How and why markets aren't rational. Navigational tips for successfully charting the Bermuda Triangle of human economic behavior. ™

 
I just posted this definition to Technorati's WTF section. I'll be interested in hearing any comments, additions, subtractions, clarifications you, the reader, might make. I had to keep the thing under 2000 characters there, but that is not the case here. I'm all ears! Sara

The post:

Historically, the discipline we call 'economics' has operated on the 'rational man' hypothesis: that economic self-interest drives most -if not all- human behavior. Historically, the discipline we call 'psychology' has operated on the premise that intangible, intra-psychic or interpersonal forces drive most -if not all- behavior.

By contrast, economic psychology, and its close cousin behavioral economics, both recognize that economic behavior is a subset of human behavior, and as such is almost never purely rational---simply because people are almost never purely rational. A good example is the way so many procrastinate in saving for retirement.

This is not to say that there are no 'laws' or 'principles' that govern such behavior. Instead, we who work in these fields believe that any attempt to make sense of market behavior that fails to grasp the roles of both psychological and economic forces (as well as the ways in which these interact) will fall short of accuracy in understanding, predicting, and/or influencing such behavior. We wild-eyed radicals who work in behavioral economics and/or economic psychology are striving to identify the "new rules" of market behavior (which are actually not new at all--but our effort to learn about them is).

This is a very exciting field for a number of reasons.

First, when one puts economic psychology into practice (as I and others have done in a variety of settings), it works!! The outcomes are better---measurably better.

Second, psychologists and economists are finally acknowledging that the 'causes' of market behavior are far more varied, and the means for making sense of them far broader and richer, than traditional dogma would suggest.

Finally and from a purely selfish point of view, I find it incredibly interesting.
permalink: posted by saraw1 at 5/12/2007 02:08:00 PM
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....By someone who knows that of which he speaks.

If you require knowing the future to create it you are living the past.

Bob Frankston
permalink: posted by saraw1 at 5/12/2007 11:27:00 AM
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