Rational Expectation, Irrational Decision Making

Today is the first day of school (for primary and secondary level) in my country. We just had a long year end break of about 6 weeks. (yes we have winter break which is different than western countries where they have summer break)

Education...... can it really help us? Can they guide us towards a rational person?

Well......

In Economics, agents are assumed to be rational. We choose the alternative that are best for us and this whole concept were discussed in Wealth of Nations. (rational self interest)

Rational expectation gains its popularity in recent years with the monetarism (chicago school). It is an economics theory which states that economic agents (consumers, firms, government and international sector) predictions of the future value of economically relevant variables, is not systematically wrong in that all errors are random. In other word, it means that agents in economy will use all information to select the best choices and the outcome will be more significant in the future.

However, as far as I can see, the world is encountering a phenomenon i like to call "irrational decision making". Economic agents just do not select the best alternative based on available information. In other words, yes, they are selecting the alternative that they think is the best, but they are irrational to consider all the important information.

To demonstrate my point clearly, I will use 2 examples:

1. Most US consumers buy many unnecessary goods for Christmas as present. Although some of the goods are at discounted price (some are not), is that rational consumption? Do they rationally expect how they gonna finance it? How much marginal utility can they achieve?

2. The problem of ignoring opportunity cost. Most consumers think that buying house(s) is one of the best investment. According to them, price of houses will be higher in the long run because of inflation and problems with unlimited demand and scarce supply. However, in that circumstances, price of any goods will increase as well. Price of commodities such as food and energy will rise higher. (I already demonstrate renting is better than buying for house in my past post)

Furthermore, most of us are spending future expected income without consider the risk involved ie. higher interest, unemployment, decrease of future income etc. As a result, they get into debt and fall into the hands of lender(s).

The only way education can help us is when we become a rational person in decision making process. Otherwise it will be like winning lottery the day after we died, it means nothing.