Who is Homo Economicus and What is Wrong with Her?

October 30, 2014

Abstract: Economists take a very counterintuitive view of human behaviour, reducing life to a single-minded pursuit of maximising either profit or pleasure. The current article critiques the two major theories of human behaviour that have dominated Economics for a century, pointing to the accumulating evidence that refutes them.

The Homo economicus model or how economists see the person

At its most basic Economics is about human choice. In our lives we have to make choices as to how to allocate our limited resources to best satisfy our unlimited desires. Economists try to model human behaviour in order to be able to predict what choices we make in what circumstances.

Currently, the model most prevalent in Economics, which aims at describing how a human person makes choices, is the model of Homo economicus, economic man. According to this model all people are reduced to a single, representative (or ‘average’) human being who has only two traits: she is rational, and she is profit seeking.

In this article I describe two versions of the Homo economicus model and argue that both of them have major flaws. The first version is empirically proven false, while the second is too general, and for that reason can neither be proven nor disproven by experiment. Both versions are too crude and simplistic to be able to describe something as complex as human choice.

Before exploring the two, rather simplistic, conceptions economists have of their fellow human beings, I must start with a brief discussion of rationality. That is because rationality, in one form or another, lies at the heart of all human choice. That is to say, every person acts for reasons, regardless of how ‘good’ or ‘bad’ those reasons might be.

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About the Journal

Moral Cents: The Journal of Ethics in Finance (Summer/Fall 2014)

Financial regulations have proliferated since the Global Financial Crisis. Some, having lost their faith in self-regulation, welcome the new rules. Others, clinging to the belief that a free market ensures financial actors will self-regulate, deplore the promulgation of clumsy and poorly designed regulations. Both sides are right. Regulations are necessary in an ethically unconstrained world but they are sometimes badly thought out, arise too hastily, and have negative unintended consequences. Less regulation is of course more desirable. Yet, for self-regulation to function properly, individual actors must possess a sense of values and work in a culture that genuinely promotes, rather than pays lip service to, ethical behavior.
Thus, the promotion of ethics in individuals and organizations decreases the need for regulations.
This issue of Moral Cents focuses on financial regulations over a diverse range of transactions and actors around the world.
Daryl Koehn and Jo Lynne Koehn analyze dark liquidity or dark pools and the ethical issues associated with them. They bring to light some less obvious but yet, significant problems connected to dark liquidity. The authors direct attention to three possible ways for coping with the problems and ultimately choose a policy of targeted regulations to benefit investors.
Steven Wu writes about corporate governance in Hong Kong, within the context of the Hong Kong Securities and Futures Commission’s new rules for the sponsor regime governing initial public offerings. Mr. Wu questions the rigidity of these new rules. While the reforms are ethically upstanding, their long-term consequences remain to be seen.
Rebecca Wong investigates UK’s Regulators’ Code and analyzes the effectiveness of financial regulation. The Code was published by the Better Regulation Delivery Office in April 2014 and is meant to reduce regulatory burdens. Ms. Wong critiques the Code, finding it lacking, and recommends instead that regulators stress the great need to engender a culture of ethics within the financial services industry.
Calvin Benedict gives an opinion piece calling for enlightened leadership in finance. He uses examples from the Barclays bonuses and job cuts case as well as the BNP Paribas sanctions case. Benedict recommends leaders play a decisive role in building a sense of the systemic and promoting the common good.
Maja Cvjetanovic provides insight into the concept of consumer sovereignty and applies it to recent payday lending reforms in Australia. She argues that consumer sovereignty should be preserved as a ‘normative standard’ and not used in its descriptive sense, as championed by neoliberalism to mean the consumer’s rational ability to fulfill wealth- maximizing preferences. In any case, empirical evidence refutes the latter point of view.
Vesko Karadotchev continues in the vein of criticizing the neoliberal economic model. In particular, he critiques the two major versions of the Homo economicus model, which has dominated economics for a century, and argues both versions have major flaws. The first version is not supported empirically, while the second is too general to be useful. Neither can hope to fully describe human economic behavior.
It would be a fine thing indeed to have as little regulation as possible. But this ideal is a distant goal if we continue to adhere to flawed and empirically disproved economic models. Bring back values into economics and finance, use an economic theory in which ethics plays a central role, then, chances are, regulations cease proliferating.

Editorial by Dr. Kara Tan Bhala

Moral Cents: The Journal of Ethics in Finance is published by
Seven Pillars Institute for Global Finance and Ethics
ISSN 2326-5663

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