Rationality and Irrationality in Markets

Rationality in markets refers to participants making decisions based on logical analysis, full information, and objective evaluation to maximize their benefits. Irrationality occurs when decisions are influenced by emotions, biases, or incomplete information, leading to choices that might not maximize value. While rational behaviors help markets function efficiently, irrational behaviors—such as panic selling or herd mentality—can cause distortions, bubbles, or crashes. Understanding this contrast helps explain how markets operate smoothly at times and become volatile or unpredictable at others.