A friend of mine is planning to buy the house he’s currently living in. While discussing we figured that it made more sense not to buy it right now since he can easily get a better place by waiting a couple more years. But then he mentioned something that changed everything.
He said it’s the first place he and his partner had moved in together, and therefore it has sentimental value. Well, in that case I thought it made perfect sense to buy the place.
Financially, it may not be the most rational thing to do, but sometimes, instead of being coldly rational, one has to be psychologically reasonable. Any decision that lets you sleep well at night is a good private decision, even if it isn’t the most rational one.
A private decision is something that affects only you (primarily). For example, if you want to experiment with food this evening—knowing very well that it may end up ruining dinner for you—it’s okay to go ahead if you are alone. You may end up consuming what you cook (if its edible) or order from outside. Either way, you’ll be the only person to face the consequences. It would be considered a private decision even if more than one people—say you and your partner—are in it together, as long as neither of you are compromising for the other.
A public decision, on the other hand, affects others as well—who don’t take part in the decision-making process. For example, if you have invited your friends over for dinner, it may not be a great idea to experiment with food tonight. If it doesn’t go well, it would ruin dinner not only for you, but for your friends as well. Not the best way to treat guests in my opinion!
But as much as we would like to believe it, we don’t make decisions on a spreadsheet. Therefore, even though it makes a lot of sense, it’s hard to be rational all the time.
For example, I’m somebody who is extremely wary of taking loans. If I ever buy a house, I would prefer it without any loan. I am just not comfortable with the idea of monthly payments. Eliminating it would make me feel more independent. Any rational advisor would recommend getting a cheap loan and investing extra savings in assets that would generate better returns, such as stocks. But since it’s a private decision, I would prefer my psychological independence over any sort of maths.
On paper, it’s defenceless, but it works for me. I like it, and that’s what matters. Good private decisions aren’t always rational, but they let you sleep peacefully. At some point you have to choose being happy over being correct. That, however, doesn’t mean that I would use all my savings to get a house just because I want to avoid a loan. That would be foolish. Being reasonable doesn’t mean being irrational.
But not all decisions are private. The case flips when other people come into the picture. For example, if I’m running a business, all my employees will be affected by my decisions. If I’m running a hedge fund, my clients’ money will be affected by my decisions. If being reasonable would help me sleep well at night but keep others awake, it would be irresponsible to optimise my psychological comfort over others’. When making public decisions, being coldly rational is the way only way forward.
For example, a financial advisor cannot let their own financial history get in the way of suggesting a financial plan to a client. The leader of a country cannot let their private views get in the way of doing what’s good for the nation. A lawman cannot let their personal biases affect how they judge criminals.
Doing this, giving your personal preferences more importance over public good while making a public decision, is equivalent to asking others to pay for your sins. Nassim Nicholas Taleb calls this transfer of fragility, and there aren’t many vices more dishonourable than this. While ruining dinner for friends may not be the same as not hiring a good candidate because of their gender, race, or ethnicity—they have similar roots.
Having said that, reasonable decision and rational decisions aren’t mutually exclusive. Most of our day-to-day decisions—both private and public—would be both reasonable and rational at the same time. For example, you can keep Saturdays for food experiments so that you don’t end up ruining every day’s meal. And if you want to avoid having meetings in your business, you can create a work culture that revolves around async communication.
One advantage of being reasonable is that you are emotionally invested in your private decisions. Even if things go south, you are emotionally invested enough not to get completely derailed. But human beings aren’t perfect. Now and then we’ll come at a crossroads where we would have to choose. If it’s a private decision, it’s okay to be more reasonable and less rational as long as you aren’t being irrational. If it’s a public decision, it’s okay to be reasonable as long as you are not being irresponsible. Otherwise, being rational is the only way forward. Because with great responsibility, comes cold rationality.