Saturday, June 18, 2011

The wants of Homo economicus

Prompt: Read the “Economic Man” and “Wants” from the New Palgrave Dictionary of Economics. State whether you believe humans actually act in such a manner in their daily lives. How do these actions and beliefs differ from those held within ecological economics?

Homo economicus has perfect information, infinite computing power, and makes optimal, rational decisions. Demonstrations that H. sapiens H. economicus abound. One example is the variety of prices at which goods are purchased. Even on the internet, where the perfect-information premise is most-closely realized and the opportunity cost of selecting a different vender is near zero, goods are routinely sold at prices greater than their minimum.

It seems worth noting that corporate entities are more likely to make rational decisions than individuals. Corporate decisions are made by groups of individuals, often through formalized processes that are designed to maximize profits. Periodic review by managers and, at the ultimate level, shareholders, ensures that individuals or processes that produce sub-optimal (ie., irrational, ie., non-profit-maximizing) decision making are weeded out.

In contrast, individuals make decisions based on a complex psychological suite of rationality, morality, and emotion with little oversight or review. The decision to take $300 to a casino rather than to invest it is irrational*, but, as casino-loyalty-rewards programs demonstrate, there is seldom a mechanism to stop the individual from repeating the irrational act. In marked contrast, if the same person took $300 of a corporation’s money to a casino, they would be eliminated from the company and safeguards would be put in place to ensure that similar irrationality would not be repeated. This may be one of many reasons corporations have grown so dominant in our society.

On the subject of wants, it seems clear that neoclassical economics has inappropriately thought of individuals as surrogates for firms. Human wants aren’t rational; they are influenced, for instance, by social conditions (see, eg., cosmetic skin-whitening cream, which is presently very popular in East Asia). Furthermore, as the essay on economic man points out, the idea that individuals are preference-maximizing entities is entirely unfalsifiable, which makes it entirely unscientific. Preferences being invisible, the theory takes one’s actions as markers of preferences, and then says that those actions are evidence of the preferences they demonstrated. Circular reasoning, par exemplar.

Ecological economics acknowledges that human wants are complex and driven by a variety forces, among which rationality is but one. Being transdisciplinary, ecological economics' appreciation of human wants and decision making is informed by behavioral economics, cognitive psychology, anthropology, sociology, etc.

* The counter-argument would be that the individual derives pleasure from going to the casino in excess of the difference between the anticipated gains of investment and the anticipated loss of gambling. I would respond by suggesting that the counter-arguer go to a casino and look for such pleasure. It has been my experience that individuals are profoundly unhappy while they are in casinos, which returns us to the point that humans often make irrational decisions.


  1. The economic rational behind assuming actions or choice mark preferences is because otherwise some very nice theoretical math would not work out so pretty. Additionally, if you got into the more advanced economic theory, I can imagine you being extremely frustrated by all of the circular "proofs" of a given theorem.

  2. Ok, not the economic rational, but more the for economic convenience sake-this is the way it's been done for so long and since so much other theory is based on this initial assumption, changing that assumption and updating all the theory is just too much. . . or something like that.

  3. Yes! It's awfully tough to fix the foundation once you've built the sky-scraper!