Richard Thaler, an American economist and founder of the field of behavioral economics, just won the Nobel Prize. The Nobel Committee awarded him the prize for his research using psychology and economics to understand how people make economic decisions.
For generations, mainstream economics had used rational choice theory, which assumes that people make decisions that will maximize their own utility, and used statistics and mathematical models to prove theories and evaluate various economic developments. In other words, the theory assumes that man will always try to maximize his income.
As I understand it, behavioral economics suggests that human decisions are strongly influenced by context, i.e., the social. In other words, humans are not always rational. While behavioral economics is relatively new, I will assert that I (and many others) knew its assumptions all along.
As it happens, I studied the irrationality of some human behavior as a teenager in segregated Alabama. I always noticed that no white restaurants served black folks as regular dining customers; however, Nader’s restaurant in Calvert, Alabama, served blacks out a back window. To the best of my knowledge, Nader’s and other restaurants with the same practice did not lose any of their white customers as they shoved the sandwiches out the back window to blacks.
Therefore, relatively speaking, Nader’s made more money than those restaurants that did not serve blacks in the dining room or out the back window. Consequently, I considered Nader’s more rational, as the other restaurants did not maximize their income. Although I tried to avoid Nader’s back window, I always thought restaurants without a back window were relatively irrational.
While I was always complaining about the folly of assuming that there was any such thing as “rational man,” Thaler was leading the development of an alternative economic theory, that our judgments and decisions often are not rational.