The rationality of homo economicus: an unfounded hypothesis

The rationality of homo economicus: definition and criticism

Homo economicus is a representation of the economic agent in neoclassical theory who is capable of:

• maximizing its satisfaction – called “utility” by economists – by making the best use of its resources.
• analyzing and anticipating as best as possible the situation and events in the world around it, in order to make the decisions that will enable it to maximize its potential.

In simple terms, homo economicus, that curious biped, thinks only of his own interest and acts only to optimize it on all time scales, integrating all the information at his disposal… Let’s read Richard Thaler:

“A medium-sized grocery store offers customers millions of combinations of items and products that can fit into a family’s budget. Will they really choose the best one? And let’s not forget that there are far more difficult issues to deal with than choosing a product: a career, a mortgage, a spouse, for example. Given the failure rate we see in all these areas, it seems hard to defend the idea that all these choices are truly optimal.” ¹

The main principles of rationality in economics

Neoclassical microeconomics mathematically formulates rationality behavior though 2 axioms: transitivity and completeness.

• Transitivity: if a consumer prefers X to Y, and prefers Y to Z, then he will prefer X to Z.
• Completeness: consumers know their individual preferences. They can choose between consuming X and consuming Y. They know whether they prefer X to Y, Y to X, or whether they are indifferent to consuming X or Y, for any good or service (in all possible forms) and for all eternity (these preferences being intertemporal). The utility functions chosen to represent these preferences have mathematical properties consistent with them.
• In addition, a third axiom is used to define homo economicus: that of non-satiation, i.e. the idea that consumption of a good never reaches saturation point. The fact that economists consider it rational to be insatiable is problematic, and raises questions over this assumption of rationality: why is it rational to want “always more”? To ask the question is to answer it. This particular homo is clearly not rational in the sense of reasonable, temperate or wise…

Let’s stress that this definition of rationality is very specific. There are many other definitions. Three comments are in order.

Rational beings can be defined as those who “never do anything without a reason”, or as those who make justifiable decisions. But this definition in no way implies analytical and optimization skills such as those of homo economicus.

It can also be said (this is Herbert Simon’s concept of bounded rationality ²) that an individual’s decision-making ability is impaired by a set of constraints, such as lack of information, cognitive biases or lack of time. From this point of view, decision-makers tend to choose satisfactory rather than optimal solutions.

Not accepting the hypothesis that we are homo economicus does not mean, however, that we are subject only to our unconscious passions, incapable of defending our interests or incapable of discernment. This is an obvious point, but one that needs to be made, because free-market political economy is generally presented as being aimed at responsible, rational human beings, as opposed to an “interventionist” political economy that would like to make citizens happy against their will, which is not the case. These caricatures of rationality by economists should be recalled to make it clear that our criticism here concerns the very specific conception of rationality adopted by “neoclassical” economists.

There are therefore two levels of criticism of this postulate of rationality:

• sa définition de la rationalité, comme nous venons de le voir en donnant deux exemples de définition alternative.
• its generalization: whatever the definition of rationality, can it be considered a universal property?

Before turning to the empirical tests of this hypothesis, let’s mention the fact that to identify man with homo economicus is to abandon the idea that human beings are, on the contrary, capable of selfless love, generosity and self-giving. This is demonstrated by, among others, social psychologist Jacques Lecomte’s book La Bonté humaine. ³

The decisions of economic agents are not independent of the social context and human biology.

The hypothesis of rationality in the sense of “optimizing one’s interests under budgetary constraints” is not validated by the studies of social psychologists. It does not take into account the fact that economic agents’ decisions are not independent of legal, institutional, political and cultural spheres. ⁴and that they are determined by the different social environments they have been exposed to (family, school, peer groups, cultural institutions, media, etc.).

Behavioral economics, a branch of economics whose two leaders, Daniel Kahneman ⁵ and Robert Thaler, were awarded the Nobel Prize in Economics in 2002 and 2017 respectively, seeks to describe human economic behavior on the basis of laboratory experiments. Admittedly, these experiments are incapable of reproducing the complexity of our choices in real life, and the scope of the teachings of experimental economics remains limited. However, if even in simple situations, behavior does not obey this postulate of rationality, we can reasonably deduce (if need be) that it does not obey it as a general rule.

