Much of economic - and hence, business - thinking is based on the notion that human beings make rational decisions, and that those decisions, in aggregate, serve as an invisible hand that is a healthy self-regulating force for our markets.
But recent studies in the newly emerging field of behavioural economics, probing actual economic choices, have demonstrated that people often don't act rationally.
For example, in one study, when people were offered a fancy Lindt truffle for 15 cents and a Hershey's kiss for a penny, 73 per cent chose the premium truffle. But when the same chocolates were offered for a penny less - the truffle for 14 cents and the kiss for nothing - just 31 per cent of participants chose the truffle, as the word free cast its powerful spell.
"We are finally beginning to understand that irrationality is the real invisible hand that drives human decision-making," behavioural economist Dan Ariely writes in Harvard Business Review.
He says that means your organization needs to develop a behavioural economics capability by hiring people to run experiments that test in small trials how consumers, employees and governments you deal with actually act, rather than basing your decisions, as most businesses do, on the flawed theories of rational economic thinking.
Harvey Schachter