Rational Behaviour

A significant part of classical economic theory, holding that people active in a market will act as ‘rational maximisers’; that is, they seek the best return on their commitment of investment or resources; and that a market will in the end always self-correct its prices logically to reflect the balance of supply and demand. Unfortunately for this theory, it is disproved by (among other things) the repeated events of market bubbles and crashes, as in 2008; by human altruism; and by “affect” (as shown by behavioural science, the way that our decisions are more often driven by emotional cues, such as loyalty or discomfort, than by rational analysis).