The Irrational Economist

January 4, 2010
The past year has been eye-opening for economists, suggesting that free markets are far from self-correcting and that people do not, in fact, behave rationally, a hard blow for a burgeoning field that aspires to hard science. To make up for that apparent reality gap, this compendium from academics Michel-Kerjan and Slovic broadens the purview of economics by drawing on everything from psychology (behavioral economics) to neurology (neuroeconomics) to underwriting (lessons from catastrophe reinsurance). Many contributors' approaches are so nascent they suggest little more than a direction for exploration, but raise compelling questions regarding the human capacity for irrationality: why, for instance, can the fate of one (imaginary) boy in a helium balloon arrest our sympathy while we ignore the violent deaths of thousands in Darfur? Why do we fail to protect ourselves against likely catastrophic events (only 1 out of 5 California households hold earthquake insurance) while investing millions of dollars to combat highly unlikely terrorist attacks? Allowing for such factors when building economic and other models of human behavior should enhance their predictive power; one essayist reveals how the inevitable failure of New Orleans levees might have been foreseen and prevented. This collection is an intriguing look at the limitations of human knowledge regarding its own nature, especially relevant for the current moment of economic turmoil.