Economics - to great dismay of economists - is merely a branch of psychology. It deals with individual behaviour and with mass behaviour. Many of its practitioners sought to disguise its nature as a social science by applying complex mathematics where common sense and direct experimentation would have yielded far better results.

The outcome has been an embarrassing divorce between economic theory and its subjects.

The economic actor is assumed to be constantly engaged in rational pursuit of self interest. This is not a realistic model - merely a useful approximation. According to this latter day - rational - version of dismal science, people refrain from repeating their mistakes systematically. They seek to optimize their preferences. Altruism can be such a preference, as well.

Still, many people are non-rational or only nearly rational in certain situations. And definition of "self-interest" as pursuit of fulfillment of preferences is a tautology.

The theory fails to predict important phenomena such as "strong reciprocity" - propensity to "irrationally" sacrifice resources to reward forthcoming collaborators and punish free-riders. It even fails to account for simpler forms of apparent selflessness, such as reciprocal altruism (motivated by hopes of reciprocal benevolent treatment in future).

Even authoritative and mainstream 1995 "Handbook of Experimental Economics", by John Hagel and Alvin Roth (eds.) admits that people do not behave in accordance with predictions of basic economic theories, such as standard theory of utility and theory of general equilibrium. Irritatingly for economists, people change their preferences mysteriously and irrationally. This is called "preference reversals".

Moreover, people's preferences, as evidenced by their choices and decisions in carefully controlled experiments, are inconsistent. They tend to lose control of their actions or procrastinate because they place greater importance (i.e., greater "weight") on present and near future than on far future. This makes most people both irrational and unpredictable.

Either one cannot design an experiment to rigorously and validly test theorems and conjectures in economics - or something is very flawed with intellectual pillars and models of this field.

Neo-classical economics has failed on several fronts simultaneously. This multiple failure led to despair and re-examination of basic precepts and tenets.

Consider this sample of outstanding issues:

Unlike other economic actors and agents, governments are accorded a special status and receive special treatment in economic theory. Government is alternately cast as a saint, seeking to selflessly maximize social welfare - or as villain, seeking to perpetuate and increase its power ruthlessly, as per public choice theories.

Both views are caricatures of reality. Governments indeed seek to perpetuate their clout and increase it - but they do so mostly in order to redistribute income and rarely for self-enrichment.

Economics also failed until recently to account for role of innovation in growth and development. The discipline often ignored specific nature of knowledge industries (where returns increase rather than diminish and network effects prevail). Thus, current economic thinking is woefully inadequate to deal with information monopolies (such as Microsoft), path dependence, and pervasive externalities.

Classic cost/benefit analyses fail to tackle very long term investment horizons (i.e., periods). Their underlying assumption - opportunity cost of delayed consumption - fails when applied beyond investor's useful economic life expectancy. People care less about their grandchildren's future than about their own. This is because predictions concerned with far future are highly uncertain and investors refuse to base current decisions on fuzzy "what ifs".

This is a problem because many current investments, such as fight against global warming, are likely to yield results only decades hence. There is no effective method of cost/benefit analysis applicable to such time horizons.

How are consumer choices influenced by advertising and by pricing? No one seems to have a clear answer. Advertising is concerned with dissemination of information. Yet it is also a signal sent to consumers that a certain product is useful and qualitative and that advertiser's stability, longevity, and profitability are secure. Advertising communicates a long term commitment to a winning product by a firm with deep pockets. This is why patrons react to level of visual exposure to advertising - regardless of its content.

Humans may be too multi-dimensional and hyper-complex to be usefully captured by econometric models. These either lack predictive powers or lapse into logical fallacies, such as "omitted variable bias" or "reverse causality". The former is concerned with important variables unaccounted for - latter with reciprocal causation, when every cause is also caused by its own effect.

These are symptoms of an all-pervasive malaise. Economists are simply not sure what precisely constitutes their subject matter. Is economics about construction and testing of models in accordance with certain basic assumptions? Or should it revolve around mining of data for emerging patterns, rules, and "laws"?

