The rationality of human beings when it comes to making decisions on economic matters is a highly controversial issue. Over the past decades it has been believed that markets are rational entities and that they will regulate themselves in an efficient way. However, the economic crises that people have faced during some of the years, and especially the most recent economic crisis of 2008, has led to some opposing and new ideas of the way the markets are organized. In the documentary “Mind over Money” the argument is that when it comes to making decisions about money-related issues humans are largely guided by their emotions rather than rationality. While there may be not enough scientifically proved evidence yet for this view, the events that are happening in real life illustrate that behavioral sciences’ arguments have some very strong points.
The whole idea that people go through the rigorous calculating process in order to determine how much they should or shouldn’t pay for something sounds like an extract from a comedy. Of course, the rational school of economists does not say that is what actually happens. They argue that humans make financial decisions as if they are doing these calculations. Still, this argument can hardly hold because even reflecting back on one’s own actions there may be many instances when people paid a particular amount of money for a certain good just because it felt good or because the consultant was rather nice.
Looking at the situation with the housing process that developed during couple of years up to 2006 it is unbelievable how people could believe that this trend will persist. Logically speaking, it is inevitable that the process will drop eventually and there will be no eternal rise of them. The question that is begging to be asked is why would a rational human being take a serious amount of risk knowing that the benefits it presents at the moment can end at any second? Surely, this kind of behavior cannot be legitimately explained by the rational economic scientists. The reality is that in the constant drive to enrich themselves and improve their financial well-being people often turn a blind eye on the logical arguments in a irrational hope that things will turn out alright.
The role of behavioral economics in the reality of today’s world should be emphasized and given voice. It is extremely important nowadays to acknowledge that there are some areas in economics that are not well-studied yet. In order to fill those white spaces it is crucial to ensure the dialogue between different disciplines. Psychology is just one example of a field that should come into close contact with economics. Behavioral economists have discovered some eye-opening notions about the way people spend money. One of the most interesting points in the documentary was the fact that the desire to receive some money triggered the part of the brain that is responsible for basic human needs like food. Furthermore, another important finding is that sadness increases the value that people assign to things. Taking into account how people often go shopping to reduce stress after having a tough day at work it explains why they buy overpriced things and regret doing it afterwards.
Analyzing all these examples and reflecting upon the personal experiences one can realize that there is, in fact, a very limited rationality in the economic and financial matters. It is not surprising that rational economists are opposed to this idea because it may lead to reduced volumes of investment and lack of trust to financial markets. If the human beings are irrational creatures than the financial markets operated by people cannot be trusted that easily. This awareness is important as it drives an average person to at least contemplate on the matter of making financial decisions.