Misconceptions of “Homo Economicus”


There is a concept in economics known as “Rational Choice Theory,” which claims that individuals will act with intent and make rational choices that result in a benefit to their own interest. This rational actor is referred to by economists as homo economicus.

The accuracy of Rational Choice Theory is disputed, despite it being a pretty mainstream concept. Its validity depends entirely on how one defines “rational,” and there lie the misconceptions.

Some make the mistake of assuming that the rational choice is the same as the “correct” choice. Economist Bob Murphy clarifies the Austrian economist’s view of what constitutes “rational” action in his book, Choice. We know that human beings act in pursuit of some desired goal. People acknowledge their current situation A, compare it to their preferred situation B, and then act to move from A to B. They also rely on previous knowledge and assumptions (whether true or not) to determine the best method of moving from A to B.

This is what is considered to be rational action. Most people wouldn’t think it “rational” if they saw a man doing a rain dance, but under certain circumstances, that might actually fall under the Austrian definition of rational. If one of the man’s initial premises was that a rain dance causes rain, and his goal was to get rain, it would be rational to then perform a rain dance. Obviously, the man is not actually acting to bring about rain, but he is still, from his viewpoint, acting in pursuit of a goal based on what he believes to be an effective means to an end.

If this man were later convinced that a rain dance doesn’t actually bring about rain, we wouldn’t expect him to perform a rain dance again when he wants rain. Now that his initial premises have changed, his actions have also changed to reflect that.

Homo economicus does not necessarily make the most efficient choices or have the right initial premises. All that is defined within the Rational Choice Theory is that individuals act based on what they believe to be the best route to achieve a goal.

Financial investments are a clear example of this. Investing in something is risky and only potentially profitable. Nobody knows for sure what the price of Cardano or Apple stock will be a year from now, but one can speculate. Rational Choice Theory states that if individuals believe that something is a worthwhile investment, they will invest in it. The theory does not assume perfect knowledge, it only assumes rational action based on known information. A theory that claimed individuals make the best choices would be clearly untrue and easily disproved by the fact that some people make bad investments.

Even if an action does not lead to the desired goal, it can still be considered rational. Individuals investing in the market sometimes make mistakes and lose money. An investment turned sour does not make the original choice of investment an irrational one. The investor still had the intent of making a profit, even if the result wasn’t close to the desired goal.

The fields of behavioral economics and psychology have uncovered many different examples of humans acting irrationally in unintentional ways. Many of these are in minor subconscious ways that we don’t even realize are influencing us. But the fact that they are unconscious brings into question the role of intent in rational action.

Human beings occasionally make self-destructive choices, sometimes with intent or knowledge of self-destruction, and other times unaware of what they are doing. In scenarios where the former is true, individuals are still acting in pursuit of a goal (as horrible as that goal may be), thus fulfilling the defining quality of homo economicus in the realm of economics.

In the latter sense, intent is important. If human beings can be influenced in subconscious ways that make their decision making less than perfect, can we still say they act rationally?

From an economics standpoint, yes. We can still say that human beings are acting in pursuit of a desired goal based on the knowledge they have. Even if their premises aren’t always true, or even if the human decision making process is flawed, we can still say that people are “rational” in the sense that they act in pursuit of an objective. That much is known.

Of course, we can’t just toss out everything about flawed decision making and untrue premises. That’s still worthwhile information to keep in mind when analyzing human action. But what we can say, at least in the Austrian view of Rational Choice Theory, is that human beings act, and when they act, they act with intent to pursue a desired goal, whatever that may be.

This article represents the views of the author, and not those of Being Libertarian LLC.

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Nathan A. Kreider is author of the Misconceptions column for Being Libertarian, and has written for the Austrian Economics Center, the Foundation for Economic Education, and the Liberalists. He also occasionally publishes a blog and video content, including short book reviews, which can be found on his website, nkreider.com. He can be contacted by email via [email protected]