On the first day of the semester, I tell the students that we assume people are rational in economics. That means that no one intentionally makes themselves worse off. People only engage in actions if the benefits outweght the costs. What should we think when we see people do things that might seem crazy or at least look very much like they are hurting themselves? Consider the following from an article in Sunday's New York Times Magazine called "Darwin's God"
"Rituals are a way of signaling a sincere commitment to the religion’s core beliefs, thereby earning loyalty from others in the group. “By donning several layers of clothing and standing out in the midday sun,” Richard Sosis wrote, “ultraorthodox Jewish men are signaling to others: ‘Hey! Look, I’m a haredi’ — or extremely pious — ‘Jew. If you are also a member of this group, you can trust me because why else would I be dressed like this?’ ” These “signaling” rituals can grant the individual a sense of belonging and grant the group some freedom from constant and costly monitoring to ensure that their members are loyal and committed. The rituals are harsh enough to weed out the infidels, and both the group and the individual believers benefit."
Here is another example. In his book Passions Within Reasons, economist Robert Frank demonstrates how emotions communicate ability and intentions more effectively than rational signals. In one example from a novel, he explains why a private investigator (PI), would smash the window on the car of gangster boss. The PI wanted the gangster's help in finding his girlfriend's murderer. The gangster needs a reason to help. The PI's only option is to make the gangster think he is crazy enough to try to hurt the gangster. The PI cannot simply say "I am crazy." He must communicate that his emotional state is at least somewhat unbalanced or abnormal. A crazy person is much more likely to smash the window than a normal person. This action successfully demonstrates the PI's possible emotional state better than any normal, rational signal. It works partly because emotions are costly to fake and therefore emotional demonstrations are more believable.