CHICAGO — In all of the animal kingdom, only we humans have the ability to employ reasoning in a way that allows us to reach rational decisions. Why is it, then, that we seem to misuse that ability so often, especially in important areas such as money matters?
In coining the phrase “irrational exuberance” more than 15 years ago, former Federal Reserve Board Chairman Alan Greenspan was thought to be warning us that the stock market was irrationally overvalued. As it turns out, his comment may have presaged a new field of study called behavioral economics—a new science that makes an effort to determine why supposedly rational humans make so many irrational decisions.
When it comes to how we handle our money, there’s no shortage of irrational decisions. Consider the person who drives five miles to save three cents per gallon of gasoline, or the investor who consistently buys stocks at their highs and then panics when the market goes down and sells them at their lows.