The Perception of Value - How Human Irrationality Defies The Laws Of Economic Theory

The most important assumption in standard economic theory defines man as a rational economic
agent. Through self-interest and utility maximization, man is capable of making rational decisions under any circumstances. Several models were built on this foundation, until economists began to question the validity of such assumption in the second half of the 20th century. As it turned out, not only was it misleading, it was flat-out wrong. Countless experiments have been conducted on this matter and they have repeatedly shown that one of the greatest flaws of human choice patterns is the inability to correctly assess value. In particular, either individuals fail to rationally gauge the expected value of an outcome, or they fail to make the value-maximizing choice. Unbeknownst to an agent, there are processes that tremendously modify his or her utility and render nearly every choice imperfect. The agent's perception of absolute value is fundamentally biased by the intrinsic processes of anchoring and comparison, and by the extrinsic process of framing.