Consumer rationality
Homo economicus, or Economic man, is a term used for an approximation of Homo sapiens that acts to obtain the highest possible well-being given available information about opportunities. This approach has been formalized in certain social science models, particularly in certain economic models.
As in social science in general, these assumptions are at best approximations. The term is often used derogatorily in academic literature, perhaps most commonly by sociologists, who tend to prefer structural explanations to ones based on rational action by individuals.
Homo economicus bases his choices only the consideration of his own personal "utility function". To the extent that this utility function does not consider the well-being of others, Homo economicus is selfish. Some believe such assumptions about humans are unethical. Economists tend to disagree, arguing that it may be relevant to analyze the consequences of enlightened egoism just as it may be worthwile to consider altruistic or social behavior.
How is Homo economicus rational? Usually in the sense that well-being as defined by the utility function is optimized given perceived opportunities. See rational choice theory and rational expectations for further discussion; the article on rationality widens the discussion.
The Austrian School criticise Homo economicus as an actor for economic forecasting. They stress uncertainty in the making of economic decisions, rather than relying on the rational man who is fully informed of all circumstances impinging on his decisions. They argue that perfect knowledge never exists, which means that all economic activity implies risk.
Many critics of the dominant neo-classical economics use "Homo economicus" as a straw man target. "Real people do not have cost-less access to infinite information and an inbuilt ability to process it, in no time at all." However, at advanced level economics, scholars have found ways of acknowledging these facts. When looking at some of the advanced work in the field HE is modified enough to be a realistic picture of some decision making, and the critics are targeting a straw man. It is primarily when targeting the limiting assumptions made in constructing undergrad models that the criticisms are valid.
Empirical studies by Amos Tversky questioned the assumption that investors are rational. In 1995, Tversky demonstrated the tendency of investors to make risk-averse choices in gains, and risk-seeking choices in losses. The investors appeared as very risk-averse for small losses but indifferent for a small chance of a very large loss.
Comparisons between economics and sociology have resulted in a corresponding term Homo sociologicus, to parody the image of human nature given in sociological models. Hirsch, Michaels, and Friedman (1990, p. 44) say that homo sociologicus is largely a tabula rasa upon which societies and cultures write values and goals; unlike economicus, sociologicus acts not to pursue selfish interests but to fulfill social roles. Sociologicus may appear all society and no individual.
See also
