A Win for The Dismal Science.(behavioral economics)(Brief Article)

Do people procrastinate? Do they abuse drugs in ways that are obviously not in their long-term interest? Do people feel cheated, and retaliate, when their own generosity is met by pure greed and exploitation?

In the 1960s, Irving Kristol acidly remarked that "it takes a Ph.D. in economics to be able to avoid understanding the obvious." Now comes Matthew Rabin, and a bunch of other Ph.D.s in economics, using advanced mathematical computer models to prove--get hold of yourself--that the obvious is in fact true. Rabin demonstrated, indeed, that the answer to each of the rhetorical questions asked in the first paragraph of this article is "yes." For such work in the burgeoning new discipline called "behavioral economics," the 37-year-old professor at the University of California, Berkeley, recently won the coveted John Bates Clark Award, given every two years by the American Economics Association to an economist under 40 who has produced the most important research. A year before, Rabin pulled down a $500,000 grant, known as "a genius award," from the MacArthur Foundation in Chicago.

This is not--quite--as silly as one might think. Market economics (the capitalist, individualist kind that won the cold war) assumes that people are fundamentally rational in their economic behavior and therefore make the best use of their own skills and the best use possible of their own purchasing power. This is why market economists prefer leaving each person free to make her or his own choices. By "maximizing their own utility," they will simultaneously maximize results for society as a whole.

One problem with this theory is that it works too well, leaving new young economic theorists nothing much to discover. Another problem is that the definition of the word "rational" or "utility" can vary and, in the real world, be immensely complex. Obviously, each person on earth, occasionally or often, does stupid, emotional, shortsighted things. How rational or useful is it for people to overload themselves on 18 percent-a-year credit-card debt to buy designer clothes they rarely wear? Or for poor teenagers to buy $200 sneakers? Rabin and his fellow behavioral economists have sometimes seized on these commonplace anomalies to challenge the very idea that "rational choice" exists--and other times, more interestingly, to explore the obvious and damaging aberrations that so bedevil ...