How Economic Theories Can Become Self-Fulfilling
Careful with Assumptions!

How often do managers question the assumptions behind their decisions? What are the assumptions behind widespread organizational practices such as “employee of the month,” pay for performance and budgeting? Prof. Fabrizio Ferraro went in search of the underlying truth and discovered an unquestioned allegiance to an economics worldview. He also stirred up a lively debate in the process, which has implications for business education.

Executive Summary
The assumptions of economic theories have spread as valid descriptions of behavior despite widespread doubts about their empirical validity. The pursuit of self-interest in market-mediated exchanges is a case in point. Do people in a company really only ever act out of self-interest? The truth no longer matters, because everyone accepts it as true, structuring our institutions, changing our language and eventually shaping our behavior to act in accordance with this social “reality.” The assumptions of economics can be self-fulfilling prophecies.

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