Neuro-Economics
Let's see how long it takes this bit of news to reform economics:
If one truth shines through, it is that people are not consistent or fully rational decision makers. Peter L Bossaerts, an economics professor at the California Institute of Technology, has found that brains assess risk and return separately, rather than making a single calculation of what economists call expected utility.
So reports Tyler Cowen in "Enter the Neuro-Economists: Why Do Investors Do What They Do?"* Predicating a world in which decision making is informed by rational self-interest is perhaps the greatest folly of academic economics. It may not differ much from the faith of pre-modern doctors in bleeding. As researchers are finding out, bleeding has its uses, but they're limited to a small class of wounds, more as healing accelerators than as actual fixes. "Rational self-interest" probably has just as limited a role in economic life. Perhaps in Adam Smith's day - The Wealth of Nations was published in 1776 - the pace of life was slow enough and sufficiently free of abrupt change to allow genuine deliberation. In those patriarchal days, men wealthy enough to make economic decisions lived in a world that was fairly tailored to their way of thinking. That world has vanished into relative chaos.
*The New York Times, 20 April 2006, p C3.
