The Psychology of Everyday Life: Motivation and the Search For Happiness

The Psychology of Money

What is the theory of rational economic man?

Ever since the 1700s when the seeds of modern economic theory first developed, economists have assumed that people have a very simple relationship with money. The rational economic man is seen to act more or less like a calculating machine. Financial decisions regarding how we spend, borrow, and save, are based on a rational assessment of our losses and gains. We compare the value of what we pay out to the value of what we take in and make decisions accordingly. If we make mistakes in these calculations, we eventually recognize them and correct our behavior.


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