On one hand, patterns based on limited - or, worse, non-recurrent - sets of data form a questionable foundation for any kind of "science". On other hand, models based on assumptions are also in doubt because they are bound to be replaced by new models with new, hopefully improved, assumptions.

One way around this apparent quagmire is to put human cognition (i.e., psychology) at heart of economics. Assuming that being human is an immutable and knowable constant - it should be amenable to scientific treatment. "Prospect theory", "bounded rationality theories", and study of "hindsight bias" as well as other cognitive deficiencies are outcomes of this approach.

The child reacts by constructing false self that is possessed of everything it needs in order to prevail: unlimited and instantaneously available Harry Potter-like powers and wisdom. The false self, this Superman, is indifferent to abuse and punishment. This way, child's true self is shielded from toddler's harsh reality.

This artificial, maladaptive separation between a vulnerable (but not punishable) true self and a punishable (but invulnerable) false self is an effective mechanism. It isolates child from unjust, capricious, emotionally dangerous world that he occupies. But, at same time, it fosters in him a false sense of "nothing can happen to me, because I am not here, I am not available to be punished, hence I am immune to punishment".

The comfort of false immunity is also yielded by narcissist's sense of entitlement. In his grandiose delusions, narcissist is sui generis, a gift to humanity, a precious, fragile, object. Moreover, narcissist is convinced both that this uniqueness is immediately discernible - and that it gives him special rights. The narcissist feels that he is protected by some cosmological law pertaining to "endangered species".

He is convinced that his future contribution to others - his firm, his country, humanity - should and does exempt him from mundane: daily chores, boring jobs, recurrent tasks, personal exertion, orderly investment of resources and efforts, laws and regulations, social conventions, and so on.

The narcissist is entitled to a "special treatment": high living standards, constant and immediate catering to his needs, eradication of any friction with humdrum and routine, an all-engulfing absolution of his sins, fast track privileges (to higher education, or in his encounters with bureaucracies, for instance). Punishment, trusts narcissist, is for ordinary people, where no great loss to humanity is involved.

Narcissists are possessed of inordinate abilities to charm, to convince, to seduce, and to persuade. Many of them are gifted orators and intellectually endowed. Many of them work in in politics, media, fashion, show business, arts, medicine, or business, and serve as religious leaders.

By virtue of their standing in community, their charisma, or their ability to find willing scapegoats, they do get exempted many times. Having recurrently "got away with it" - they develop a theory of personal immunity, founded upon some kind of societal and even cosmic "order" in which certain people are above punishment.

But there is a fourth, simpler, explanation. The narcissist lacks self-awareness. Divorced from his true self, unable to empathise (to understand what it is like to be someone else), unwilling to constrain his actions to cater to feelings and needs of others - narcissist is in a constant dreamlike state.

To narcissist, his life is unreal, like watching an autonomously unfolding movie. The narcissist is a mere spectator, mildly interested, greatly entertained at times. He does not "own" his actions. He, therefore, cannot understand why he should be punished and when he is, he feels grossly wronged.

So convinced is narcissist that he is destined to great things - that he refuses to accept setbacks, failures and punishments. He regards them as temporary, as outcomes of someone else's errors, as part of future mythology of his rise to power/brilliance/wealth/ideal love, etc. Being punished is a diversion of his precious energy and resources from all-important task of fulfilling his mission in life.

The narcissist is pathologically envious of people and believes that they are equally envious of him. He is paranoid, on guard, ready to fend off an imminent attack. A punishment to narcissist is a major surprise and a nuisance but it also validates his suspicion that he is being persecuted. It proves to him that strong forces are arrayed against him.

He tells himself that people, envious of his achievements and humiliated by them, are out to get him. He constitutes a threat to accepted order. When required to pay for his misdeeds, narcissist is always disdainful and bitter and feels misunderstood by his inferiors.