We make choices on biased beliefs (ie.: overconfidence).Optimizations people face are too complex to be solved with perfect rationality (even going to the grocery store presents way too many options to be all resolved rationally, let alone the complexities of a career to choose).There is a problem with economic theories though: they rest on completely flawed premises. Economic Theories Rest on Flawed Assumption Ironically, notes Thaler, the homo economicus theories based on math and rationality long gave economics the reputation of the most powerful of the social sciences. Just as an example, not only no economists failed to predict the 2007-2008 financial crisis, but economic theories based around econs also postulate that financial bubbles are impossible. And that means that, since econs don’t really exist in real life, optimization theories make all sorts of bad predictions.

Richard Thaler, with the first salvo of wit that will characterize all of “Misbehaving” says that economists replaced homo sapiens with a fictional creature called “homo economicus”.įor short, Thaler will call refer to “homo economicus” as “econ” (pl.: “econs”).Įcons are rational and always make the best rational decisions considering all information available and all alternatives available.Įcons are not good representations of real humans though, who make all sorts of mistakes and irrational decisions.Įconomical models designed by economists, which the author also call “optimization theories”, have long been built around “econs”. Little by little, psychology supplanted the myth of the (inexistent and hyper-rational) “homo economicus” to give us all a better understanding of how people make financial and (ir)rational decisions.Īlbeit psychology was only taking us closer to the truth, it wasn’t easy to change economists’ minds.

Behavioral economics, such as economics with good psychology, is today widely accepted.

Economists have long rejected the idea of an irrational individual (and the meddling of psychologists into economics).Even financial markets are not rational and not always efficient.Old economic theories centered around fully rational individuals are deficient.PART V: Engaging The Economic Profession 1986-1994.

Misbehaving richard