Does Homo Economicus exist?
- 1. Does Homo Economicus exist?
- 3. Definition Latin for "economic human". A term used in economic theories to describe humans as rational and self-interested beings capable of making judgments towards subjectively defined ends (such as accumulation of wealth and resources). This is used as a basic for the majority of economic models, where they assume that all human beings will act like homo economicus. The validity of this assumption has been questioned in some economic circles, with alternative assumptions proposed. http://www.businessdictionary.com/definition/homo-economicus.html#ixzz26H7fSQXC
- 4. Thinking rationally... Experiment 1 Imagine you are hungry and fancy an apple. The answer is obvious; the You stroll to the nearest market and find three cheapest. But why? fruit stands, each selling identical apples. The ● The apples are identical so apples and the price being charged are shown each will bring the same below. benefit (utility) ● The money is a scarce Which apple do you buy? resource so the less you spend of it the better 35p 40p 45p
- 5. Assumptions The concept of Homo Economicus relies on the assumption that people act in their rational self- interest i.e.they do what is best for them. Therefore we are assuming that; ● People know what they want and their priorities ● People can judge the benefit (or utility) the consumption of a good will bring ● People can place a value on the utility (i.e. they know what they are prepared to pay) ● People act selfishly i.e. seek to satisfy their own needs Are these assumptions correct?
- 6. Thinking rationally...? Experiment 2 Solution (part two) Imagine you are given £20. You are allowed If player B acts rationally they will accept to keep some of the money on one condition; as little as 1p. Therefore the rational you give some away to another person (call amount to offer is 1p. It is in your self- them player B). However, player B has the interest to keep as much money as choice to reject your offer. If they do, neither possible. of you get to keep any money. If they accept you both keep your share of the money. Will you offer 1p? If not, why not? How much do you offer player B? Solution (part one) To work out the rational thing to do we must first think like player B. If player B This experiment demonstrates that rejects ANY offer then they will go away emotions play a part in our decisions with nothing. Therefore the rational and that the economically rational thing to do is to accept ANYTHING that thing to do is not always how people is offered, even if it is 1p. behave. Will player B be likely to accept 1p in reality? If not, why not?
- 7. Thinking irrationally... Experiment 3 – The Prisoner's Dilemma Two men are arrested.. The police separate the two men, and offer both the same deal: if one testifies against his partner (betrays), and the other remains silent (cooperates with his partner), the betrayer goes free and the one that remains silent gets a one-year sentence. If both remain silent, both are sentenced to only one month in jail on a minor charge. If each 'rats out' the other, each receives a three- month sentence. Each prisoner must choose either to betray or remain silent; the decision of each is kept secret from his partner. What should they do? The rational thing to do is to both stay silent. However, each is fearful of the much higher jail-term if they stay silent and the . other prisoner 'rats'. Therefore the safest thing to do is to betray each other. Each prisoner will 'choose' the option which leads to a 3 month jail-term. There is an option which could lead to a shorter jail-term but they do not choose to act in what appears to be their self-interest .Source: Wikipedia
- 8. Thinking irrationally... Experiment 4 – The Sunk Cost fallacy You purchase a ticket to the theatre. When you arrive you realise that the ticket is lost. There are more tickets on offer. Do you buy another ticket? Many people answer by saying that they cannot bring themselves to pay for another ticket. In their mind they cannot let go of the money already 'sunk' into the purchase. By paying for another ticket they feel that they would be paying twice the original cost for the ticket. Rationally we should behave as we did when we first purchased a ticket. The value of the ticket hasn't changed and the price is the same, therefore the A little more about rational thinking... decision should still be to buy. The original cost is sunk whether or not we http://boxonomics.blogspot.co.uk/2012/ buy the new ticket and enjoy the theatre 09/basic-concepts-rational-choice- production. theory.html#!/2012/09/basic-concepts-
- 9. Summary We behave rationally when... ● We search for the cheapest product available ● We buy what we most need ● We seek to maximise our utility with the scarce money we possess ● We consider the opportunity cost of our decisions Some economists claim we often don't behave rationally. For example we may... ● Be persuaded to make decisions which are not in our self-interest ● Allow emotions to influence our decisions ● Take account of sunk costs rather than just the future costs which will be incurred ● Follow others rather than thinking for ourselves ● Make decisions without all the information we need at our disposal
- 10. Do firms behave rationally? Economists often apply the idea of rational self-interest to other economic agents (this means other economic decision makers) such as firms or government. What are these economic agents trying to achieve? In other words, what is in their self-interest? Individuals seek to maximise their utility through increasing their income and consumption Government seek to maximise welfare i.e. society's wellbeing and wealth Firms seek to maximise their profit