What's wrong with the basic assumptions of economics?

Different subdivisions of economics will have different assumptions. I only cover two basic assumptions, which I think are applicable to most segments. These two assumptions are basic assumptions that will be used at both macro and micro levels.

hypothesis of rational man

Economics assumes that everyone's decision-making is rational, in other words, the goal is to maximize utility or profit. However, this assumption is not necessarily true in real life. For personal decision-making, some experiments and theories of behavioral economics have proved that personal decision-making is influenced by many other factors, such as emotions, fantasies and other psychological factors, which leads to the fact that even when individuals know complete information, the huge level they make is still not a decision that maximizes utility. For enterprises, corporate finance has also discussed a lot of situations, such as conflicts of interest, agency costs, etc., which will lead to the company's decision-making deviating from its goal of maximizing enterprise value. At the same time, because the company's decision-making is ultimately made by individuals, behavioral economics also discusses a large number of cases in which personal emotions and cognitive biases lead to company decision-making mistakes.

In economics, the hypothesis of rational man is the cornerstone of the whole economic theory, and the subsequent "invisible hand", laissez-faire, classical economics school and so on are all based on the hypothesis of rational man, which deduces that all participants in the market will go their own way and finally work together to push the market to a balanced state of maximizing efficiency and social welfare. Then the defects of rational man hypothesis will lead to the great deviation of economic theory prediction.

2. Complete information hypothesis

As mentioned above, even if market participants are highly rational, they still need to know all the real information in the market at the first time in order to make the best decision. But this can't be fully realized in real life. On the one hand, due to technical limitations, it takes time to spread market news; On the other hand, because some market participants hope to obtain high profits through information advantages, some people will strengthen the isolation of confidence for strength; At the same time, with the development of finance and technology, interpreting market information often requires profound professional accumulation, which is not available to every participant in the market. For the above three reasons, market participants often can't get all the real information in the market at the first time, which is what economists often call "information asymmetry". Information asymmetry will lead to market failures such as adverse selection and moral hazard, and lead to invalid decision-making. One of the simplest examples is the subprime mortgage crisis in the United States in 2008. In fact, a large number of extremely complex ABS and CDO products have caused the risk connection of the whole market, and the initial risk diversification effect of ABS has failed. At the same time, due to the complex structure of ABS at that time, few people in the market could really understand the real risk level of these ABS products. At the same time, a large number of investment banks failed to effectively reveal the risk level of ABS products in order to promote ABS in exchange for cash flow. Eventually, it led to a large number of defaults, the bankruptcy of investment banks and financial insurance companies, and the sharp drop in asset prices, which led to the subprime mortgage crisis in 2008.

These are the basic assumptions of economics. Combined with your man's life experience, in fact, you can see at a glance where these hypothetical problems are. I don't understand why it is necessary to read difficult pure theoretical books. If you don't want to develop in the direction of economics, the rigid method is to waste time.

At the same time, we should also see that there are other assumptions in the subdivision of economics, such as perfect competitive market theory, macroeconomics, corporate finance, no arbitrage in financial economics and other basic assumptions. Seeing the contents of these assumptions, combining the cases in the market and your life experience, it is not difficult to see the limitations of the assumptions. However, any theory is an appropriate simplification of real life, so as to analyze the problem. As economists, we should weigh the advantages of reducing the difficulty of analysis against the disadvantages of oversimplification.