I write a lot on this blog about economists’ assumptions about human behavior, and when these assumptions are useful to understand reality and when they are not. For instance, a while back I touched on the assumption of “rationality”, which for economists has a strict mathematical definition and is needed to make certain clean, elegant microeconomic models work. Unfortunately, some people take this and other theoretical assumptions beyond their original purpose, asserting, for instance that every human action in real life must be motivated by a rational thought process all the time.
Most of us are observant enough to know that at least sometimes, human beings do not, in fact, behave rationally. Addiction is an often used as example. I’m sure you can construct a model showing how a person could behave rationally and still drink himself into oblivion. But it’s much easier simply to admit to oneself that irrational behavior exists in the world, and basic models based based on an assumption of rationality are limited.
The question is, Just how widespread is our irrationality? That’s the question asked by many behavioral economists and psychologists who’ve attempted to document and codify all sorts of irrational things that human beings tend to do. (Dan Ariely’s best seller Predictably Irrational, though a few years old now, is a great book for a summary of this line of research.) I tend to believe irrational behavior can be found almost everywhere, and understanding this can help us improve ourselves and our society. A few months back, for instance, I made the argument that certain types or consumer loans preyed on individuals’ irrationality, specifically their impulsiveness and lack of understanding of finance. The poor are prime targets, in that they may be less likely to have had some basic financial education, and are naturally more susceptible to the “Interest Free Loans!” thing and other scams, perpetuating the imaginary dream of unlimited access to money without consequences.