Despite myriad challenges to these assumptions, investment professionals still employ work-horse models built on expectations of rational behaviour. However, living through the unprecedented uncertainty surrounding the coronavirus crisis not only reminds us of our own fragility, it also demonstrates the fragility of our assumptions. Are our preferences really unchanged in this environment? Are the decisions we make under stress – like hoarding toilet paper – truly rational? Do we really feel able to judge the likelihood of potential future scenarios?
Much of economic theory is built on assumptions of stable preferences, rational decision-making and infinite foresight.