Behavioral Economics

Historically, economic models and analytic tools assumed that humans were fully rational. The notion of full rationality includes a number of aspects that are not realistic in the world at large. For example, full rationality assumes that people can identify all available options in a given scenario, that they [Page 65]have full and relevant information at hand, and that they have explicit preferences for those options that they can rank in simple and complex scenarios. Full rationality also assumes that people maximize their own utility or benefit and are motivated by unadulterated self-interest.

Given the extreme notion of full rationality, it is not surprising that the underlying assumptions have been brought into question and that alternative models of decision making have been developed. To that end, ...