Rational economic behavior?

Forbes is out with an article by Bill Bonner and Lila Rajiva drawing on a major theme of their best-seller Mobs, Messiahs, and Markets.  In a few short paragraphs, they demolish an all-too-common misconception in economics — that left to their own devices, humans will act in their own rational self interest:

No prejudices are more dangerous than those you didn’t know you had. And no one is more likely to crash into them than one who believes he is impartially examining the facts. That is the trouble with theories about man that assume he is a rational decision maker. All the evidence we have points to the contrary.

What rational commuter, for instance, would buy a Hummer? People buy them not to get somewhere but to tell others that they have already arrived. And what reasonable man would waste his time going to the polls? The rate of return is so uncertain and so remote, he would do better buying a lottery ticket.

Bonner and Rajiva point out how this "rational decision making" prejudice trips up even those people who think they're above it — like Blink author Malcolm Gladwell, and academic researchers examining how emotions influence decision making.

If human beings only did things out of economic self-interest, then buying stocks when prices are high or investing in subprime mortgages would be mistakes. But if investors, like everyone else, are expressing other, more complex and subtle motives, then their bad economic decisions might be bringing them other rewards. They might want the security of being part of a crowd. They might want to feel smart, or cool. They might invest to make money. Or not to lose it. To make a point. Or to make a better world.

Go read the whole thing.  Then get the book.

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