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We’re painfully blinking awake to the falsity of standard economic theory—that human beings are capable of always making rational decisions and that markets and institutions, in the aggregate, are healthily self-regulating.
If assumptions about the way things are supposed to work have failed us in the hyperrational world of Wall Street, what damage have they done in other institutions and organizations that are also made up of fallible, less-than-logical people?
They have argued that experiments conducted by behavioral economists and psychologists, albeit interesting, do not undercut rational models because they are carried out under controlled conditions and without the most important regulator of rational behavior: the large, competitive environment of the market.
Then, in October 2008, Greenspan made his confession.
Standing in the smoke and ash, Alan Greenspan, the former chairman of the U. Federal Reserve once hailed as “the greatest banker who ever lived,” confessed to Congress that he was “shocked” that the markets did not operate according to his lifelong expectations.
He had “made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders.” We are now paying a terrible price for our unblinking faith in the power of the invisible hand.
Revenge and cheating are only two of the irrational behaviors that companies will find underlying their employees’ and customers’ actions.
And where do corporate managers, schooled in rational assumptions but who run messy, often unpredictable businesses, go from here?
We are finally beginning to understand that irrationality is the real invisible hand that drives human decision making.
Things got more interesting in the third treatment, where participants worked in pairs and shared the spoils.
The results showed that when a person realizes that his or her fudging would benefit other team members by increasing the payout, dishonesty further increased by 25%.