This question, “Are People Rational?” is highly debated among economist.

Of course, the generally accepted economic theory is based on agreeing that, Yes: Economic agents act in a logical way.

This flies in the face of the way many markets trade though.

We see so many companies and so many investors make such stupid decisions that it’s easy to disagree and think that, No: Economic agents are irrational all the time.

Now I am no economic genius, but I have studied it quite a bit.

I think it’s a bit of both.

I think that people and firms are rational, based on the information they have at that time.

Obviously, not all of us have the same information. Some of us can even have bad information. And even if we did, that information can change over time.

Like so many other decisions, I think that most of the time, people’s decisions only look irrational after the fact.

Or maybe their proprieties are simply different than yours are?

I’ve found that people—all of them, regardless of time or place, religion or culture, wealth, poverty, or anything else—are rational. To be rational, as I see it, means simply to pursue your goals as best you can given your limitations and the limitations of your environment. In this form at least, the claim that people are rational isn’t one that most will find hard to accept. Yet the immediate and certain implication is that people don’t do senseless things. One of this tour’s purposes is to show you that what seems like senseless behavior actually makes sense, and thus what seems like irrationality is actually rational. Weird social institutions strike you as weird because you’re unfamiliar with the constraints that the people who developed them confront.

-Peter Leeson, WTF?! An Economic Tour Of The Weird