Theory Vs. Reality: Why Our Economic Behavior Isn't Always Rational

May 28, 2020

We don't always behave the way economic models say we will. We don't save enough for retirement. We order dessert when we're supposed to be dieting. We give donations when we could keep our money for ourselves.

Again and again, we fail to act rationally and selfishly — the way traditional economics expects us to.

We've seen this during the coronavirus crisis: People selflessly mobilizing to help each other, like the retired Kansas farmer who sent an N95 mask to New York to help a nurse or a doctor.

At the same time, though, we've also seen some people do exactly what economic theory assumes they will: Place their own self-interest above everything else. There are those who have even tried to profit from the pandemic, like the man in New York accused of stockpiling N95 masks to sell at an inflated price.

Think about this man who hoarded masks and the man who donated a mask. In almost every sphere, our public and economic policies are designed around the assumption that most of us are going to behave like the first man. Legislators pass laws that take aim at transgressors. Regulators and police departments come up with rules that punish lawbreakers. Parents and teachers discipline truants.

But what about all the helpers, like the man who donated his mask? What are the costs when we design our public and economic policies to focus on the crooks and wrongdoers?

This week on Hidden Brain, we talk with two behavioral economists — Sam Bowles and Richard Thaler — about why economic models of human behavior regularly fail to describe how people actually behave. And we consider another question: can policies crafted with only selfishness in mind have perverse effects on the rest of us?

Additional Resources:

Misbehaving: The Making of Behavioral Economics by Richard Thaler, 2015.

Nudge: Improving Decisions about Health, Wealth, and Happiness by Richard Thaler and Cass Sunstein, 2008.

The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens by Sam Bowles, 2016.

A Cooperative Species: Human Reciprocity and Its Evolution by Sam Bowles and Herbert Gintis, 2011.

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