Myth: Homo economicus is a valid assumption of human behavior.

Fact: Homo economicus is a fiction useful to right-wing economists.



Summary

Most social scientists believe that human behavior is often complex, contradictory, imperfect and unpredictable. Economists, however, use a model of human behavior called Homo economicus, who is endowed with perfect (or abnormally high) rationality, self-interest and knowledge. Besides the obvious fact that humans aren't perfect, the model suffers from other basic problems. Humans are ultimately driven by their emotions, not their logic, and emotions are often irrational. Nor are humans 100 percent self-interested. They perform altruistic acts like charity, volunteerism, lending a helping hand, parenting and even giving one's life for one's country. They also perform self-destructive acts like substance abuse, negative addiction, negative risk-taking, procrastination, inability to complete projects, masochism, and suicide. Nor are people highly knowledgeable about all their affairs; they can be expert in only a few topics at a time. The reasons why economist use such a flawed model as Homo economicus is because it makes their economic analysis simpler and allows them to generate results that confirm their pet prejudices. Such methodology, however, leads to inaccurate conclusions.



Argument

Since economic activity is a human activity, it follows that economics must be premised on some model of human behavior. But where do we find the best one? Therein lies the controversy. Right-wing economists have their own model, called Homo economicus, or "Economic Man." It stands in sharp contrast to the model drawn by psychologists, sociologists, biologists, liberal economists and other social scientists.

Specifically, social scientists believe that human behavior is often complex, imperfect, limited, self-contradictory and unpredictable. Homo economicus, however, is a greatly simplified model which assumes that individuals possess the following traits:

Of course, humans aren't perfect, and right-wing economists concede -- albeit begrudgingly -- that a strong version of Homo economicus is unrealistic. That's why more moderate economists hold to a weaker version, in which these traits are not quite perfect, but still abnormally high. Regardless of which one an economist uses, what unites these two versions is the assumption that humans are "rational maximizers" who are self-interested, who only do things for their own material gain.

This essay is divided into two parts. First, we'll show why either version of Homo economicus is a deeply flawed model of human behavior. Second, we'll reveal the less than noble reasons why right-wing economists use such a flawed model.

THE FLAWS OF HOMO ECONOMICUS

Let's look at each of the three traits of Homo economicus -- self-interest, rationality and information -- and see how they violate the findings of the other social sciences.

Rationality

Rationality is defined as "the ability to reason" and "to exercise good judgment." Humans of course possess these traits, but they are not the ultimate driving force behind human behavior. One of the basic facts of modern psychology is that our intellect serves our emotions, not vice versa. Human behavior is not primarily the result of logical cost-benefit analysis, but of emotions like love, hate, loneliness, fear, greed, anxiety, sexual attraction, pleasure, pain, etc. We use our intellect only to fulfill or avoid these emotional states.

Let's consider the first half of the definition of rationality: "the ability to reason." Just one example of how emotions are irrational in this sense is sexual attraction. We do not "decide" or "think" to become sexually attracted to someone; we just are, thanks to our genes and hormones. The only role of the intellect here is to formulate a mating strategy.

Now let's consider the second half of the definition of rationality: "the ability to exercise good judgment." Just one example of how emotions are irrational in this sense is self-destructive behavior like alcoholism. People become addicted to alcohol because it chemically induces an emotional state: euphoria. But while pursuing this emotional state, alcoholics destroy their lives. George Vaillant is perhaps the nation's leading authority on alcoholism, and he offers the following portrait of an alcoholic's career. Most alcoholics go on and off the wagon, but their condition progressively worsens as they reach middle age. They will generally lose everything dear to them: their family, their friends, their jobs, their homes, their possessions, their reputations. Finally they will hit bottom: they will have nothing left to lose but their lives. This is the turning point for most. Roughly a third will die or stay in horrible shape at the bottom, another third will become abstinent, and another third will shift to more responsible social drinking. (1)

Although one might argue that most alcoholics ultimately do the rational thing at bottom and choose survival, the point is that the 20-year slide to the bottom is not rational in the first place. Losing a job would be a negative incentive that would compel a truly rational person to stop drinking. But the alcoholic goes on to the next negative incentive -- losing one's family -- and then on to the next -- losing one's house -- and so on, without ever making the obvious rational choice. And all in the pursuit of an emotional state.

