The Hindu Business Line : Choice irrationality

Consider this. My friend earns Rs 1.5 lakh per month with a total annual income of Rs 20 lakh including other benefits. One of his company’s clients wants him to work at their office in Europe for four months. He has been promised an income of Rs 10 lakh in lieu of his existing salary. Should he grab the offer? My friend passed it off. Why? Based on his current salary, he will earn Rs 6 lakh in four months. He has been offered Rs 10 lakh, two-thirds more than his current earnings. Classical economics tells us that he should accept the offer, as it increases his total wealth.

So, why then did he reject the offer? Classical economics assumes that all human beings are rational. That is, given a chance, all of us will strive to maximise our well-being. But that is not true in the behavioural world.

Against principle of fairness

Here is how my friend evaluated the proposal. A person of his skill-set can earn Rs 15 lakh for a four-month period in that country. The company offered him 50 per cent less. That went against the principle of fairness. So, he rejected the offer. Classical economists may scoff at his decision. Behavioural psychologists term this behaviour “choice irrationality”.

The same principle works elsewhere too — in factory strikes and job appraisals. Suppose your annual appraisal has just finished and you expect an increment of Rs 25,000. Your boss in a surprisingly generous mood gives you Rs 40,000. You are obviously ecstatic, till you find out that your colleague received Rs 60,000! How will you react? At the extreme, you may quit your job and join another company, perhaps, for a lower salary. Why? You feel that your boss was unfair in paying you less. Your “irrational” choice leaves you worse off. But that is a price you pay to deal with the unfair treatment.

“Choice irrationality” then shows that my friend’s reaction was normal indeed. Would you have reacted the same way?

(The author is a self-styled investment psychologist. He can be reached at enhancek@gmail.com)

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