4. Behavioral Economics, Evolution, and the Human Brain

As early as the late 1950s with the work of Herbert Simon, psychologists began questioning the value of unbounded rationality in economic modeling, noting that the human brain faced its own evolved limited and imperfect internal resources. Daniel Kahneman and Amos Tversky in the 1970s began calling into serious question the neoclassical methodological approach by running a series of laboratory and survey experiments that found substantial gaps between the predictions of economic models grounded in perfect rationality and the way real people behave or say they would behave. In the late 1980s and continuing into this century, Richard Thaler uncovered a small library of “anomalies” in people’s behaviors, as judged by predictions from neoclassical economics, grounded in contemporary times (but not in earlier eras) in perfect rationality. A growing cadre of behavioral economists have gone further, concluding that people are so frequently “irrational” that they are “predictably irrational,” suggesting that neoclassical economists should fold their analytical efforts.