Tech Central has an excellent article by Arnold Kling summarizing the differences between the "Sweetwater vs. Saltwater" schools of econ thought.

This year's Nobel Prize, awarded to Vernon Smith and Daniel Kahneman, may prove to be the most controversial in its 34-year history. In general, I would expect that Saltwater economists (from Berkeley, MIT, and Harvard, near the oceans) would approve, while Sweetwater economists (from Chicago, Minnesota, and Rochester, near the Great Lakes) would not.

One difference between the two is axiomatic -- Is economics the study of the way life's decisions are made or should be made?

...The standard definition of economics is "the study of the allocation of scarce resources for competing ends," which does not rule out irrational behavior. However, for Chicago-trained [Sweetwater] professors, economics is the study of rational behavior. In their view, work such as Kahneman's, which looks at irrational behavior, is outside of economics by definition.

The Saltwater view takes the less optimistic approach:

Saltwater economists believe that examples of irrational behavior and imperfect markets are interesting and important.

Unfortunately, despite some surface appeal to this approach (it feels more rational to be a supposed realist than an idealist mode for something as practical as econ), the problem has been that the Saltwater approach hasn't yielded results with empirically provable significance.  Kling says:

...giving a Nobel Prize to behavioral economics at this stage is like putting a promising rookie in the Hall of Fame.

My views are very strongly biased towards Sweetwater.   I do believe that individuals make less-than-rational decisions but simply pointing out when these decisions systematically occur is often enough to provoke the appropriate market response.  Just like the "free money" that's being made by the arbitrageurs on Wall Street from exploiting gaps in NYSE/NASDAQ Reason.   Or how simply writing newspaper stories about the Nigerian Scam helps close the loop of irrational behavior by the potential victims. 

Recognition of these gaps is why the average American individual has a wide & growing variety of "personal decision consultants" around estate planning, taxes, law, home buying, etc.   It's why the web is used to research a growing number of purchasing decisions before the decision happens.  In essence,we see self-correction in action by the growth of markets specifically designed to reduce knowledge and behavioral rationality gaps.

The Saltwater view also breeds a particular type of faith in technocratic solutions.   Saltwater economists tend to be quick to prove market failures stemming from systematic errors in human judgement but shy away embracing from governance failures stemming from the same.  On the whole, these governance failures inflict far more harm upon individuals than market ones.

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