Definition
Economic irrationalism refers to the departure from rational decision-making in economic behaviour. While classical economic theory assumes that individuals are rational, real-world evidence shows that people often make decisions that do not maximize utility and can lead to market failure and personal issues such as addiction and poor health
Case in point.
Two neighbours live side by side in a semi-detached house and are locked in a dispute over the front dividing fence. The Magistrate orders a mediation.
There is no dispute over that there is to be a new dividing fence or its position. It is just the mundane matters of height, type (materials) and who pays. The Council regulations stipulate you need a building permit for any front dividing fence over 1.5 meters.
This is where the concept of economic irrationalism arises.
Our client puts forward a simple A/B option
Option A – Our client prefers a superior fence, 1.5m high, with square cypress pickets, and small gaps. It is what she wants. Cost $2200
Option B – Standard paling fence, 1.8m high, overlapping palings (hardwood). Cost $1300 + $2,000 for a building surveyor to grant the permit for the 1.8m high fence being higher than the allowed 1.5m
Our offer
Option A – we pay the difference for the superior fence. Cost to neighbour $650. Our client pays $650 plus the difference of $900
Option B – we pay 50% and the neighbour pays 50% + the cost of the building surveyor of $2,000. Cost to neighbour $2,650
The economic rationalist would tell you the neighbour would accept Option A, choosing the “superior fence” and only pay $650. Why choose Option B and pay $2,650?
Answer. Because the neighbour is not an economic rationalist. She has broader issues I need not go into, but you can infer why or reach your own conclusions.
