By Guest Author 23/09/2016

This is the final post in the three-part guest series from the Morgan Foundation’s Jess Berentson-Shaw and Geoff Simmons exploring the legacy of the myth of the rational human – Homo economicus.

In our previous post we looked at how Homo economicus thinking ignores so much of what we know about human behaviour, especially in relation to public health.

Of course, this sort of evidence won’t stop libertarians championing their cartoon model of freedom of choice and a perfect market. Libertarianism is after all not based on evidence; it is far closer to a religious ideology, a tautology where any piece of inconvenient evidence can be twisted on itself. Many economists, donkey deep in their own discipline, simply haven’t challenged the theory in the last 30 years. Embarrassingly the ideas are perpetuated in most 101 courses. In contrast, behavioural economics is considered a ‘niche’, ‘specialist’ topic studied at postgraduate level – so much for evidence-based theories.

The assumption of free and fully informed choice allows for tidy, logical thinking to prevail, uncluttered by the realities of the real world and the complexities of human behaviour. It is such a simple, logical position that immediately seizes the moral high ground and demands anyone else to mount a case against it. There is always a right answer, a mathematical formula that can be worked through. And usually the answer is – “Whatever people do, it must be right for them. Prove to me otherwise.” Even when you can prove people aren’t rational, you then have to prove that governments are more rational.

Human are not rational 'robots'. iStock.
Human are not rational ‘robots’. iStock.

What about governments as an agent for the will of the community about shared issues? It is time for economists to accept that homo economicus is a shaky assumption, that it is violated far more often than the condition is satisfied – and by implication that much economic analyses has to become a little more sophisticated. We need to cast it aside and enter into a messy, pluralist discussion about how society should respond to issues rather than assuming government or community intervention is bad unless proven otherwise. Sure, this gets you in the messy real world of politics, which of course libertarians loathe. After all they think government’s only role is to protect their wealth from criminals.

In short, the homo economicus approach is completely out of touch with the evidence about what really influences and determines people’s behaviours and choices. In other words we now understand human beings are not rational robots operating in a perfect environment and market. Continuing to think they are only serves to slow social and economic progress and preserve the status quo. And that probably explains the popularity of this belief amongst lay people – status quo bias is another insight of the behavioural sciences. However, as researchers, we shouldn’t be perpetuating an out-dated belief that has been proven wrong. Just ask Copernicus.

Is there an Antidote for the Kool Aid?

How do we overcome what appears to be a pervasive belief in the predominance of rational humans and the perfect market? The fact is that all researchers have their ideologies, no matter how much they say differently. We all make assumptions about how the world works and to a certain degree we have to in order to make sense of everything. The important thing is that we make those assumptions clear and stay open to changing those assumptions in the face of evidence. Within our professional life and disciplines we should be especially cautious to guard against becoming tied to old theories based on bad science. The very essence of scientific endeavour is seeking to build upon (or even disprove) previous findings.

One thing the economics profession can do to recover some of its credibility is open up to working with other disciplines. This homo economicus model makes it very easy to create a model and find the ‘right answer’ to the world’s problems. But if the basic assumptions being used are wrong, any model is a junk-in, junk- out distraction. Working with other disciplines can help reality check our assumptions and make the work more pragmatic. Economists have a lot to offer other disciplines, but other disciplines also have a lot to offer economists.

Economists can help researchers understand what policies would actually work in the real world. Instead of telling health researchers that their ideas to reduce obesity are stupid, economists should be working with them to find the best way forward. Sure, choices have value and we should recognise that, but choice isn’t much use if you aren’t healthy. Very few people rationally ‘choose’ to be morbidly obese. These conversations are pluralistic and messy, but everyone engaged in policy discussions should be open to them. Otherwise we are merely tacitly accepting the status quo where one in three of our kids is overweight or obese, and will die an early death.

And that is what it comes down to. Does economics want to be the discipline that says because these kids – or their parents for that matter – are choosing a lifetime of chronic disease, it must be a good thing? Should economists endorse a status quo that condemns most of those kids to an early grave? Or should they be part of a conversation to find the most cost-effective solution?

In summary, it is time to consign homo economicus to the evolutionary graveyard. (S)he never existed, except in economist’s imaginations to support simple theoretical models. If the discipline is to survive, economists need to question their dearest assumptions. They need to look outside the closed system thinking, look at the evidence from other sciences and apply the same rigour to ideological preconceptions that are applied to the work of others.

