Irrational Behavior: The “New” Normal
By: Jonathan M. Lamb. Jonathan M. Lamb is an Economist, Consultant, and Entrepreneur that resides in the Research Triangle of North Carolina.
One of the reasons that I did not fit well into my PhD program when I was working on my Econ degree is that Economists have lots of great, wonderful, insightful laws, theories and tools, but Economists seem to forget one thing…people and markets are irrational. So what does it mean to be irrational?…illogical, unreasonable, foolish, crazy, ridiculous, absurd, and silly just to name a few. Does that about sum up what you know about people and the behavior of our markets? Economists and pundits seem to forget, or at least discount this very important trait…people behave irrationally.
Sunday afternoon my wife was helping with my oldest son count out 100 marshmallows for a kindergarten project when Braskey, our 11 year old Pug, got up on the counter and ate an entire bag of marshmallows, plastic wrapper and all. On my way home from a meeting I make a detour to stop at the grocery to replace the marshmallows. When I got there I could barely navigate through the chaos at the store.
You see I am from the Mid-West and one thing that I will never fully understand about Southerners is the irrational behavior when the words “snow” and “ice” are worked into a 7 day weather forecast. The shelves at the grocery were bare, and the lines were long in anticipation for the 1-3 inches of snow that was forecasted to fall on Monday in the Raleigh area. I got my bag of marshmallows and waited behind a guy in the “express” checkout line. He had 7 items that he was buying…6 bottles of wine and a snow shovel. What can I say, but I love the South!
We ended up getting a bit of ice and some snow that did not even cover the grass, but everything, and I mean everything in and around Raleigh and Durham was closed on Tuesday, and remained closed on Wednesday, and if the hysteria holds up it could be July before people get back to ”normal.”
The same is true in our markets. What is normal? I hear all the time from business owners, workers, and investors since the recession, about getting back to normal. What is normal? This is normal. Normal is not being normal, how is that from a deep, insightful economist?
To get back to my point, people and markets do not act like they are “supposed” to. The guy beside you at the Black Jack table will always hit on 18 and take your face card. Until we as Economists realize that people and markets do not behave like we want them then we will have to continue to accept irrationality as normal.