Just how rational are we? That’s the question at the heart of
behavioral economics, an intellectual movement boasting hundreds
of professors around the country and more than a few policy
makers in the Obama administration. The movement extends back to
the mid-1950s, when several economists and psychologists began
to question the so-called “classical” economic model of how
people made decisions. In general, this model said, people were
rational and therefore they acted, economically speaking, in
their own best interest. Clearly, many psychologists noted,
people do not always act in their own best interests,
economically speaking or otherwise. In many cases, they don’t
even act in accordance with their own stated preferences. Why,
then, should economists use the “classical” model when trying to
explain or predict economic behavior? Wouldn’t it be better to
assume irrationality? Or, at least, to see what kinds of biases,
misperceptions, and faulty reasoning people bring to bear on
certain economic decisions, and