The (Ir)rational Actor

Traditional economic theorists have assumed that people are rational actors; we undertake choices and activities that will be in our best, most rationally logical interest. Every time. (Queue laugh track.) Having just finished eating the whole (family size) bag of nacho cheese Doritos, and reading the reality told to me by my stomach ache, we can now agree that the decision to do so was not a rational one based in my best interest. Yet, we often judge ourselves and others for not making the most rational of decisions. This needs to stop. Judging leads to blame and shame and that does nothing to help make better decisions in the future. Rather, seeing what is at play can help us better navigate the choices that face us.

Four years into our marriage, my wife and I bought our first car together – a new car. We didn’t know much about buying cars. However, her father had bought a hybrid Toyota Camry, and we liked that it got great gas mileage, was of the few eco-friendly options available at the time, and being mindful of the environment was important to us too. So we bought it. And then we regretted it. And then over time, we came to accept it. The actual purchase process with the man behind the desk felt icky. He tried to make us pay extra for the floor mats (Seriously?! $27,000 and it doesn’t come with floor mats? When the car arrived a few days later, the mats were also delivered and he “generously” gave them to us for free.) and he kept us strung along for a much longer time than we had allotted (“Just one more thing, and you’re done!”, he says, fifteen things later).

So we first got hit by the emotional feeling of the process. It turns out that finishing a meeting, appointment, or process on an emotionally bad note leaves you with a much worse memory of the experience, than if that bad part was simply earlier in the process and the end was on a good note. We got taken for a ride (pun intended), and now, if we’re to reframe the experience and distill whatever learning we can from it, we’re all the wiser to the antics of car salesmen. Even the most “rational” of us can be unhinged easily by a few swift strokes against our unconscious psychology. We may know it’s happening or we may not. At worst, we’re taken advantage of by a con artist. But many marketers and advertisers also take advantage of our subconscious biases and inclinations. It’s a case of either we are driven by our unconscious, or lead along by someone else tapping our subconscious. (If you want more information on persuasion and sales psychology, see the work of Robert Cialdini. Or just go back to Aesop’s fables and read about how vanity was the downfall of the crow.) So, becoming aware of how influence is around us and being applied to us helps (if never fully inoculating us) to make better decisions, guided by our principles.

The other part of the issue for us was due to our lack of knowledge about the car. It turns out that the large battery took up two-thirds of what would have been the trunk space, limiting how much baby gear we could haul, as our first child was born shortly after purchasing the car. I can’t remember if we actually looked to compare trunk space, but our knowledge was based upon what we knew of how much we packed for vacations as two low-maintenance adults. It took time, but we both came to a place where we stopped regretting the decision. We learned to accept that we made the best decision we could, given the amount of information we knew at the time. Going easy on ourselves felt a lot better than beating ourselves up for what we didn’t know… like just how much gear it takes to travel with an infant. By the time the pack-n-play, highchair, 24 changes of onesies, bottles, diapers, board books and everything else for our daughter was packed in, my wife and I had room for the clothes on our backs and maybe a deck of cards. (Hint: Have your in-laws buy a pack-n-play to just keep at their place so you’re not lugging it.)

So, accepting that you’re not a rational actor, what’s to be done? At a minimum, you can make conscious choices, doing enough background search before hand, so you’re clear about what you want and why. Comparison shop and get second opinions and quotes. But also know the value of your time. If left unchecked, you can drown in paralysis by analysis. Leave all forms of payment at home during the search stage. The deal that “won’t last” can almost always be extended or found elsewhere. When it comes to defending yourself against the marketing and sales tricks, it’s better to just go on the offensive, since you’ll never be able to defend against it all.

But at a deeper level, this is where clarity around your values and principles again come into play. The neat thing I love about principled decision-making is that, whereas specific rules can only tell you what to do in a specific situation, principles can guide in a wide range of applications – such as paying in cash for all but a mortgage. Once you have your principles sufficiently clear, you can consciously set up habits that support those principles (thus, saving regularly for the future car), eliminating many of the smaller daily decisions along the way. (Ray Dalio’s book Principles is invaluable on this topic, and the free app version contains the whole book.) We’ll explore more of how to go about this in Part 2.

This book is a work in progress and we’ll all benefit from your input and collaboration. In the “Leave a Reply” below, please post examples, comments, questions, and needed edits. By posting, you grant permission for inclusion of any content to become part of the book, now or in the future, in whatever form it may take. I’ll give attributions to the extent possible. I know sharing about our financial lives can be sensitive, so if you want to share anonymously, please use the contact form instead and I’ll honor your request.

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