And indeed, these experiments do not confirm what the theory of homo economicus would predict. The examples are numerous. We’ll limit ourselves to just one, the ultimatum game, which is played as follows: a first person (player A) is given a certain sum of money, and must decide how much to keep for himself and how much to give to a second person (player B). The second person must then decide whether to accept or refuse the offer. If he refuses, neither person receives any money. If the players were acting as homo economicus, Player B would have to accept any offer greater than zero from Player A, and Player A, anticipating Player B’s response, would have to make the smallest possible positive offer. These two predictions are not verified by experiments.

Homo economicus offers a distorted image of the human being

Not only is the homo economicus hypothesis simplistic, it is also false and cannot claim to represent the behavior of economic agents, even in a simplified way. In short, homo economicus offers a distorted image of the human being.

What do the other human and social sciences have to say? Let’s quote Gilles Rotillon, who talks about Jean Tirole’s “simple world” in an article published in 2015 (one year after Jean Tirole was awarded the Nobel Prize in Economics):

“Economic science can only become a behavioral science if it reduces man to little and “behavior” to almost nothing. Yet anthropology, psychology and linguistics teach us that human beings do not exist independently of the society in which they live, even before they are born, because “the first condition for a baby to become a person is for its parents to consider it as such”. ⁶

Philosopher Gilbert Simondon shows that the formation of the individual is not simply a matter of unfolding an innate potential personality, but presupposes the prior existence of the whole of society. ⁷ Far from being shaped by our “preferences”, we depend on our technical and social environment. From carved flint to cell phones, the whole of human evolution demonstrates the constitutive nature of the technical objects that surround us. Articulated language itself, so characteristic of the human species, as well as all the higher psychic functions (aesthetic sense, conceptual thinking, critical spirit) develop, as Lev Vygotski has shown ⁸ as early as the 1920s, from the existing social context, through the appropriation of technical, cultural and symbolic achievements already present in the human world.

As for the cognitive sciences, they invite us to consider that the biology of the human being makes him more subject to his appetites and to always wanting more. ⁹ Archaic cerebral mechanisms, notably the striatum, and neural reward circuits, via dopamine, encourage man to continually and exponentially satisfy five fundamental needs: to eat, to reproduce, to establish power, to acquire information, and to provide the least effort.

This is a far cry from the portrait of an omniscient calculator…

Market rationality and efficiency: mathematical models without a solid foundation

The rationality hypothesis enables neoclassical economists to create mathematical models. Behavior “idealized” in this way can be expressed mathematically and used for calculations. One might think that this theoretical work would be of no consequence, and of interest only to a few specialists. But the reality is more disturbing, for two reasons:

1. This formalization is used in mathematical models, including those used by major international institutions (ECB, IMF, OECD, World Bank, OECD finance ministries, etc.) to make forecasts and simulate public policies (such as the ECB’s monetary policy). These models involve assumptions and postulates other than those of homo economicus. But if only because they are based on such a distortion, their results cannot be considered conclusive.

It’s often argued that it’s better to have simplified (and false) models than no model at all. But, on the one hand, it’s dangerous to make decisions based on “illumination” that doesn’t point in the right direction; everyone knows the story of the drunkard who looks for his keys under a lamppost, not because he’s lost them there, but because that’s where the light is… On the other hand, the economists who rely on these models don’t explain their limitations; and yet, they are so complex that it’s difficult for an ordinary citizen to understand them. There is therefore a form of abuse of power (on the part of these economists), which consists in fact of making authoritative statements based on “scientiform” mathematical foundations, but without any solid empirical basis (on this subject, read our page On the proper use of mathematics in economics ).

2. Neoclassical economists claim to have demonstrated that the market of free and perfect competition is efficient and leads to a “Pareto optimum”.¹⁰ These are the two welfare theorems ¹¹ taught in every microeconomics course in the world.

• According to the first, every general equilibrium in pure and perfect competition is a Pareto optimum.
• According to the second, any Pareto optimum can be obtained as a Walrasian equilibrium (i.e. in pure and perfect competition) after reallocation of initial endowments.

These demonstrations are based on many “heroic” assumptions. But for our purposes only, these demonstrations assume that economic agents behave like homo economicus. This is enough to invalidate the conclusions.

Unfortunately, students who are not necessarily given the tools for critical analysis during these presentations or in microeconomics textbooks may remain impressed by these so-called demonstrations with their seemingly rigorous formalism.