Are You Rational When It Comes to Money?

I just read a great blog post by Ben Hayden on Psychology Today. I tried leaving a comment but was enable to due to website difficulties. Instead I’ve reprinted the post here with my comment below. Click on the article title below to go to the original blog post on Psychology Today…

The Decision Tree

Decision-making from all perspectives.

by Ben Hayden, Ph.D., is an Assistant Professor of Brain and Cognitive Sciences at the University of Rochester.

Are you rational?

What do economists mean by rational and irrational?

Published on June 26, 2011 by Ben Y. Hayden, Ph.D. in The Decision Tree

My last post raised a lot of questions about rationality. Rather than reply to them individually, I decided to devote this column to the topic.

I talk to the public a lot about economic discoveries that violate assumptions of rationality. And one thing that always surprises me is just how pleased people are to hear about these violations of rationality. Gleeful even. Relieved to not be the only dummy out there.

It’s surprising that people are so excited because, when it comes to economics, violations of rationality are pretty darn recondite.

An economically rational individual is someone whose preferences obey certain formal rules that insulate them from economists’ bugbear: intransitive preferences. Intransitive preferences means I prefer an apple to an orange, an orange to a pear, and a pear to an apple. This pattern of preferences is distressing to economists because some opportunistic evildoer could come along and offer to trade me an apple for my orange plus a small fee, and then offer me a pear for that same apple plus an additional fee, and then offer me an orange for the pear plus another small fee. Then that evildoer winds up with a free lunch from me. And there’s nothing economists hate more than a free lunch. (Economists would say that this evildoer has turned me into a ‘money pump’).

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But the real reason this bothers economists goes much deeper than their annoying perennial reminders about free lunches. In the early 20th century, economics struggled to establish itself as a formal and rigorous science. Economists craved respect. (Anyone who has heard economics called the dismal science knows it’s been an uphill battle). Many brilliant economists built the field a solid foundation that was axiomatic – based on a few simple and obvious rules – the same way Euclid did with geometry and Peano did with arithmetic. And to make these axioms, economists had to come up with an economist’s equivalent of mathematically true and false. And they chose the terms rational and irrational.

Aristotle and Plato

Aristotle and Plato Discussing Reason and Emotion

These words were not intended to describe what people do. Humans are not robots; most (but not all) economists know that. Even if we were, our brains are finite. We have to take mental shortcuts. We are approximately rational and even that only sometimes. We economic psychologists love the phase ‘bounded rationality’.

Economics 101 is one of the most popular undergraduate courses in the United States, and it often gives rationality a central place. But we all have money anxieties, so we are predisposed to hear personal judgment coming from our economics professors. Every year, a new crop of students thinks their teachers are criticizing them about how they manage their personal finances.

But that’s not it at all.

Violations of rationality are nothing to be ashamed of. They are like optical illusions in vision: they are universal and they provide clues to how the visual system works. We study irrationality because it gives us essential clues to help us learn how the brain makes economic decisions. And we do that because it leads us to solutions for the real irrationalities: depression, addiction, schizophrenia, and so on.

Invite your local economists to the bar, buy them a round of beer and ask them about it. They’ll admit (in my experience, cheerfully) that when they go to the store, they make the exact same mistakes as the rest of us do. Because we are all human. We are all irrational.



Dear Ben:

Thanks for the insightful blog post! I have this difficulty with clients frequently – they want to believe the illusion that they are primarily, if not solely, rational individuals. This would be great if it were so, but as you point out, it’s not the case. And I find individuals vary on a spectrum as to how much of the time they spend being rational vs. emotional. My challenge, for years, has been to decipher how to become aware of and train the emotional mind.


Different emotions can increase or decrease our rationality, reasoning and focus. Anger, for example, makes us more focused and rational – to a point. Think of anger on a 1 through 10 scale with 1 being calm and 10 be enraged.  Anger can  be useful below a 5. Once you go above a 5, the emotional mind is in charge, rationality goes out the window and we become atavistic and primal.


Thank you for pointing out our ubiquitous illusion of rationality.

Best regards,

John L. Schinnerer, Ph.D.

Founder Guide to Self

Award-winning author, blogger and anger management coach

For a free copy of John’s award-winning book on reason and emotion, visit, click on the yellow book icon and enter your name and email.

Author: Dr. John Schinnerer

John Schinnerer, Ph.D. is a U.C. Berkeley-trained executive coach and founder of Guide To Self, a company that focuses on coaching high performing individuals to their potential using strengths-based development and positive psychology (the science of optimal human functioning). He consulted on Pixar's Academy Award-winning movie Inside Out. He was featured in the documentary Skewed. He was recently cited in US News and World Report on anger management. His private practice is located at 913 San Ramon Valley Blvd. #280, Danville, CA 94526. He may be reached at John Most recently, Dr. John hosted Guide To Self Radio, a daily prime time radio show, in the San Francisco Bay Area. He graduated summa cum laude from U.C. Berkeley with a Ph.D. in psychology. Dr. John has been a coach and psychologist for over 10 years. Dr. John’s areas of expertise range from positive psychology, to emotional awareness, to moral development to parenting. He is a noted writer and speaker on topics such as employee engagement, emotional intelligence, making a good brain great, and creating a healthy and efficient workplace. His award-winning book is on proven ways to lead a meaningful and happy life and is entitled, “Guide To Self: The Beginner’s Guide To Managing Emotion and Thought.” He has written articles on corporate ethics and EQ in the workplace for Workspan magazine,, and Business Ethics. He has given numerous presentations and consulted with tens of thousands of people for organizations such as Kaiser Permanente, Pixar, Sutter Health, SHRM, NCHRA, KNEW and KDIA. For over 17 years, Dr. John has been a loving father to four children.