ABSTRACT
Classical economics assumed that individuals act rationally even though they occasionally make mistakes. The idea that they might act irrationally, especially in a systematic way, was not contemplated. Major defenders of rational behavior had been Milton Friedman and members of the Chicago School. In recent decades some economists and psychologists started to question that assumption. They identified systematic acts of irrational behavior. That “discovery” led to the creation of “behavioral” and “experimental” economics. Various laboratory experiments and some market behavior revealed irrationality and led to the formulation of “nudges” that governments could use playing a tutorial role which would promote rational behavior and public welfare. “Nudges” have been used by some governments in public finance actions. This chapter cautions about such a government role where governments may not necessarily have in mind the best interest of the citizens.
