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Most consumers are rational, they simply lack adequate information.
If you tell someone that housing prices can only go up and that real estate is the best investment that there is, and there's no compelling evidence against this, most people are going to buy real estate.
That is not an irrational decision.
The problem is that when you combine the rational decisions of hundreds of millions (or even billions) of people, you get a result that is irrational.
To take this another way...
Lets say that you have two religions, A and B.
A's holy book says that members of B are evil, and commands all As to kill Bs. Those who do this will be rewarded by God.
B's holy book says that members of A re evil, and commands all Bs to kill As. Those who do this will be rewarded by God.
The rational thing for As to do is kill Bs. The rational thing for Bs to do is kill As.
The result is irrational.
tatupu70
2010 May 2, 10:28pm
I think it was in the 2nd freakanomics book that they talked about a study where they gave people with mulitple credit card debts at varying rates some money. Turned out that people would pay off a lower interest rate card if they could pay it all off rather than just pay on the highest rate card. You feel better paying off a card completely, even if it's not a rational economic decision.
This is a must-watch episode of Nova:
http://www.pbs.org/wgbh/nova/money/
The core belief of Chicago school of economics is that consumers are rational. This leads naturally into the "efficient market" hypothesis that markets in general are always rational and correct. There are some quite interesting experiments shown where people obviously do not behave rationally.