As you know, this website is named 'Homo Economicus', which may have led you to consider what this term actually means. Homo Economicus, or 'economic man', refers to a person who acts rationally, pursuing wealth in self-interest and trying to maximise utility (benefit or satisfaction). In general economic theories, we assume that all humans are examples of homo economicus. Although this is a fundamental premise for various economic theories, behavioural economics suggests that humans in fact often behave irrationally in their decision-making, and that recognising and expecting the irrational behaviours of humans is crucial for developing more relevant economic models.
Homo economicus is a representative person utilised in rational choice theory, which states that individuals use rational calculations to make rational choices and obtain outcomes that are in accordance with their personal objectives. The idea of homo economicus as it is used today in economics dates back to John Stuart Mill in the 19th century. Mill defined an economic actor as a person 'who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained'. Similarly, Adam Smith stated that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from regard to their own interest." While the notion that people act in economic self-interest is frequently attributed to economists and philosophers such as Adam Smith, David Ricardo, and Aristotle, Mill is thought to be the first to have explicitly defined the economic man as such.
The idea of homo economicus has been criticised by several notable economists, including John Maynard Keynes. Although the theory of homo economicus was at the forefront of classical economic thought until it was criticised by neoclassical economists, Keynes (among other economists) posited that humans do not always behave like the economic man and instead, behave irrationally. For example, economic actors may not have the full information at hand when making economic decisions, causing them to behave irrationally.
Irrational behaviour causes a loss of economic welfare rather than maximise utility. There are many different types of irrational behaviour, including but not limited to:
Weakness at computation - consumers not being able to calculate the decision that will provide the most utility fast enough or correctly
Herd behaviour - following the crowd
Habitual behaviour - this includes the status quo bias, which is a type of cognitive bias in which we prefer a choice that we are used to
Irrational exuberance - being overly optimistic about asset bubbles.
The idea of homo economicus sparks a conversation about rationality. Being aware of the different types of irrational behaviour, we can take more conscious and careful economic decisions going forward.
Writer: Ritisha Baidyaray
Editor: Ritisha Baidyaray
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