Human Irrationality?

The latest excuse for criticizing capitalism comes from psychologists:

For all its intellectual power and its empirical success as a creator of wealth, free-market economics rests on a fallacy, which economists have politely agreed among themselves to overlook. This is the belief that people apply rational calculations to economic decisions, ruling their lives by economic models.

That's not necessarily the case. In order to oppose the free market, it is not only necessary to show that people are irrational, it is also necessary to show that regulators are rational. It's hard to combine the two claims when we remember that most regulators consist of members of the same species as the people.

There appears to be some evidence showing that people have cognitive blind spots. Has there been any investigation into similar blind spots on the part of regulators? What is the track record of groups of decision makers who thought they knew how to run people's lives better than the people did?

Meanwhile, the studies purporting to show cognitive blind spots are based on asking unbriefed people questions in highly artificial environments. I have read that when the knowledge of physics of The Celebrated Man In The Street is analyzed under similar circumstances, most people will give the wrong answer when asked about the behavior of objects swung in a circle and then released. On the other hand, most people can throw a ball across the room. Maybe they're better at making decisions than at answering questions about making decisions.

In any case, if humans are that irrational, what does that say about the accuracy of conclusions derived by human psychologists? Are psychologists from another planet?