We are rational, self-interested optimizers: Homo economicus. So the neoclassical model of economics has held for over a century. It has been a fruitful model, at the heart of the discipline’s most profound theories, predictions and policy prescriptions.
According to Richard Thaler, it is also flawed.
Humans in the real world, Thaler points out, behave in ways that are strikingly inconsistent with rational models, are frequently concerned with the welfare of others (even to their own detriment) and are rarely capable of optimization. True, we can be rational, calculating, self-centered and disciplined—but within limits.
This is the essential insight that Thaler insists his fellow economists use to modify neoclassical theory. Without it, findings will hold little relevance to reality. He illustrates this regularly with research into areas as disparate as health care, retirement planning, investing, NFL football drafts and British game shows.Read the rest of the article...