Myth: Homo economicus is a valid assumption of human
Fact: Homo economicus is a fiction useful to right-wing
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.
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.
- Perfect self-interest
- Perfect rationality
- Perfect information
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 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.
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)
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,
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
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.
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
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
(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
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
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
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
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:
- Labor force participation
- Per-capita income
- Racial and age characteristics
- The probable arrest rate in murder cases
- The conditional probability of conviction for arrested murder
When these factors are accounted for, the deterrence effect in
Ehrlich's study disappears.
- The length of prison sentences for murder
- The availability of guns
- Income inequality
- Media violence
- Changing family structures
- The revolutionary and changing social forces of the 1960s,
a period Ehrlich's study covered. This era saw rising racial tensions,
anti-war protest, new sexual mores, greater drug use, greater
television viewing, etc.
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.
Return to Overview
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.
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,