The Unattainable Rational of Homo Economicus and Other Rational Agents
“Homo economicus”, or as more commonly known as a rational man or an economic man, is a central figure in economic theory, and despite its controversial nature it sustained its position in extrapolating commercial behavior. As such, this figure exists as an ideal notion, its does not exist in real, its best described in its characteristics which are that its consistently rational, and narrowly self interested in perusing its subjectively defined goals optimally. Its apparently awkward disposition attracts its critics to discuss its unrealistic qualities, which stem confusion in grasping underlying motives of an individual, which, generally speaking, would contain elements of behavior such as emotions, biases, goodwill, loyalty, love etc., or in the larger categories these including social, economic and personal motives. On the other hand, homo economicus only contains economic motives, while fundamentally ignoring the other two elements. However, its critics unfairly dismiss its utility in making decisions, interpenetrating behaviors, and simulating outcomes, which precisely operates effectively from its lack of social and personal motives, more than what lies at its core.
This notion is applied in mathematical applications and on a wider framework of modeling its similar to others notions of scientific method which uses exclusion more than its internal proof. In simple terms a model is put against which implementation is measured, albeit its understood that performance in all circumstances will not be achievable, its unattainable. These deficiencies are manifestations of incomplete information to used in predictive techniques, even more critically the rate of change within an environment. For example in considering if a person can actually achieve his full potential is limited by a priori conditions one is given, his social, personal and economical status, limit opportunities and as such one cannot think outside a given set of circumstances; lets inverse this argument, now we are looking at a consideration can one even know his full potential surrounded by uncertainties from the beginning of one’s life, since his life is itself a priori.
Returning to homo economicus, as we discussed above that this is a notion, and to understand this abstract man, we have to analyse its inners, from its being to its essence, which seem identical except for their representation. In its first representation its primary function is objectification of this notion, this is to say that while this objectification is also in itself an abstraction, it presents itself in a reflective form presented as a person, through which it becomes an other. But unlike a concrete other which is another person, this other is unattainable, that is to say its characteristics do not manifests outside this objectified abstraction. It escapes concrete development as it does not exist within the subject or the concrete other, for example I am an other for you, and in the same way you are an other to me, and we are others to a third person who is an other to us, and while two of these are others to me, they have three identities, i.e. the two individual others, and a collective other manifested in the other two, this reflective moment is used in recognition, however homo economicus is neither of these others, but the three others can associate with this other as not being I, or collectively them, and it remains elusive of any concrete development.
Its truth, or its essence, is a pure abstraction abstraction, this movement from its being to its essence loses its from to become only meaning. Losing its objectified abstract existence leads to losing its reflective property, its residue is a rationale, more precisely one’s economic desires, which is achieved through this movement leaving out social and personal motives. This essence, as much as its defined by its economic motives, is actually determined by lack of social and personal motives. As its commonly known, economic motives are related to accumulation of wealth where one strives to gain in all transactions, however this meaning is not complete without subtracting any social and personal motives behind such decisions, in doing this the essence of homo economicus takes its determinate shape.
For the other, this essence is a negation of the social and personal motives, and it is in this way relative from one person to another person, in this the essence of homo economicus appears as relative which is to say this development is not identical from one person to another. And while economic motives remains behind as its content, its subtraction of the other two which determines this meaning. This is why in common language when giving advice on economic decisions we often come across something that we should not think personally of commercial transactions, its only business. In this advice, we can see that it focuses on subtracting the emotional association with the transaction, and as such it is not to optimize the economic gains. In this way, the essence completes its determinate shape, where pure economic motives of one person are different from another, as it only represents the remainder.
In itself, this essence is the development of a notion which is concerned with mechanism to free economic decisions from social and personal motives. This subtraction, of social and personal elements is the notion which then in essence presents itself in form of selfishness, economic well being. Economic gain, or this remainder of the essence reduces the man to a repressive form, and the notion therefore is not an ideal form, but a reduced form, however this reduction makes it more than a man who has influences from social and personal motives to make economic decisions, and this way this reduced form becomes an ideal form for economic decisions.
