Role of Psychology in Economics

One of the major postulates in economics is that people's consumption decisions are driven by "rational self-interest." It occurs to me that this is not universally true.

How rational is it to work overtime to procure unnecessary products just because your neighbors have them? How rational is it to spend large money on fashionable jeans when one can get jeans just as good for one tenth the price? How rational is it to spend vast amounts of money on plastic surgery when you are already beautiful? How rational is it to spend $100,000 on a Hummer when you can get a Great Wall for $20,000?

Whatever drives consumption decisions, rational self-interest is a factor in only some of them. There's nothing rational about a person who stuffs herself with food until she becomes morbidly obese. There's nothing rational about a person who spends all his money on gambling or cocaine. Something drives these consumption decisions. But rational self-interest does not.

What actually does drive consumption decisions? Well perhaps the best people to ask are the people who are successful at selling products to people, and the main answer is this: good marketing. Borland products are vastly superior in quality to Microsoft products; but people buy Microsoft because Microsoft has been a smarter marketer than Borland. One must reach people, one must move people, one must influence people. Which means that the greatest predictor of economic decisions is skill at personal manipulation in the producer - and openness to that manipulation in the consumer.

Of course manipulation is a negative term; and for those who want to avoid negative implications one can coin another term such as being able to influence people. The question then becomes, how and through what? What is it in people that can be influenced by a marketer or a producer? Is it reason? Or is it psychology?

Psychological, not rational, factors are the dominant cause of economic decisions. And with psychological factors we see all sorts of things, good or ill. The justification of capitalism from the standpoint that market decisions reflect rational self-interest is simply untruthful. One needs to have better reasons to support the capitalist system if it is to remain in place.

It is important therefore to understand what actually drives people's economic choices. Some choices are rational, and others are not. Psychology is a huge factor in economic decisions; and the more such things are understood the better decisions can be made both by the producers and by the consumers in capitalism.