The Economics Book

266

PEOPLE

ARE NOT

100 PERCENT

RATIONAL

BEHAVIORAL ECONOMICS

U

ntil the 1980s standard

economic theory was

dominated by the idea of

“rational economic man” (pp.52–53).

Individuals were understood to be

agents who look at all decisions

rationally, weighing the costs and

benefits to themselves and making

a decision that will give them the

best outcome. Economists thought

that this was how people behaved

in situations of both certainty and

uncertainty, and they formalized

the idea of rational decision making

in expected utility theory (pp.162–

63). In reality, however, people often

make irrational decisions that don’t

give them the highest payoffs and

may even hurt their own prospects.

IN CONTEXT

FOCUS

Decision making

KEY THINKERS

Amos Tversky (1937–96)

Daniel Kahneman (1934 – )

BEFORE

1940s US economist Herbert

Simon argues that rational

decision alone does not explain

human decision making.

1953 French economist

Maurice Allais criticizes

expected utility theory, saying

that real-life decisions are not

always taken rationally.

AFTER

1990 Economists Andrei

Shleifer and Lawrence

Summers show that irrational

decisions can affect prices.

2008 US psychologist and

economist Dan Ariely publishes

Predictably Irrational, showing

irrationality has a pattern.