See Inside September 2009

Economic Thinking

Even apparently irrational human choices can make sense in terms of our inner logic

Much economic thinking rests on the assumption that individuals know what they want and that they make rational decisions to achieve it. Such behavior requires that they be able to rank the possible outcomes of their actions, also known as putting a value on things.

The value of a decision’s outcome is often not the same as its nominal dollar value. Say you are offered a fair bet: you have the same chance of doubling your $1 wager as you have of losing it. Purely rational individuals would be indifferent to the choice between playing or not playing: if they play such a bet every day, on average they will be no better or no worse off.

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