Anita Gantner
Human Decision Makers: Traditional and Modern Concepts in Economics
Homo oeconomicus
For more than a century, the concept of homo oeconomicus has been the paradigm of a decision making subject in economic theory: a human being with given preferences who acts in a perfectly rational manner, her behavior guided solely by the principle of maximization of her individual utility. The origins of this concept go back even farther: It was Adam Smith, founder of classical economics as an autonomous discipline, who claimed that the wealth of nations is not based on altruism and humanity, but rather on self-interested behavior that tends to benefit society as a whole through competition. The so-called “invisible hand,” which seems to magically guide the free market to produce just the right amounts and varieties of goods, is a result of the interaction of many self-interested, utility-maximizing economic agents. However, in his less well-known book The Theory of Moral Sentiments, one can find insights into human psychology that are not in line with this description of homo oeconomicus. For example, he observes that people seem to suffer more when they go from a better situation to a worse one than they feel happy when things go the opposite way—from the same worse situation to the better one. In the jargon of economic theory, he describes this as the loss of a given value (expressed as “suffering”) being perceived differently from an equivalent gain (expressed in “happiness”). This contradicts the reasoning of homo oeconomicus, because her perfectly rational judgment of any situation implies that the difference in utility when moving from situation A to situation B must be equal to the one that results from moving from B to A.
Abstract models
Despite the early insights into human psychology and its influence on behavior and decision-making, the paradigm of homo oeconomicus has prevailed as the predominant description of a decision maker in economic theory. Neoclassical theory carries this abstraction even farther by making very specific assumptions about the preferences of homo oeconomicus, which in turn allow the set-up of formal mathematical models that are supposed to reflect economic reality—if not in their exact mode of operation, then at least in their outcomes. Within these models a human being, that is, an economic decision maker, is guided by her invariable preferences and is capable of maximizing her individual utility by using each available piece of information. A perfectly rational decision maker who is left with no room for uncertainty about her preferences or wishes, she knows the reasons for her past behavior as well as those for the future, since her preferences are stable over time. Now in most situations there is not only one decision maker involved; economic reality is defined by the interaction of many agents, their behavior, their expectations, and other uncertain events. Thus, the result of a decision made by a single decision maker does not depend on her decision only, but also on the behavior of all other agents involved in the situation. A rational decision maker therefore has to take into consideration the entire interaction within this context in order to find the optimal decision for herself. 33