In economics, it has traditionally been considered that people and companies make rational decisions, that is, that a decision-maker, having all the available information and knowing all the available options, will always choose the option that maximizes its utility, which in the financial field would mean affirming that the rational decision-maker will always choose the option that brings the greatest gain or the least cost.
However, in practice this is not always the case, due, among other factors, to the cognitive biases that may be present when making a decision. Therefore, it is possible that in the economy or, more specifically, in financial markets, there is a certain degree of irrationality that would affect asset prices, the cost of borrowing money, etc. However, this irrationality would be exploited by decision-makers who do operate in a rational way, in a process that is called arbitrage, bringing asset prices and the situation back to the equilibrium that would allow all decision-makers to act rationally.
However, when there are very marked cognitive biases, it is possible that irrationality is perpetuated, a consequence of repeatedly erroneous decision-making due to the preponderance of biases and their general extension over decision-makers.
In addition, leaving aside psychological issues, there are also other factors that influence decision-makers not to always make rational decisions, such as, for example, the personal circumstances of the decision-maker, the information available…
Ultimately, the decision-making process can really be very complex, with a multitude of options and approaches for making a decision. This highlights the need for decision-makers to simplify the process. To this end, they use heuristics or simple rules for decision-making.