A large part of the reason why alcoholics aren't rational is because they are in denial. In other words, they've constructed their own alternate reality to protect themselves from the ugly truth about their condition. For instance, they often blame everyone else for the negative events in their lives, when in fact people are just reacting as they normally would to a problematic person.

This sort of irrationality (or "rationalization") is not isolated to alcoholics. To varying degrees, we all rationalize our reality. The consensus of modern psychologists on this point is overwhelming, and finds its best expression in Cognitive Dissonance Theory, first advanced in 1957 by famed psychologist Leon Festinger.

A "cognition" is a belief or attitude. "Dissonance" is an inconsistency between cognitions, or between cognitions and actions. For example, dissonance occurs when you hit someone (say, on a regular basis) and then feel guilty about it between times. Dissonance is unpleasant, so people seek to reduce this unpleasantness by changing either their behavior or their cognition. In the above example, you could either stop hitting someone, or else stop feeling guilty about it ("He or she deserved it"). Most of the time, it's easier to change one's beliefs than behavior, especially when the behavior is addictive, pleasurable, genetic, etc. Psychologists have concluded that people create rationalizations or justifications for their beliefs and actions to maintain psychological stability -- they do not generally come to those beliefs or actions through objective rationality and self-interest. (2)

Self-interest

It is a scientific fact that people are not 100 percent self-interested. If they were, we would not see such altruistic behavior as charity (especially towards strangers), volunteerism, parenting, lending a helping hand, sacrifice, martyrdom or giving up one's life for one's country. Nor would we see such self-destructive behavior as substance abuse, negative addiction, negative risk-taking, procrastination, inability to complete projects, masochism, suicide, etc.

Contrary to all the above examples, the strong version of Homo economicus assumes that everything people do is for their own material gain. And, true, this would be an excellent individual survival strategy. Both sociologists and biologists agree that humans compete for limited resources. Those with more resources are able to compete better and survive longer. We can see this in our statistics: in the U.S., the poor have six times the death rate of the rich. (3) That's because people with wealth can afford better health care, better diets, better education and information, safer and less toxic homes and workplaces, more creature comforts, greater efficiency of survival, etc. Under no circumstances, then, should a truly self-interested individual do anything that surrenders wealth or health to others.

Yet parenting does exactly that, in many ways. First, a couple having sex could lose their health or even their lives to sexual disease. Women risk death at childbirth -- and did so at shockingly high rates in pre-modern times. Both parents must also sacrifice considerable time and wealth to raise their children. (Until the 20th century, children eventually became economic assets, but the vast majority of child labor profited the aristocrat or company owner, not the parents, whose children brought home pittance wages.) And if children are ever threatened, parents will sacrifice life and limb to protect them. Objectively, parenting is one of the most anti-individual things a person can do. Natural selection only overcame this impediment by creating overwhelming emotional incentives to parent -- namely, sexual attraction, sexual pleasure, maternal and paternal instincts, etc. These emotional incentives prove that human nature is designed for more than just individual survival.

Biologists recognize four levels of survival: the gene, the individual, the group, and the specie. All of them interact to produce the complex and often paradoxical behavior we witness in humans. The error of Homo economicus is that it focuses only on one level: the individual. It cannot explain why couples bear children (to promote genetic survival), or why soldiers often sacrifice their lives in war (to promote group survival), or why people practice charity (to promote human survival).

Some defenders of Homo economicus therefore turn to its weaker version -- an Economic Man who responds to emotional as well as material incentives. In The Armchair Economist, Steven Landsburg opens his first chapter thus: "Most of economics can be summarized in four words: 'People respond to incentives.' The rest is commentary." (4) According to this viewpoint, humans respond to financial and emotional incentives to maximize their "utility" (happiness). Certainly we can see the selfishness of people who try to satisfy their sexual and parental urges, even if doing so reduces their individual health and wealth.

But this too fails, because emotional incentives are often anti-individualistic. It is nonsensical to claim that people can be 100 percent self-interested and yet pursue anti-individualistic behaviors at the same time. Smoking is a prime example. According to economists, smokers are maximizing their happiness both when they start smoking and when they quit. But as any smoker will tell you, only the first few weeks of smoking bring on a pleasurable rush -- after that, it's a nasty habit whose only pleasure is the relief provided by avoiding withdrawal symptoms. And this is not to mention the financial costs, health problems and early deaths that accompany smoking. It is actually not smoking -- as opposed to smoking -- that maximizes happiness.

