Economists have typicality described the thought processes of Homo sapiens as strictly logical, centered on a clearly defined goal, and free from the unsteady influences of emotion or irrationality far removed from the uncertain, error-prone groping with which most of us are familiar. But not a wind of change is blowing some human spirit back into .the ivory towers where economic theory is made. It is becoming increasingly fashionable for economist to instead borrow insights from psychologists in order to explain behavior that defies rationality.
The golden age of rational economic man began after the Second World War. While famous earlier economists, such as Adam Smith and John Maynard Keynes, had made use of irrationality in their theories, these aspects were brushed aside in the post war years for an approach that went hand in glove with the growing use of mathematics in economics―which also happened to be easier to apply if humans were assumed to be rational.
Rational behavior was understood to have several components. At a minimum, man was assumed to be trying always to maximize his “utility,” a term that nineteenth-century philosopher John Stuart Mill used to describe general contentment. Given a choice, in other words, a rational person would take the option with the highest “expected utility.”
Today, a growing school of economists is instead drawing on behavioral traits identified by experimental psychologists. The theory that so far has made the greatest impact on economics suggests that many people are loss averse. This means that human beings often have an asymmetric attitude toward gains and losses―their fear of loss is a greater emotional force than their desire for gain.