The Homo Oeconomicus doesn’t exist. It is just a creature that we as economists use to cover things we can’t explain!
It is obvious that in economics studies, one can find lots of models that explain different cases from an economics perspective. However, that is not the end to it because economists have a broader perspective about the world.
Traditional economics, or narrow economics, is mainly concerned only with the economic variables that are affecting a given situation. Standard economic theory ignores cognitive restrictions! But, as the science is becoming more and more modern, broader economics, takes into consideration a large number of variables which are interdisciplinary in nature. In fact, economics is an interdisciplinary science and all economists agree on that. With a broader perspective, economics is embracing and applying attributes from psychology, anthropology and biology to say the least. The list goes on.
In standard economics or narrow economics, researchers base their models on the assumptions of the Homo Oeconomicus. Who is Homo Oeconomicus? He/she is a fully informed creature with absolute information regarding the alternatives in front, bounded to maximise utility and will always choose the consumption plan or basket according to his/her preferences. In other words, he/she is totally rational. He/she is selfish (not benevolent unless it is part of his utility preference) and it is not malicious in nature.
Why do economists use these assumptions? The answer is straightforward. It is because that without an agreed-upon truth there will be no forecasting. It is easy. However, in my own opinion, the Homo Oeconomicus doesn’t exist, and if it does, it is totally by chance because one cannot be fully aware, fully informed and perfectly rational of everything that is going on with the consumption bundles that are in front of him/her. In other words, the Homo Oeconomicus is a “walking computer”. In economics, when we talk about market failures, we lay some causes to that. One of them, of course, is asymmetrical information which means that one/some party may have more or better information than the other party and thus the decisions will not be the same. Although asymmetrical information considers both the supply and demand side, I’m leveraging the logic of it to apply it only to the demand side. Given the demand side context I presented, we cannot expect that the individual will always be informed, rather the decisions of the individual will be merely based upon heuristics which takes into consideration risk aversion, loss aversion, anchoring effects.
The human brain consists of two cognitive processes. One being the intuition, or fast thinking which is influenced by emotions and habits and it’s difficult to control and modify, and the other process which is reason or slow thinking. Slow thinking is effortful, slow as the name suggests and I’d say it may consist of some constraints because it is lazy. Most of human decisions are intuitive. Having said that, we come to a new term, heuristics. Heuristics is a simple procedure of the brain which provides us with a shortcut but incomplete answers or judgement. It might lead us to systematic biases. To clear things up a little, here’s an example. Say, somebody asks us “How satisfied are we currently with our life”, this is the target question in hand but what our brain gives to our conscience is probably more like “How do I feel today”. This is the heuristic question which is determined by emotions and therefore our decisions reflect emotions. One simple example could be, say, if we don’t like marijuana consumption, we judge the risks of marijuana higher than they actually are.
From this context, the homo oeconomicus is largely debatable, at least from behavioural economists. It is not that they deem it as illegitimate in constructing economic models but it is merely seen as a flawed model. However, the assumptions still hold true and broader economics, or lately, modern behavioural economics researches and finds additional or supplementary variables that ought to be considered in a dynamic model.
