Tuesday, June 18, 2013

Humans and Econs: Homo Economicus vs. Homo Sapiens

The theme of many of my posts involve the struggle between our human behavior and judgment as they function in reality vs how they are incorrectly, but commonly, perceived to function. Actors Homo Economicus and Homo Sapiens are at the forefront of this long ensuing battle for public validity. 

At a Glance

Homo Economicus (Econs[1])

Homo Sapiens (Humans)

  • Intelligence of Albert Einstein.[2]
  • Willpower of Ghandi.[3]
  • Stores as much memory as IBM blue. [4]
  • Limited cognitive abilities.
  • Prone to foreseeable weaknesses in willpower.
  • Memory fails to store much of the information that is presented to it. [5]
Overview: Errs only occasionally, usually due to circumstances not knowable at the time of decision making.
Overview: Errs Systematically.

A Closer Look

Homo Economicus (Econs)

Homo Economicus is "a rational actor who employs complex algorithmic processing that follows rules of logic and probability in order to maximize expected utility."[6]

While Homo Economicus does not always make perfect forecasts, she never makes systematically wrong forecasts.[7] Instead, when an error occurs she becomes aware of it and accordingly adjusts her judgment, or upon finding insufficient regularities to draw a judgment from, declines to make a forecast all together.

She is aware of all publicly known information and responds accordingly.[8].If a company’s accounting statements shows a looming liquidity crisis, prototypical Econs are immediately aware and will sell off shares until the stock price lowers to adequately reflect its true value.[9]

She is influenced by incentives – if a government taxes candy less, then she will buy more candy. She is not influenced by immaterial environment circumstances such as the order in which options are presented to her.

Homo Sapiens (Humans)

Homo Sapiens, here played by Homer, employ judgment primarily guided by a handful of leading heuristics (mental shortcuts). These heuristics are used particularly when facing incomplete information, an absence of stable environment, or complex problems.[10] These heuristics, although fast, and efficient, can lead to imperfect judgment in a slew of contexts, especially when forecasting future events.

Homer is influenced by superficial and irrational factors.  The order in which food is presented to him in a cafeteria can increase his fruit and vegetable consumption respectively 13% and 23%.[11]

Homer’s imperfect decision making is most easily illustrated in the financial decision making domain. Whether in the context of a divorce proceeding, saving for retirement, or regular consumer habits, we can find many examples in which Homer fails to maximize his expected utility. For instance, Homer will forget to cancel his 30 day free trial subscription resulting in the undesired outcome of a debit charge.[12] Even worse, Homer will thereafter fail to cancel his subscription and continue paying for goods or services he has no desire to have (and sometimes for many months!).

Homer has a profound lack of awareness of known rules of logic and probability[13] and even easily accessible facts like occurrence rates of natural disaster[14].  


Humans are NOT Econs. Further investigation should be done to examine differences in how the actors respond in various situational conditions.

[1] Richard Thaler, Nudge: Improving Decision Making about Health, Wealth, and Happiness, 18. (Framing the Homo Economicus vs Homo Sapien concepts in regards to “Humans and Econs” was taken directly from Richard Thaler’s Econs and Humans chapter in Nudge. Moreover, the term "Homo Economicus" is widely used and was not created by me).
[2] See Thaler, supra note 1. (This, along with the next two anecdotal examples, was taken directly from Richard Thaler’s Econs and Humans chapter in Nudge).
[3] Id.
[4] Id.
[5] See Generally Atkinson-Shiffrin Model; In pertinent part states that only a select amount of information processed through our sensory memory is eventually stored in our working memory (short-term memory) or long-term memory. More information available at, http://users.ipfw.edu/abbott/120/AtkinsonShifrin.html
[7] See Thaler, supra note 1.
[8] In essence she encompasses the semi-strong form of the Efficient Capital Market Hypothesis which asserts that a stock price incorporates all past and present public (but not non-public) information. For more on Efficient Capital Market Hypothesis see Robert Rhee, Essential Concepts of Business for Lawyers, (2012), 290.
[9] Of course the semi-strong form hypothesis is directly contradicted by evidence of bubbles - extended periods of times in which stock prices were clearly mispriced. Id.
[10] See, Daniel Kahneman, Thinking Fast And Slow, “In the absence of valid cues, intuitive “hits” are due either to luck or to lies. If you find this conclusion surprising, you still have a lingering belief that intuition is magic. Remember this rule: intuition cannot be trusted in the absence of stable regularities in the environment [emphasis added]”
[11] Andrew Hanks, D. Just, B. Wansink, Smarter Lunchrooms Can Address New School Lunchroom Guidelines and Childhood Obesity, The Journal of Pediatrics (2013), 2.
[12] Thaler, supra note 1, 203-4.
[14] See Kahneman,  supra note 10, at 204. In pertinent part:
Strokes cause almost twice as many deaths as all accidents combined, but 80% of respondents judged accidental death to be more likely. 
Tornadoes were seen as more frequent killers than asthma, although the latter cause 20 times more deaths. 
Death by lightning was judged less likely than death from botulism even though it is 52 times more frequent.
Death by disease is 18 times as likely as accidental death, but the two were judged about equally likely.
Death by accidents was judged to be more than 300 times more likely than death by diabetes, but the true ratio is 1:4”)

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