ABSTRACT

In a fast-food restaurant with four service counters, would you expect to see a big difference in the number of people in line at the counters, as illustrated below? No; ordinarily we would expect some of the people in the longest line to move. This might continue until all four lines were approximately equal in length. When all customers were content to stay in their existing lines, they would be in “equilibrium,” as economics uses the concept. As consumers sought the shortest lines we would consider their behavior purposeful or “rational.” What does this example have to do with the economic turmoil of 2008-2009 and beyond? As we will see, the answer to this question lies in the concept of rational equilibrium. Rational equilibrium is a powerful concept in economics, but it does not lend itself to exact conclusions. If we concluded “the length of fast-food service lines will always be equalized,” we would not be correct. We would be

attributing too much rationality and precision to an equilibrium model, when we know that misperceptions, mistakes, and balky cash registers can get in the way of equalizing lines. If we say fast-food service lines will always equalize, we make the mistake of putting too much trust in a rational equilibrium model. But to say “we cannot predict anything about service lines” makes the opposite mistake, that of putting too little trust in a rational equilibrium model. There are significant behavior patterns at work, and we cannot learn much if we ignore them. When we expand the subject from fast-food service lines to the economic structural changes of 2008-2009 and beyond, it becomes even more important to put the right degree of trust in equilibrium models. Social studies instructors whose teaching reflects too much or too little trust may not be fully equipping students with the tools needed to understand some types of observed behavior. The distinctive fields of public choice and behavioral economics show why. Those whose teaching reflects a government that always operates in the public interest may put too little trust in the rational model, failing to account for the impact of self-interested behavior by government officials on some public policy outcomes. These instructors could gain from the insights of public choice, which addresses these issues by bringing many aspects of the rational model into the study of public decision-making. On the other hand, those whose teaching reflects a belief that consumers always operate rationally may put too much trust in the rational model, failing to account for various limits on individual rationality and other emotional and psychological responses that affect some decisions. These instructors could benefit from more understanding of behavioral economics, which relaxes the rigidity of the rational model. It incorporates a broader variety of behaviors that do not easily fit into the optimizing framework in order to better understand and predict individual choices. This chapter provides an introduction to the two related fields, with teaching suggestions and activities for each. We believe our exploration of public choice and behavioral economics can help instructors discover implicit assumptions behind their teaching that may need revision in light of some events relating to the 2008-2009

crisis such as the housing bubble and sub-prime mortgage crisis, the behavior of Fannie Mae and Freddie Mac, the government bailouts of financial and automotive firms, and the decline in various asset markets.