The central argument in the notion of homo economicus is that its devoid of social and personal relationships with others, and reduces concrete others to agents bearing potentiality to generate gain; and in the same way, for the other, one is the same agent, and as such this now appears as a contradiction, however, this contradiction is preserved within the concept, making it unattainable. In this way, one can predict the response of the other by reducing the other to his economic motives as we approach with a potential transaction, and in this we do not consider personal and social motives of the other, while we know that as the other is a concrete other, he also has in himself, social and personal motives.
From the point of view of the critics, it’s argued that homo economicus defines his objectives so narrowly and to a degree that it becomes impractical for a a real person to act in this mechanical way. However, the critics ignore that it is not a real person, its a notion which takes its determinate shape by exclusion of social and personal motives. If we try to model a rational man by including these motives in a composite in any proportion, for example social 45%, economic 30% and personal 25%, objectified as a representation of a real person on collective average, we still make assumption that these proportions would not vary from one to another as a person would not act according to the average, further this assumption would also ignore state of flux characterized in these motives. It is commonly observed that a small group from same ethnic background represents unique mix of preference on social, personal and economical motives, and further more these motives are not in a frozen state, therefore measuring variability of these motives cannot be predicted. In this way, the modeling average behavior by taking multiple motives in a state of flux becomes less reliable as a predictive tool, than by excluding the two motives and working with the remainder i.e. economic motives. To clear more on state of flux, consider that one may have more need of money at one time, while at another time, his social or personal motives influence the behavior to for example give a donation. In this same consideration, person A would have different proportions of influence acting at one time than person B at the same time, therefore even if a priori composite is assumed, these underlying contradictions would render it useless.
On the other hand, some experts presented contradictions by undertaking experimenting with actual behavior within real environment and developed an alternative system popularly known as behavioral economics. In contrast to theory of economic man, behavioral economics claims to use actual human behavior to develop probabilities for outcomes related to choice, an important aspect of human behavior, particularly related to making commercial decisions, by including social and personal motives as well as economic motives of a person, if you are interested in these works, some interesting ideas are shared by Richard Thaler and Dan Ariely. This is put forward as a most recent and ultimate contradiction showing people do not act rationally in making their decisions, but their behavior can be nudged, or directed, by manipulating environment. For example an experiment was done to test the effect of word “free” on choices of people, whereby people were given choice between selecting a cheaper chocolate for free, or alternatively paying a nominal amount to select a better quality candy, the results showed people overwhelmingly took free candy, and it was concluded that people do not choose rationally, celebrating the effect word “free” created; however, if we apply the homo economicus model, the free choice was always the rational choice. The experiment was conducted in the supermarket, where people do not generally go to buy candies, in addition the other elements which could influence the experiment was the scale, given that a person would not mind eating one cheap candy, compared to buying lots of cheap candies, in which case there would never be expensive candies in the market.
Lets consider another, more serious example, the noble prize winning prospect theory of Daniel Kahneman. It describes that we are far more risk averse than risk taking, so for example it shows that we prefer 100% chance of winning $50/- over 70% chance of winning $100, while the later has more economic value at $70/-. We can, by taking some risk makes more money, which makes more economic sense in reason of homo economicus, yet we do not prefer it more than living with certainty. In this, our choice is actually different from our protagonist, in making our choice we are considering our relative wealth which include social and personal biases, while our economic man lacks these vices.
Another use of this notion is in game theory, which is used in decision science taking that others act within a frame of rationally, or bounded rationality, through deliberations and reactions which are in their best economic interest, and as such these positions open up to predictable behavior. For example, Company A is likely to take certain decision which would benefit it, knows that the Company B knows that Company A would is likely to take certain decision and as such using the same framework predicts what would be reaction of Company B if Company A undertakes the action, and so on and so on….therefore making a decision which involves reaction of the other, in this case Company A can take decision knowing that it has certain competitive advantage knowing that in response its competition may enter into price war to cut its profits, however knowing that also means that the organization makes this decision in light of this possibility by measuring financial capabilities of the competition, including other factors such as technology patents, talent, brand attractiveness, distribution channels etc. Rationality provides basis for predictability as it based on rational behavior. If the argument then is that however despite predicting rational behavior, Company B may not act rationally, than this antagonism can be resolved by including irrationality into the rational model, which is to say a range of reactions are simulated, and through this movement irrational behaviors are excluded as these would not threaten Company A decisions.
