Our irrational behaviors are neither random or senseless - they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains. So wouldn't it make sense to modify standard economics and move away from naive psychology, which often fails the test of reason, introspection, and - most important - empirical scrutiny?
Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?
Yes, Dan. It would make sense. Humans aren't nearly as rational as we tend to think we are, though we are fairly adept at rationalizing. People consistently make irrational choices. We are dishonest. We cheat and steal when given the opportunity, especially when we are a step or two removed from dealing with cash. We procrastinate and often discount or devalue the future at our peril. We are seduced by the powerful allure of FREE! We succumb to social pressures. Our experiences are modulated by our expectations of them. The placebo effect plays a much greater role in our lives than we ever could imagine. And so on...
And yet, standard economic theory would have it that humans are rational agents capable of acting in their own interest based on the best available information in the realm of the free market. If we mess up, "market forces" will correct the errors and set us back on the right path. To me, these ideas aren't just mistaken, but delusional.
The reality is that humans are evolved creatures that come equipped with all sorts of cognitive biases and blind spots that serve to limit our ability to behave in an idealistically rational way. There is little room for freedom here. This is just another example of the disconnect between what we think the world is like (or wish it would be like), and what the world is really like. Ideology, unfortunately, often trumps a more evidence-based approach to understanding reality.