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.

0 Responses to “Homo economicus: Why do we keep swallowing the Kool Aid?”

  • “Many economists, donkey deep in their own discipline, simply haven’t challenged the theory in the last 30 years. Embarrassingly the ideas are perpetuated in most 101 courses. In contrast, behavioural economics is considered a ‘niche’, ‘specialist’ topic studied at postgraduate level – so much for evidence-based theories.”

    Except for the work in Ecological Economics, Institutional Economics (for which Williamson received a Nobel prize in 2009) and continuing work in behavioural economics (Kahneman receiving a Nobel prize for this in 2002) you mean?
    Indeed, we have hidden the topic of behavioural economics so well, it’s included in mainstream textbooks in principles and intermediate microeconomics. Is it in fact possible, that the dogmatic Libertarian strawman economist you’ve conjured does not actually describe the discipline?

    I welcome your attachment to evidence-based thinking however, and would ask you answer the questions I put to you days ago. As they seem to contradict much of your thesis. Thankyou-

    Questions reproduced below
    “Isn’t this satisficing choice market-behavior you describe (aka Simon) a type of rational behaviour?
    Doesn’t rational in economics mean to behave consistently with preferences rather than being super-computers?
    Didn’t Simon get a Nobel prize for his work in behavioural economics in 1978? Wouldn’t it be true to say that this discipline isn’t being created, but has actually been around for quite a few decades now? Wasn’t Peter Earl teaching it at Lincoln Uni in the early 1990s?
    If it’s only being created why has it been present in first year economic textbooks for many years now? Why am I teaching it in my introductory microeconomics class?
    Could you please identify your source for “…For homo economicus “choice” is a good thing, and any intervention by government that reduces this “choice” is inherently a bad thing.” I’ve not come across this before.”

  • I have to agree with Brendan here. Since around 1970 we have seen many changes in the thinking of economists. The standard neoclassical model has been extended by advances in game theory, contract theory, asymmetric information (Nobel to Akerlof, Spence and Stiglitz), law and economics, public choice, the theory of the firm and organisational economics more generally (Nobels to Coase and Williamson), the economics of religion, the new economic history (Nobel to Fogel and North), mechanism design theory (Nobel to Hurwicz, Maskin and Myerson), experimental economics (Nobel to Smith), incentive theory (Nobel to Mirrlees and Vickrey) etc, in addition to the ecological economics, the new institutional economics and behavioural economics mentioned by Brendan. Also one of the most obvious developments over this period has been the advance in empirical economics, both in terms of econometric papers and laboratory and field experimental papers (the New Zealand Experimental Economics Laboratory is at Canterbury). One can not open any of the top journals today without seeing a seemingly endless supply of such work. In fact such is has been the development of economics over the last 40 years or so that David Colander’s 1999 presidential address to the History of Economics Society was on the subject of “The Death of NeoClassical Economics”. Colander wrote “The term, neoClassical economics, was born in 1900; in this paper I am proposing economist-assisted terminasia; by the powers vested in me as president of the History of Economics Society, I hereby declare the term, neoClassical economics, dead”.

    So I would argue, again, you are attacking a strawman.

  • One is remained of the old joke that The Treasury once opposed something because, although it worked in practice, it didn’t work in theory.

    This series of articles seems to want to tear down an economic framework that has produced increased wealth for billions of people over the last few decades. Suggesting there may need to be minor modifications to the theory in no way changes the fact that economics as presently applied works in practice.

    I return to my comment on the first article. The authors state above “Libertarianism is after all not based on evidence”. With respect, I think that the economic growth of Hong Kong does indeed provide evidence.

  • If Brendan, Paul and Ross are right, then economics needs a new PR section. The messages the regular public get are entirely consistent with the message from Jess and Geoff.

  • @Jim Sargent

    I work with biologists, criminologists and regulators in the economic research I do. Issues like why people consume Traditional Medicines that have rhino, or tiger or bear ingredients often benefit from a behaviorism economics analysis. We know for instance, rhino-horn has no pharmacological properties. Yet people are willing to spend large amounts of money buying it. And they’re resistant to being told by westerners it’s not efficacious.

    What Paul and I are talking about, isn’t just some ivory-tower academic stuff that never leaves this environment. It is extremely unfortunate that the authors of this series have chosen to propagate the misleading myth you allude to.