At this point, it's best to abandon both versions of Homo economicus and acknowledge the four levels of human survival.

Information

Will Rogers once said, "Everybody is ignorant, only on different subjects." In other words, each hour you spend becoming an expert in, say, medicine is an hour you did not spend studying some other subject. And if you become an expert in medicine, it can only be in a very narrow sub-discipline, like surgery, pediatric care or pharmacology. Even in these sub-disciplines, there is practically an infinite amount to learn, and experts in them can never fully master them.

Although these observations seem like common sense, they are ones that economists frequently forget. How? Often, economists argue that national problems are solved by people learning some bit of information, something usually just beyond the realm of common knowledge. But when this solution is repeated for every national problem, the information demands quickly become overwhelming. Economists who posit this solution for every national problem forget its own cumulative effect.

For example, economists assume that people adjust their price and wage demands by watching changes in Federal Reserve policy. This may seem simple, but it requires people to know exactly where to find such data, to be able to afford it, to acquire it on a regular basis, and to know how to use it in their calculations. Meanwhile, on another front, economists assume that people know whether to consume or save depending on whether the government is running a deficit. Again, this involves all the above information costs and requirements. Multiply this by a thousand other problems, and you can easily see that people cannot handle the information overload.

For these reasons, people cannot be true experts in all their affairs -- only a few of them. Which means that ignorance, not informed analysis, is the chief characteristic of society. The only reason why society appears so successful is because everyone is an expert at something, and they socially and economically interact. In sum, it is our collective knowledge, not individual knowledge, which solves national problems.

Examples of how real people differ from Homo economicus

Countless experiments and examples show the fallaciousness of Homo economicus.

Cornell economist Richard Thaler conducted a famous experiment in which he gave half his students coffee mugs that normally cost $6.00. He then invited students to buy, sell or keep their mugs, at whatever price they wanted to negotiate among themselves. Economic theory predicts that roughly half the mugs should change hands, and that mug-owners and non-mug owners would agree on the objective value of the mug, and therefore an average price. But in four different experiments, something different happened. Mug-owners demanded an average of $5.25; non-mug owners were willing to pay no more than $2.75. Consequently, only 12.5 percent of the mugs traded. In theory, both owners and non-owners were asking themselves the same question: the value of the mug. But somehow, the value of possession of the mug also worked itself into the equation. Apparently, humans have an instinctive and "irrational" predisposition to hoard material wealth. (5)

In 1985, Elizabeth Hoffman and Matthew Spitzer conducted the following experiment on rationality. They devised a simple game in which two people decide how to split $14. The rules allowed the players to split the money however they wanted. However, if no agreement was reached, then the first player would receive $12 and the second player would receive nothing. According to cooperative game theory, the most logical result is that the second player should agree to $1 and let first player take $13. That's because if the second player tries for anything more, he gets nothing since the first player can simply disagree and collect $12 anyway. So, under no circumstances should the first player agree to anything less than $13. But something very different happened during the actual experiment. When players 1 and 2 were determined by a coin toss, the players always agreed to split the money evenly… $7 apiece! (6) It appears that people are often more motivated by fair play, easy solutions or some other factor than "rational maximization."

Studies also show that people still tip in restaurants that they do not expect to visit again, in contrast to Homo economicus, who is predicted to keep his money since no retribution will result. Other experiments show that large numbers of people are willing to return lost wallets, cash intact, with no expectation of reward. Obviously, people often engage in civil behavior, not just out of virtue and morality, but because such behavior makes for a smoother running and more efficient society and economy. (7)

Another obvious irrationality is advertising. Take one of the most successful advertising ploys of all time: the inclusion of sexy young women in beer commercials. The implication of these commercials is "Drink our beer, get this girl." Interestingly enough, these subliminal messages work -- such beer ads are wildly successful. But a message closer to the truth is "Get this beer gut, drive this girl away." One of the more amusing topics in right-wing economics is the defense of such advertising as "rational."

WHY ECONOMISTS USE HOMO ECONOMICUS

There are at least three reasons why economists use Homo economicus, none of them noble.

The first is that Homo economicus makes economic analysis relatively simple. In real life, accurately predicting or explaining human behavior is extremely difficult. To simplify this task, economists simplify the human being. This means assuming the traits of humans to be 100 percent… as in 100 percent self-interested, 100 percent rational, etc. Such purity of traits allows them to make predictions.

