I’ve got my beefs with the idea of homo oeconomicus: namely, it’s a caricature of humanity. This is as old as the idea of homo oeconomicus itself, and something that economists recognize, even as they use the model. Behavioral economics has, in recent years, become popular as a reaction to some of the assumptions of homo oeconomicus, such as pure rationality (in the sense that homo oeconomicus has unlimited computing capacity and full knowledge of all consequences of its actions). There are two camps that have formed on this: the first camp includes behavioral economists and argues that in order to further our understanding of the real world, we must model man in a more complex and serious manner; the second camp, however, follows from Milton Friedman’s view that as long as our models comport with reality, it doesn’t really matter how ridiculous the simplifying assumptions are. And that’s exactly what homo oeconomicus is: a simplifying assumption.
Anyhow, I have a few papers which stick up for homo oeconomicus, either implicitly or explicitly. The first paper is by Faruk Gul and Wolfgang Pesendorfer, entitled The Case for Mindless Economics (ungated version).
Neuroeconomics proposes radical changes in the methods of economics. This essay discusses
the proposed changes in methodology, together with the the neuroeconomic critique
of standard economics. We do not assess the contributions or promise of neuroeconomic
research. Rather, we offer a response to the neuroeconomic critique of standard economics.
In this paper, Gul and Pesendorfer defend standard economics against the critiques of neuroeconomists and psychologists, who argue that the model of homo oeconomicus does not take into consideration what happens in the brain. This field tries to take psychological insights and apply them to economics. Gul and Pesendorfer take a fairly pragmatic stance here, arguing that how people get to the decisions they choose is not a part of economics as such, and any information discovered by neuroeconomists indicating that people can make poor choices in selecting what they really want is secondary to the study of economics as a science of choices. Standard economics does not depend on a person’s brain working in particular ways, as economics abstracts away from that. In short, argue the authors, the field of neuroeconomics may very well be a good field for research and may turn up interesting things, but these authors are looking at a different piece of the social science world, and results in that field will not affect standard economics one way or the other.
Moving along, we have next David Levine’s Max Weber Lecture, Is Behavioral Economics Doomed? (ungated version)
There is no abstract to this, as it was a talk. Levine’s talk focused on how standard economics gets a lot right. Even though people do not live according to the model of homo oeconomicus, for example, Levine argues that standard economics gets voting pretty well (though Bryan Caplan would disagree).
Levine even defends standard economics against the ultimatum game critique. Basically, the ultimatum game goes a bit like this: you have $10 to split between yourself and a second person. You choose the split, and the second person chooses whether or not to accept this. If he accepts, you both take the money according to your split; if he refuses, neither of you gets a penny. In either event, the game ends after this choice. According to standard economic theory, you should offer the other person 1 cent, and the other person should accept because 1 cent is still better than nothing. This is one of the games that behavioral economists use to critique the standard economic model. Levine points out, though, that if you think about the game a bit longer, there is a good interpretation of the results in the standard economic framework, and that is the power of spite and the threat of retaliation, especially relating to multi-shot games. In addition, Levine argues, people are searching out the equilibrium, so we tend to see multi-shot games ending closer to what standard economics would suggest: a high take-home amount for the first person, but not quite 100%.
Finally, Elif Incekara Hafalir and George Loewenstein accidentally support homo oeconomicus in The Impact of Credit Cards on Spending: A Field Experiment (ungated version).
In a field experiment, we measure the impact of payment with credit card as compared with cash on insurance company employees’ spending on lunch in a cafeteria. We exogenously changed some diners’ payment medium from cash to a credit card by giving them an incentive to pay with a credit card. Surprisingly, we find that credit cards do not increase spending. However, the use of credit cards has a differential impact on spending for revolvers and convenience users: Revolvers spend less when induced to spend with a credit card, whereas convenience users display the opposite pattern.
Basically, the authors have an experiment in which they tried to show that people will act irrationally if you have them use credit cards as opposed to cash: they will spend more money if spending with credit than with cash. In the results, however, they actually showed that there was no statistically significant difference between their control group and the group of individuals they attempted to entice into using credit cards as opposed to cash (by offering higher-valued Amazon gift cards as a reward for paying for lunch with a credit card).
And, to end this, I shall link to a blog post on a David Levine article. It seems that people who want to dump homo oeconomicus are going to have to do a bit more than say that the simplifying assumptions are realistic; they’ll also have to show that more complex assumptions explain the world better, that these results directly affect utility-based choice behavior, and that they can explain a set of experimental results of which those that standard economics can explain is a subset. Behavioral economics as it stands does not fit these characteristics, at least according to the papers above.