Behavioral finance FAQ / Glossary (Economic man)
This is a separate page of the E section of the Glossary
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
01/1d - 08/4i
+ see rational choice
The money-wise, super-smart, hyper-cool superhero!
that we are all supposed to be?
But is he always at work?
The economic man or "homo oeconomicus" is an allegory that
pictures the typical human being, in his economic behavior, as
A rational and knowledgeable person who makes his
decisions by doing correct analyses and maximizing his
Or at least somebody whose actions have the best chance
to reach his economic goals.
The "rational choice" theory states that people in general,
in their economic behavior, match that economic man
Some classical economists made this assumption that:
Most of us, fellow Earthlings, behave as perfect
economic men / women
This brings market efficiency which results in the best
allocation of resources, as if our behaviors were
guided by a superior, wise and benevolent "invisible hand"
(Adam Smith dixit).
More precisely, how the economic man
is supposed to behave
Smart and getting the best from the cake.
Such rational economic persons are supposed to combine two traits:
They are perfectly informed and make correct
the economic situations and prospects,
the behaviors of the other economic players.
Their decisions and actions always maximize the
satisfaction of their economic interests / goals.
As an effect of those two traits, those bionic (*) people are
supposed, when they decide an action (or inaction), not to
let cognitive deficiencies or emotional biases override their
rationality / efficiency.
(*) Will transhumanism and artificial intellgence
ressuscitate the concept ?
The economic goal puzzle
If we expand the concept a little, and step a bit outside the economic
world (the boundary between economy and life in general is fuzzy),
our rational decisions and moves are those supposed to fit strictly
our hierarchy of "preferences".
But that is still not enough to obtain perfect rationality, as confusions
can also be made about:
What is behind economic preferences, intentions and
goals (see those words)
Therefore, how rational they are.
Even money seeking above a certain level is not fully a criteria of
rational goal. Other motives might hide behind it such as
"status seeking", "trophy seeking" or even "power seeking"*.
Its effects can be damaging for the person itself as well
as for others.
Does this guy exist?
Can his behavior be modeled?
A rational ...myth?
Research in behavioral economics (see that phrase) has shown that
The "economic man" assumptions do not fully
match economic decisions in real life.
Various market anomalies (see anomaly)
show that rationality in most human behaviors is partly
To assume mechanically perfect rationality in economic / financial
models (see model) is highly hazardous.
Such assumptions can only be used carefully, and only as
approximations, in such models. At least, they need to be completed by
adaptable and flexible parameters to get close to reality.
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