Misconceptions of the Rational Actor

Economic insight

A common criticism from both the left and the right used to dismiss economic arguments is the myth of the “rational actor.” This supposed person, sometimes referred to as Homo Economicus, is a template used by some economic models and theories.

This person is apparently supremely well-informed, and is so dedicated to rationality and reason that we could call them John Galt or Howard Roark. This rational actor is constantly making the best choice to maximize their own material profit. In fact, every action taken is based on thorough rational judgement.

The only issue is, as so many point out, this person isn’t anything like the average person. In fact, it would be difficult to find anyone at all that fits this description. Sure, people generally want to increase their own material profit, but this is in no way a consistent rule. In nearly all cases, people lack perfect knowledge of all possible decisions, leading to inefficient actions. Sometimes people pursue psychic profit, rather than material profit, like in the case of volunteering or donating.

But then, if the concept of Homo Economicus is so flawed, does this mean that the critics of economics are correct?

Not at all.

Many different economists, from John Maynard Keynes to Ludwig von Mises, reject this view of man.

Most economists use a different definition of the economic person, simply stating that people act to pursue their own self-interest, whatever that may be. Some economists, especially in the Austrian school, put forth Homo Agens (the acting person) as a substitute for Homo Economicus.

To understand Homo Agens, one must first consider what is meant by “rational.” To a person without perfect knowledge, the rational choice might not always be the correct choice (“correct” in the sense of the ideal to achieve a desired outcome).

Human beings act to accomplish a desired goal based on the knowledge they have. This is rational action. If one believed that rain dances bring rain, and this person wanted rain, then it would be a rational action to perform a rain dance.

If we knew that a person believed in rain dances and desired rain, we could predict that they will probably perform a rain dance. If we knew that a person didn’t believe in rain dances and also wanted rain, we could predict that they probably won’t perform a rain dance. Our predictions would almost certainly turn out to be correct.

If a person wanted to make money, and decided to invest in stocks that resulted in him losing money, we wouldn’t call their decision to invest irrational. It may have been a poor choice, but the choice was still made with the goal of making money. We can say that if they knew in advance that these stocks would be a poor investment, they certainly would have put thier money elsewhere.

This is the viewpoint typically held by economists. Economic models mean nothing if they’re based on a faulty understanding of man, and many economists (especially the Austrian school) understand this. While the general critique of Homo Economicus is justified, it is not a valid critique of economics in general.

The following two tabs change content below.
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]