Essay: Irrational Decision Making by Human Beings

Sample Essay

The article critically evaluates these four themes and points out several flaws in these themes such as lack of proof and detailed explanation in the first model, irrational decision making by human beings even after training as suggested in the second model and importance and relevance of emotions in decision making as opposed to the third model. Olsen also explains that several researches have shown that people make decisions based on what a particular group or society as a whole perceives. This phenomenon is seen in financial markets where people usually tend to follow the crowd whether the crowd makes rational or irrational decisions. The writer presents this notion in criticism of the last traditional financial model which explains that decisions are based on personal gains.

The article compares traditionalist and behavioral views regarding other models and themes. Traditionalists regard financial risk as the variances in returns and investment whereas behavioral finance suggests that financial risk is a human perception based on several characteristics and decisions are made based on two processes. Another theme discussed in the article is the phenomenon of herding and crowd following. Traditionalists suggest that following a certain group and making decisions based on decisions made by a reference group is rational. Behavioral finance practitioners on the other hand suggest that herding and crowd following is based on a much larger theme rather than decision making.

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