Human Behavior and Economics

The Myth of Homo Economicus

A central assumption of neoclassical economic theory and models is that economic decisions are undertaken by an isolated (others have no impact on his decisions or utility function), self-maximizing individual who behaves as a rational actor, or homo economicus, at a point in time. Homo economicus is characterized as an insatiable (with unlimited wants and limited means), self-interested, outcome-oriented, and time consistent (in discounting the future more than the present) individual with exogenous (unaffected by the economic system) and pre-determined preferences (without considering the effect of advertisement) to produce, consume and exchange goods and services in the market place. However, just as many of us can identify in our own behavior, Gintis (2000) has demonstrated that humans can also be strong reciprocators and hyperbolic discounters of the immediate future.

This means that humans are more irrational than assumed in neoclassical economics because we are just as likely to be altruistic/vindictive as much as self-regarding, and to be time inconsistent as much as time consistent (Gintis, 2000; Henrich et al., 2001; Camerer and Loewenstein, 2004). The caricaturized behavior of individuals that neoclassical economics assumes can generate the most welfare to society is also a-historical since humans’ evolutionary success is due, in great part, to our ability to cooperate with one another (Henrich, 2017; Moffett, 2018). Once a utility function is affected by the welfare of others, it’s no longer possible to show that markets generate a welfare maximizing equilibrium. However, while most economists acknowledge homo economicus is a caricature, it remains implicit in the assumption that the price mechanism drives markers to welfare maximizing equilibrium. Moreover, economists conform better to the model of homo economicus than most people, which may result from self-selection as well as indoctrination (Marwell and Ames, 1981; Frank and Schulze, 2000; Kirchgässner, 2005; Cipriani et al., 2009; Bauman and Rose, 2011).

Thinking about markets and money also makes us behave more like homo economicus (Vohs et al., 2008; Caruso et al., 2013). Therefore, economic theory and polices thereof that reinforce a market logic that leads to predominantly isolating, selfish, and short-term thinking behavior are at the core our social, economic, and environmental unsustainability problems that imperil our future success as a species. Thus, a sustainability transition to a prosperous and thriving future for humans and the rest of nature requires economic policies that can foster human cooperation at a local, national and global scale to address issues such as pandemics (e.g. Covid-19), the climate crisis, and to manage natural resources in ways that ameliorate long-term depletion.