The Hindu Business Line : <I>Man can be irrational </I>

Ever since the times of Adam Smith, economists have been explaining economic phenomena and propounding various theories, assuming, sometimes firmly believing, that `man is rational'. As time passed, both students of economics and scholars were puzzled to find that, quite often, actual occurrences in the economic sphere did not correspond to theoretical findings. This was due to the fact that far too many extraneous factors upset the basic assumption of `ceteris paribus' (other things remaining the same).

Interestingly, towards the end of the 20th Century, researchers found that the assumption that normally man behaves rationally, generally tending to save voluntarily, is not always true. If this were true, the periodic occurrences of "over-spending, under-saving", causing business cycles, would not happen. Behavioural economists contend that despite their best intentions, most people spend almost all of any income that comes their way. They do not rationally balance spending and saving over a lifetime. In fact, people are found indebted from youth to old age. Besides, the economy also responds to skewed reasoning, self-indulgence, self-destructive behaviour and a host of other human frailties.

The more interesting finding is the behaviour of the stock markets in that they seem to respond not to corporate reality but to the moods of investors, their herd behaviour, and reluctance to sell a falling stock. The result is that stock trading is often irrational, the investors' egos rather than ground realities determining decisions. In the recent past, even the Nobel prize has been awarded to economists who specialise in the `behavioural' area.

Perhaps there is nothing startling in these recent findings. There was the instance of the Chinese businessman who had his $85,000 Mercedes smashed (in public) within a month of its purchase, hiring five men to wreck the car. Reason? Ire against the company in refusing to deal with some defects in the vehicle! There was the other instance of a Frenchman burning his life's savings just before he attempted suicide. Quite interesting is the reason — he did not want to leave anything behind after his death! In Italy, a widow had stashed her savings of $125,000 (stuffed in plastic bags) in an abandoned grave. Why she a chose a cemetery for this is a mystery.

More recently, in Kolar, a town in Karnataka, three gunny bags of currency notes had been set ablaze near a public dustbin. They were found to be genuine. What crime was hidden could not even be guessed.

K. GOPALAN

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