Economic theory is built on the flawed premise of a rational, economically-motivated individual. Financial historian Russell Napier argues this ignores psychology, sociology, and politics, making financial history a better guide for investors. The theory's mathematical edifice crumbles without this core assumption.

Post-mortems of bad investments reveal the cause is never a calculation error but always a psychological bias or emotional trap. Sequoia catalogs ~40 of these, including failing to separate the emotional 'thrill of the chase' from the clinical, objective assessment required for sound decision-making.

Humans naturally conserve mental energy, a concept Princeton's Susan Fisk calls being 'cognitive misers.' For most decisions, people default to quick, intuitive rules of thumb (heuristics) rather than deep, logical analysis. Marketing is more effective when it works with this human nature, not against it.

Post-WWII, economists pursued mathematical rigor by modeling human behavior as perfectly rational (i.e., 'maximizing'). This was a convenient simplification for building models, not an accurate depiction of how people actually make decisions, which are often messy and imperfect.

Seemingly irrational financial behaviors, like extreme frugality, often stem from subconscious emotional wounds or innate personality traits rather than conscious logic. With up to 90% of brain function being non-conscious, we often can't explain our own financial motivations without deep introspection, as they are shaped by past experiences we don't consciously process.

Economics-based rational choice theory frames decisions as a calculation of "expected utility," multiplying value by probability. This analogizes complex life choices—from careers to partners—to casino bets, oversimplifying non-quantifiable factors and reducing judgment to mere calculation.

Contrary to popular belief, economists don't assume perfect rationality because they think people are flawless calculators. It's a simplifying assumption that makes models mathematically tractable. The goal is often to establish a theoretical benchmark, not to accurately describe psychological reality.

Milton Friedman's 'as if' defense of rational models—that people act 'as if' they are experts—is flawed. Predicting the behavior of an average golfer by modeling Tiger Woods is bound to fail. Models must account for the behavior of regular people, not just theoretical, hyper-rational experts.

People don't treat all money as fungible. They create mental buckets based on the money's origin—'windfall,' 'salary,' 'savings'—and spend from them differently. Money won in a bet feels easier to spend on luxuries than money from a paycheck, even though its value is identical.