What’s better- commonsense or being rational?
My wife looks upon me as a more “rational being” than having “commonsense”. I have very few instances in last 15 years of our relationship to prove that I am also a “being with commonsense”. Is it possible to have both traits? If both traits exist in humans (usual assumption for social science subjects like psychology etc.) when are they used? Finally, which is better to have?
“Humans being rational” is a fundamental premise of portfolio management theories. Investors are assumed to make investment choice (preferring one firm/sector over the other), post an objective evaluation of their risk-taking capacity, fundamentals of sector being considered, market potential of target firm/sectors, expected investment horizon (years before withdrawing), historical performance on bourses, valuation etc. etc. Will they ever arrive at a decision if they have to consider so much.
So called fund managers and quant analysts have used advanced modeling techniques from mathematics, physics, biology to have forecasting models that throw-up some regressional equations, the coeffecients of which clearly determine the quantum of each of the decision-making variable. So our consultants approach us (of course a disclaimer in font size of 2 below every research recommendation) with a set of firms/avenues to consider post robbing us of all our private information.
Despite all this, trends in security prices reflects nothing more than outcome of significant amount of “irrationality” on part of investors. Behavioral finance has emerged as a new offshoot of social science premised on the rationale of “humans not being rational- atleast not always”. So what defines “rationality” and “commonsense”?
Rationality or being rational entails using logic/reason backed by use of all factual information available at that instant of time when the decision is being made. The outcome/decison taken explicitly lists out the perceptions/beliefs etc. in form of assumptions. “Commonsense” on the other hand is better understood as “exhibiting native good judgement”. As per me the element of reasonablness adorns “commonsense”. Few instances- Wife tells you to be home by a reasonable time, girfriend expects a gift almost everyday you meet, boss expects you to atleast wish him good morning on messenger, it’s commonsense for men to give extra attention/courtesies/preferences to women.
Can we reflect upon some real life instances that clearly let us know when to be rational and when to use commonsense? Agreeing to recommendations of your fund manager/consultant on considering a particular set of firms/sectors for investment may be commonsense since this saves you the effor to be rational. But them missing out the “disclaimer” is what?- “lacking in commonsense” or “paying for not being rational”.
Deciding on an appropriate mix of “rationality” and “commonsense” calls-in for rationality. My personal experience suggests that appropriate mix of rational-commonsense is an inherent component of “art of communication”. Just like the concept of parent-child ego, you need not be “rational” when people are interpreting it using their “commonsense”.
So what’s better having commonsense or being rational? When did I commit on answering this, have some commonsense.
Responses to the poll at http://polls.linkedin.com/p/75743/gjrbs will be highly appreciated.