This is the first in a three-part guest post series from the Morgan Foundation’s Jess Berentson-Shaw and Geoff Simmons exploring the legacy of the myth of the rational human – Homo economicus.
When the facts change, I change my mind. What do you do, sir?
– J.M. Keynes
Assumptions are science’s dirty little secret. We all make them, but we don’t spend enough time talking about them and examining them. Assumptions are necessary to make sense of the world. But often in the fullness of time science can lift the veil of our ignorance and prove our assumptions wrong.
Before Copernicus we thought the Earth was the centre of our solar system. Bible scholars calculated the Earth was 4,000 years old, give or take a few Noahs. We even once thought smoking was healthy.
Like these other paradigm shifts, the fundamental assumptions held by many economists have been systematically proven wrong in recent years, but they still cling to them like a rock after Noah’s flood. It is time for the discipline to grow up and consign the myth of rational humans – homo economicus – to history along with Bigfoot and the Yeti (apologies to the Bigfoot and Yeti hunters out there, there is a chance you still might be right).
Homo Economicus is born
This species first appeared in the imagination of economists in the late 19th century. They assumed that all humans are “rational”, they have perfect knowledge and perfect ability in the current market to enact “free choice”. By assuming that humans were rational it opened economics up to the rigour of mathematical modelling; which in the eyes of many gave it a leg up from the social science club to the dizzying heights of the hard sciences.
Early economists made this and other assumptions in the full knowledge that they were an approximation – at best – of reality. When viewed across a large population that assumption holds some credence; every population has a bell curve and on average that population will usually act in a broadly rational way. But the assumption was never intended to apply to each and every member of the population. And yet over time, these elegantly simple assumptions have been absorbed by successive economics graduates through a process of osmosis. The folly of this was pointed out as early as 1977 by Nobel Laureate Amartya Sen in his paper Rational Fools.
Instead of heeding Sen, the assumption of rationality flourished, underpinning the neoliberal revolution of the 1980s and 1990s. And it isn’t hard to see why, because these assumptions support the agenda that they wanted to advance: less government intervention. For homo economicus “choice” is a good thing, and any intervention by government that reduces this “choice” is inherently a bad thing.
Given the mixed results of the neoliberal experiment, you’d think that economists would happily revisit their basic assumptions. Yet some are so blinkered they merely see the problems (such as a dive in wellbeing of the most vulnerable groups in society) as evidence we should reform further. In order to challenge the out-dated assumptions of conventional economics, some psychologists and economists are now working together, creating a whole new sub-discipline: behavioural economics.
Behavioural economics is the meeting of economics and the science of understanding human behaviour (the discipline of psychology, mainly). Using evidence from psychology and the social sciences, economists are starting to understand that how people respond in a market is about way more than rational choice.
Some 95% of our purchase decisions made every day are subconscious – that is to say they are based on habits, stereotypes, bias, short cuts in our thinking and behaviours if you will, rather than explicit conscious rational thought. There are two major factors that influence our decisions that are distinctly non rational; our early development and experiences, and our physical environment. What happens during our time in the womb and childhood, both socially and physically, determines how our genetics are expressed and the very structures of our brain. And our environment continues to subtly influence our decisions throughout our lives; the ‘default’ has an enormous bearing on our choices as suggested in the book Nudge.
Why people behave as they do – often acting against their own self-interest – is a complex business, but needless to say we constantly do it, and mostly it is neither intentional, thought out or rational. We now realise that people are not robots.
Stay tuned for the next post on how Homo economicus has led public health policy down the wrong path…
Jess Berentson-Shaw is an evidence agitator at the Morgan Foundation. Jess has a PhD in Health Psychology, and has worked in the health and social sciences field with some (very nice) economists. She does lack the common sense of many economists, but then we are all irrational, just some less than others.
Geoff Simmons is an economist and General Manager at the Morgan Foundation. He is less academically qualified than Jess, with a piffling Honours degree in Economics from Auckland University. But anyone can call themselves an economist.