Homer Economicus

In the second edition of our textbook (available 2009 Sept. 15) we include material on asset bubbles and psychological pricing, departures from the classic rational actor paradigm. Richard Thaler writes about regulation for not-quite-rational humans:

...lenders could be required to offer some mortgages they call “plain vanilla,” with uniform terms. There might be one vanilla 30-year, fixed-rate mortgage and one five-year, adjustable-rate mortgage. The features of these plain mortgages would be uniform, much as in a standard lease used in most rental agreements.

Lenders would also be free to offer other exotic mortgages ... , but these offerings would receive more intense scrutiny from regulators. ...

But did all of those home buyers, who are now getting their mortgages re-set, really act irrationally?