Irrational People
William Bonner and Lila Rajiva 10.25.07, 6:00 PM ET

Bill Bonner and Lila Rajiva

No prejudices are more dangerous than those you didn’t know you had. And no one is more likely to crash into them than one who believes he is impartially examining the facts. That is the trouble with theories about man that assume he is a rational decision maker. All the evidence we have points to the contrary.

What rational commuter, for instance, would buy a Hummer? People buy them not to get somewhere but to tell others that they have already arrived. And what reasonable man would waste his time going to the polls? The rate of return is so uncertain and so remote, he would do better buying a lottery ticket.

But even otherwise insightful writers make the mistake of assuming that when people make choices, they either make rational choices or honest mistakes. Malcolm Gladwell’s best-selling book, Blink, for example, observes that rapid cognition–instinctive reaction without prolonged deliberation behind it–is often the best way to make decisions. He cites approvingly a group of art experts who were able to tell at a glance that a Greek statue was a forgery.

But there are other instances when the results of rapid cognition don’t meet his approval. While only 3.9% of adult men in America are over 6’2″, almost a third of all American CEOs are 6’2″ or taller.

There must be some mistake, says Gladwell. People ought not to pick tall men to lead companies simply because they are tall. In response, we ask, why shouldn’t they? People who choose tall mediocre CEOs over short extraordinary ones may actually be expressing a real preference, even if they explain it away later as a bias. The preference may be rooted in genetic drives that find tall males inherently more likely to dominate and succeed in the reproductive game. Or people might have an aesthetic preference for an imposing appearance. Or they might intuitively feel tall leaders might be better at gathering followers. This might be what people really want, and not a CEO who can increase company profits.

Gladwell himself recognizes this when he notes that in speed-dating the kind of men women actually pick is very different from the kind they say they want. Yet, then he goes on to find decisions based on such hidden emotions and preferences unacceptable in certain cases–say picking a CEO or a member of a symphony orchestra–because they don’t accord with his idea of how these decisions should be made.

The same bias afflicts research into economic decision-making.

In 2005, Princeton Professor Daniel Kahneman conducted an experiment comparing the performance of people with a kind of brain damage that inhibited their emotions to the performance of “normal” people at guessing the results of coin flips. Those with “normal” brain function lost their shirts. Their emotions made them make mistakes, said the researchers.

This August, researchers at the university of Maryland studied stock traders and came to the opposite conclusion. Hot heads who experienced greater emotional intensity when faced with their decisions turned in better performances. Emotions helped them maximize returns. Score one for Jim Cramer.

What is more telling than the contrary results of the experiments is that, in both cases, researchers assumed that the participants were simply trying to maximize their returns. It is true that many may have thought they were doing so. But their actions betrayed other motives, such as, a desire to play it safe, or to have fun.

If human beings only did things out of economic self-interest, then buying stocks when prices are high or investing in subprime mortgages would be mistakes. But if investors, like everyone else, are expressing other, more complex and subtle motives, then their bad economic decisions might be bringing them other rewards. They might want the security of being part of a crowd. They might want to feel smart, or cool. They might invest to make money. Or not to lose it. To make a point. Or to make a better world.

Yes, “good leaders” probably do come in any size. But it may not be a “good leader” (whatever that is) that people are looking for when they pick CEOs or Presidents.

As it is not necessarily economic self-interest that men are pursuing when they enter the investment markets.

William Bonner and Lila Rajiva are the authors of Mobs, Messiahs and Markets .