Homo Economicus is a Bad Assumption

Before I start, I want to solely credit ‘Doughnut Economics- Sevens ways to think like a 21st century economist’ by Kate Raworth for the information I use and for the great insight into how economical thinking has advanced in the 21st century.

When creating models, economics tend to call the perfectly rational agent the Homo Economicus and although we may all embody some aspect of this model, our social image is slightly nuanced from this model because we dont calculate our choices through utilities, instead we estimate them. The problem in this model, is that no human is perfectly homo economicus because we can’t be perfectly rational as we have deeper motives such as being a conditional cooperator or an altruistic punisher in certain conditions. These motives differ between economies and we can see this in the Ultimatum game which is a 2 player game where they are given some sum of money and player 1 gets to offer some portion of the money to the second player and if they accept the offer, they get that portion and the player 1 gets the remainder of the money while if they reject, both players get nothing. Although the perfectly rational option in this situation is going to be for player 2 to always accept because it is free money, what we do see is that people tend to decline offers because of pride or other self-respect motives. This explores our human nature of being altruistic punishers- we punish those who are manipulative or deviate from some nash equilibria. The interesting property of the Ultimatum game is that depending on the economy that the players are chosen from, they have differing offers and acceptance rates:

  • In America which have people of higher reciprocity, people tend to split around the 40%-60% mark with an acceptance rate of about 75%
  • If we go to an emerging economy such as Machiguenga, regardless of the offers the acceptance rate was close to 100% because any money was welcomed
  • In Lamelara, a hunter gathering tribe, the offering rate was around 60% making the offer optimal for the person receiving the trade. This high reciprocity is caused because of the high interdependence of Lamelara tribe where they all hunt together, all wash together and all each together.

Based on these very large deviations in the types of offers and acceptance rates of each of these economies, we can see that the summative model of homo economicus isn’t an accurate model for modern day economics.

Shalom Shwartz was a researcher in the 1980s who researched 80 nations and their inhabitants and was able to get a model of the typical consumer not based on homo economicus but rather based on their position on 10 different values:

  • self-direction
  • stimulation
  • hedonism- urge to seek pleasure
  • Achievement
  • Power
  • Security
  • Conformity/ Tradition
  • Benevolence
  • Universalism

Depending on the economy, people weight certain characteristics over the other. Shwartz then grouped these 10 values into 4 groups where they formed 2 pairs of 2 groups where the pairs would juxtapose each other. For example, there is a group for openness to change which juxtaposed the group on conservatism while the other pair was self-enhancement against self-transcendence. Dependent on the economy, inhabitant would position themselves on one of these sides and as a result have wavering views on what is rational. As a result, having the overarching sovereign model of homo economicus is highly inaccurate because of the fluctuations in peoples choices.

Furthermore, we tend to exhibit a lot of cognitive biases and the 4 most prominent ones are our availability bias-making decisions based only the information around us, social norms, loss aversion- making choices that take the least amount of risk than to make an equivalent gain, and only taking non board facts that fit with our existing underlying framework. Although this seems to be bad, Gigerenzer studied this behaviour and concluded that actually, it rationalises why we have evolved to be the most proficient species on the Earth and allows us to outperform computers in some ways. However, nudge policy was created in order to nudge us away from these cognitive biases. Therefore, humans are more heuristic thinkers.

Prospective Economics Student