Economists live in the same world as everyone else. They have friends who buy overpriced time-shares and brothers-in-law who just don't think. Adam Smith devoted many words to human foibles and their inevitable influence on markets. Psychology was in the lexicon of economics until the Second World War. Then things started to change.
Under the influence of people like [Paul] Samuelson and Milton Friedman, the field became progressively more mathematical. Much as dogs grow to resemble their owners, the new economics took on the features of the people now building it. Economists embodied a math-smart, self-controlled stereotype and built theories describing people exactly like themselves.
...
Part of the Chicago doctrine was that Savage-Friedman-type rationality was a prerequisite for survival in the cold, hard business world., Those failing to toe the Chicago line "would get taken advantage of in the markets. They wouldn't go on to govern companies and be successful leaders," [Caltech behavioral decision theorist Colin] Camerer said. "These rationality principles were like commandments. You're either good or evil -- and evil people get punished."
It was nonetheless an open secret that economic theories did not predict human behavior especially well. There was more than one way of waving that aside. Economic models typically assume two things: that people are perfectly reasonable, and also that they are perfectly well informed., Some economists adopted the position that the inhabitants of their models were ignorant, not stupid. Much of the 1970s was spent working out the ramification of this hopeful (?) prospect."
- William Poundstone, Priceless: The Myth of Fair Value (and How to Take Advantage of It)
, pp.77-78
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