I just read a Times article discussing the rational theory in economics.I found it mentioned an interesting point that I want to share in this blog.

“The Myth Of the Rational Market” Time, June 22, 2008, pg.44-46

I, as other Hong Kong high school students who studied economics, was educated to believe that as long as people act rationally, our society will progress, and the accumulated wealth will increase and finally the standard of living will rise as a result. Human beings are assumed to be rational. Irrational people will suffer from losses caused by their irrational decision and will be kicked out of the race (shut down business). This “System of Rationality” is exactly one of the selling points of Market economy. A Free Market is an excellent place to provideĀ  an environment for the “System of Rationality” to work. That’s makes marketplace a pillar of capitalism and centuries of prosperity.

The top scholars and experts like Fisher, Friedman believe in the rational theory. We taught our future elites in colleges and high school the very same theory till today. CEOs and other high executives in companies are suppose to be chosen for being the most rational people in the company. Yet the recent financial disaster disprove the theory. What happened?

The problem is the word ‘rational’. Being rational means that one must analyze an event 100% logically and mathematically, without being influenced by emotions. If all businessmen made their decisions without being affected by their personal grudge, gut feelings or emotions, then they can be considered as rational. But is it possible for a human to be perfectly rational as a robot or computer did? Human are fundamentally made up of emotions and rationality. It was always a balance between the 2 sides. Our strength in rationality confirmed our superiority against the other species. Yet are our rationality strong enough to make sure we won’t be affected by emotions and made bad decisions? We can control the rational part of the nature, but how about the random part, like luck, fate and destiny? Not only it is impossible for us to be totally rational, even we do, we still have to subject ourselves to the judgment of the nature.

Will this major crack in the fundemental pillar of economic rationality forever changed our opinion in value and vaildity of the discipline of Economics?