Traditional economic theory assumes that human beings behave rationally. That is, that they understand their own preferences, make perfectly consistent choices over time, and try to maximize their own well-being. This peculiar assumption has its roots in dusty essays like "Exposition of a New Theory on the Measurement of Risk" (from 1738) by Daniel Bernoulli and scholarly tomes like Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern (published in 1944). The idea has some validity: traditional economic theory is good at predicting some market behaviors, such as how the demand for products like gasoline will change after a tax hike. But it's not very good at describing more-complex phenomena like stock-price fluctuations or why people gamble against the odds.

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