E-books are cheaper and superior in every single facet?
- You still haven’t read all the books on your bookshelf, why are you buying more!?
- Why waste money on books, when you can borrow them at the local library — for free!
These are all valid questions. From an outsiders perspective, people consider my book spending habit irrational. Yet, in my worldview, it’s rational.
You see, I consider books more than just a source of information. I see them as an investment, an art.
“It’s not an accident that successful people read more books.” — Seth Godin
“Knowledge is power and education is the premise of progress, in every society, in every family.” — Kofi Annan
“I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business” — Warren Buffett
Empirical evidence supports that smart and successful people read books. I want to be both of those things, so I read and accumulate books. I prefer hardcover books because I actually enjoy the touch and feel of a book. They also look nice on my bookshelf.
Books are an investment in my eyes. The more I accumulate, the higher probability that I will read them, therefore the smarter I will become.
Let’s flip this argument and allow me have a stab at your spending habits:
- Why do you spend $30 on that weekly gym membership when;
i) You rarely go
ii) You don’t need a treadmill to go running?
- Why do people spend billions of dollars each year on gambling and the lottery. They are very clearly slanted so that you are at a big disadvantage.
- I can’t believe you just bought a brand new car. You know the value drops by 1/3 as soon as it hits the road. What a waste of money.
We are not robots: we are all irrational
In his award winning book “Thinking Fast and Slow”, behavioural psychologist Daniel Kahneman explores how people make decisions.
For a long time, economic theory has been built on the thesis that individuals always make prudent and logical decisions. They argued that we make choices according to utility theory, which states that when individuals make decisions, they look only at the rational facts and choose the option with the best overall outcome for them — the most utility.
For example, according to utility theory, I will always choose the book format that gives me the highest utility.
Under utility theory, it would be the Kindle version, due to the durability, lower price, lower environmental impact etc.
Yet, my decision was to purchase the more expensive and inferior hardcover version.
Wait, what? Does this make me irrational?
Kahneman argues that rather than making decisions based solely on rational considerations, people are often swayed by emotional factors.
My decision to buy a hardcover version of the book over kindle version has intangible benefits to me — i.e the feel and touch of the book itself, being able to display it on my book shelf — stroking my ego…
It’s hard to quantify this in traditional economic theory.
“Dumb decisions” are not necessarily ‘irrational’
Just because you think someone has made a dumb decision, that doesn’t make their decision irrational.
Let’s take the other example — gambling. The lottery is sometimes called a tax on the stupid. The logic behind this opinion is that the expected net gain is negative. The game is rigged — the odds will forever not be in your favour.
On the surface, it’s easy for me to say that people who buy the lottery are stupid. Why waste the money?
By only looking at the surface, we don’t allow ourselves to explore the reasons behind a decision. For example, if a lottery player’s cost is negligible to them, and the thrill of the draw provides ample enjoyment in return, there is really nothing irrational about their behaviour. In their eyes, it’s completely rational.
We all believe that we are rational.
The thing is, we think our decisions are rational.
You, me, everyone else, think our beliefs and the decisions that we make and made are rational. The lens of which we see the world is ours, and is right. It’s shaped by our culture, our upbringing, our mistakes and lessons learned in the past. We all have our own unique view of the world, which makes anything we do ours, and right.
It’s easy for us to look down on someone because of their opposing belief.
It’s even easier for us to label them as stupid or irrational because they didn’t make what we would consider the obvious or ‘rational’ choice.
In cases where we are quick to judge, we really ought to pause for a moment, and consider not what they’re doing, but why they’re doing it. Unless we know people’s preferences or their perspective, we cannot judge their rationality.
So how do you change someone’s “irrational” behaviour?
As an accountant, the financial compass for my clients, if you will, I am paid to assist my clients with providing some “rationality” (oh the irony!) to their decision making process. A different perspective.
Because I accept that their decision or strategy is ‘rational’ in their mind — this doesn’t necessitate that I accept it is the right one.
For example, if my client decided a core part of their growth strategy was to purchase lottery tickets, I would not accept that strategy is right, just because it is right in their view.
Understanding someone’s point of view does not mean you agree.
Rather than pointing out the lack of logic and questioning their ‘rationality’, we’re better off embracing their worldview, and learn how to work with this quirk instead.
Practising empathy, to see the world through that person’s lens, is half the battle. If you can understand how and where they are coming from, only then can you build the trust to show them how you see the situation.
“Seek first to understand, then to be understood” — Steven Covey.
A complete understanding of someone’s view is the necessary first step to making change.
So, before you go judge someone based on their belief system or irrational decision, ask why?
Who knows, you could be the one that is ‘irrational’.
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