Of course, this raises the question of how realistic and therefore valuable these models actually are. A good analogy to this problem is the shape of the earth. For simplicity's sake, we call the earth "round." But in reality, the earth is an irregular ellipse characterized by mountains, valleys, polar caps, etc. In the real world, we have to do the hard work of actually mapping these irregularities (by land survey, satellite radar, laser ranging, etc.). This is the only way we can perform practical functions like navigating, determining property boundaries, transmitting radio signals or shooting cruise missiles. Assuming that the earth is perfectly round allows us to do none of these things. A scientist might assume a "round" earth in his calculations, and defend his action by claiming that it makes his work easier. It does that, all right, but it also makes his results more inaccurate and useless.

Second, such simplifications allow economists to make their discipline more mathematical. If humans are "rational maximizers," then its possible to describe their preferences numerically… for example, a person should prefer $40 to $30. (Forget the fact that people might prefer the $30 course of action for reasons of sentimentality, charity, boycotting, or other non-economic factors.) Economists also love mathematics because it carries an air of certainty and authority. They would love nothing more than to be counted among the hard sciences, like physics or chemistry. The so-called "soft" sciences like sociology and psychology only earn their contempt. But, truth be told, economics is a branch of sociology.

Third, by picking and choosing the right starting assumptions, economists can generate results that confirm their pet prejudices. An example is a study on the death penalty by economist Isaac Ehrlich. (8) In attempting to prove that the death penalty deters murder, Ehrlich calculated how changes in America's execution rate affected its murder rate. Of course, executions aren't the only social factor that affect the murder rate, and one of Ehrlich's challenges was to identify these other factors and account for them. In his model, Ehrlich held the following factors constant: Limited to these factors, Ehrlich found that the death penalty offers a substantial deterrent to murder. However, he neglected all of the following factors: When these factors are accounted for, the deterrence effect in Ehrlich's study disappears.

Economists respond that no model ever has a complete set of starting assumptions. This is true -- there are probably countless hundreds of factors that contribute to any social phenomenon, all of varying significance. But scientists should identify as many of the significant factors as they can. This is the only way to reduce the margin of error to acceptable levels. To neglect any major known factor is to conduct second-rate science.

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Endnotes:

 1. Martin Seligman, What You Can Change and What You Can't (New York: Fawcett Columbine, 1993), p. 210.

2. For a review, see Elliot Aronson, The Social Animal (New York: W.C. Freeman and Company, 1992) and Leon Festinger's Theory of Cognitive Dissonance, 1957.

3. Robert Pear, "Big Health Gap, Tied to Income, Is Found in U.S." The New York Times, July 8, 1993, pp. A1. For other studies showing the greater mortality rates of the poor, see George Davey Smith and others, "Socioeconomic Differentials in Mortality Risk among Men Screened for the Multiple Risk Factor Intervention Trial: I. White Men," American Journal of Public Health Vol. 86, No. 4 (April, 1996), pp. 486-496; George Davey Smith and others, "Socioeconomic Differentials in Mortality Risk among Men Screened for the Multiple Risk Factor Intervention Trial: II. Black Men," American Journal of Public Health Vol. 86, No. 4 (April, 1996), pp. 497-504; Gopal K. Singh and Stella M. Yu, "US Childhood Mortality, 1950 through 1993: Trends and Socioeconomic Differentials," American Journal of Public Health Vol. 86, No. 4 (April, 1996), pp. 505-512; C. Wayne Sells and Robert Wm. Blum, "Morbidity and Mortality among US Adolescents: An Overview of Data and Trends," American Journal of Public Health Vol. 86, No. 4 (April, 1996), pp. 513-519.

4. Steven Landsburg, The Armchair Economist: Economics and Everyday Life (New York: Free Press, 1993).

5. Richard Thaler, The Winner's Curse (New York: Free Press, 1992), p. 65.

6. Elizabeth Hoffman and Matthew Spitzer, "Entitlements, Rights and Fairness: An Experimental Examination of Subjects' Concepts of Distributive Justice," Journal of Legal Studies, 14, 1985, p. 259.

7. Tipping: Thaler, p. 212. Wallets: Robert Kuttner, Everything for Sale, (New York: Alfred E. Knopf, Inc., 1996), p. 62.

8. Isaac Ehrlich, "The Deterrent Effect of Capital Punishment: A Question of Life and Death," American Economic Review, (June 1975).