In light of the above, we can say that rationality is a mediating process, not an end in itself, therefore rationality cannot be judged by looking at the outcomes, but it is applied in the process of doing something. Outcomes are nonetheless commonly associated success or failure, and then justifications are developed using hindsight to say if the decision was rational or otherwise. For example in the case discussed above related to prospect theory, we would call it a rational decision if we win $70/-, or alternatively if the 30% adverse possibility manifests itself in reality, then the choice would be called irrational; in this case rationality should actually be applied in accepting a bet, by knowing one’s existing wealth and change this bet would bring to wealth on winning or losing, but in all cases this process does not carry itself into outcome. In other words, rationality or irrationality of selecting value with higher risk involves the process not the outcome, for example it can be said that it is wise to be certain to get $50 than making a bet where there is 30% chance of losing everything, even if we take this to 99%, there remains a 1% chance to not gaining anything, while the economic value represents $99, which is twice as much to value of certain outcome. In making this choice, we first analyze significance of $50 with overall wealth, if its judged as significant, than the rational choice is obviously to avoid risk, on the other hand, if its insignificant, we can still simply walk away with $50 without taking any risk.
If the winning odds are moved down to 99% from certainty, so we now have to chose between $70, or $99 rationality becomes more clearer as risk can now only be relatively avoided, but not completely. This can be made more complicated, if we consider choice between 50% change of getting $100 which has economic value of $50 against 30% chance of getting $200 whose value comes to $60. The prospect theory describes that our behavior is influenced relatively more by threats than potential gains, so while reasons for taking SAR 50 with 100% certainty are influenced by zero level risk of loss, in real life such options are limited as uncertainty dominates most of the outcomes. Rationality therefore can be observed in process of making a decision, not in the outcomes, which is whats the underlying phenomena of prospect theory that we are more inclined to avoid risk, than take risk, which is how rationality presents itself in relative situations.
Taking rationality as ground, homo economicus model can be extrapolated into realm of social and personal motives, in doing this the shape changes into an unsubscribed agent. This agent, or two agents for the references to behavior we have discussed in this essey, each for social and personal motives, are determined through exclusion of the other two motives. So in this way the social agent is determined by exclusion of economic and personal motives, and similarly the personal agent is determined by excluding economic and social motives. As such these motives are the content of an individual, as form of his behavior, the force which mediates this form is the collective reflection of these motives from the concrete others, and these elusive agents. In other words the form conceals these motives or the contents, as its function the form is acting to achieve an individual’s objectives while concealing his motives. This is observable in our common daily activities as we do not express our motives openly, for example a man who is very thirsty or hungry does not express his motives, which if expressed is potentially exploitable by being charged a higher price, similarly in perspective of the personal motives we do not openly express love to someone, we conceal it through our behavior which is the form, and the difficulty we experience in expressing love is the resistance by the form when we remove it, the mediating force, reflection from the other, acts more clearly, in our concerns of what that other will think about us if we express our love for them, taking shape of anxiety which we experience from uncertainties involving our reflection for the other. We try to remove these uncertainties by learning about what that other likes, dislikes and changing our behavior accordingly, in doing this we are changing the reflection of that other which they get of us. In doing this, acting in love, we disassociate with social and economic reflections, or we can say we are acting rationally for our personal motives without considering social or economic motives; which is similar to how homo economicus acts in relation to economic motives by excluding social and personal motives. The unattainable rational of homo economicus is therefore not exclusive in essence, the social agent and the personal agent too are unattainable, and similarly insofar these are unattainable reflective beings.
In the end we can say that rationality is determined through its negation, irrationality, and in its determinant movement rationality sublates irrationality. The a priori irrationality, as discussed in behavioral economics through its experiments and observations in human behavior, does not discarded rationality, precisely the opposite phenomena is observable in this movement, which is rationality is applied in the process of making a choice, while on the other hand, its self deception to judge rationality in relation to outcome the vantage point of hindsight.