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

The Psychology of Money

What is wrong with the theory of rational economic man?

The problem with this theory is that it is often wrong. As the great financial crisis of 2008 has shown us, people’s economic behavior is often anything but rational. Leading up to this crisis, the whole country gorged on unaffordable debt. In 2007, according to the U.S. Federal Reserve, the median savings rate for American households was just above zero and the median income for a large section of the population had remained flat for several years. Nonetheless, our household debt continued to grow, 11 percent between 2004 and 2007, and 34 percent in the three years preceding that. In fact, from 2004 to 2007, the median credit card balance rose 25 percent. In other words, we were spending more than we could afford. This was not due to the cost of living, as inflation had remained quite low. We were on a giant national binge. While psychology cannot account for the full complexity of economic events—larger political, legislative, environmental, and cultural factors play a central role—more and more economists are recognizing the critical importance of people’s emotional responses to money.


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