Economic Man

Updated on January 28, 2024
Article byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Economic Man?

“Economic man” (also known as “Homo economicus”) is a concept that describes a hypothetical human who acts rationally, aiming to maximize utility or satisfaction while making decisions in their best self-interest after analyzing all options. The concept assumes that individuals possess perfect knowledge and act without external influences or irrational biases.

Economic Man

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Economic Man (wallstreetmojo.com)

The widely accepted view of the idea of economic man, or the Homo economicus, holds that rationality is associated with the maximizing principle. The presumptive understanding of the idea of the economic man, Homo economicus, drives the fundamentals of economics. In addition, it gives an insight into behavioral economics and how choices are made.

Key Takeaways

  • Economic man is a theoretical construct in economics that describes an idealized human being who is rational, self-interested, and consistently makes decisions to maximize utility or profit.
  • The idea of economic man has been widely criticized for oversimplifying human behavior and ignoring important aspects of social and cultural influences on decision-making.
  • Despite the criticisms, the concept continues to be used in economic models and theories, particularly in neoclassical economics.
  • Many contemporary economists recognize the limitations of economic man and are exploring alternative models that incorporate more realistic assumptions about human behavior, such as bounded rationality and social preferences.

Economic Man Theory Explained

“Economic Man” is a concept introduced by John Stuart Mill in the mid-19th century. While Adam Smith’s ideas have contributed to its development, he did not introduce the concept. According to Marshall (2005), Smith’s classical political economics was concerned with “the study of wealth as well as the study of man.” Smith used the history-inductive approach and abstract deductive methodology to understand economics. Therefore, according to classical political economics, Homo economicus possesses both individual rationality and sociality.

According to mainstream Western economics, the simplified concept of human instinct serves as the foundation for the “Rational Economic Man” assumption. However, this assumption disregards human beings’ need for social interaction. Despite this, the cultural context in which it is used often assumes its rationality. Furthermore, the “Rational Man” concept may lead to significant ethical dilemmas in Confucian-dominated Eastern social contexts.

The core definitions of the rational economic man assumption are based on the selfishness assumption and the maximizing principle, which ignore the social condition. This assumption holds that the nature of self-interest is the only guide for making economic decisions. While scholars such as Kahneman, Smith, and Sen have challenged and corrected this assumption, the theory still assumes that individuals are always rational and that their decisions are always based on self-interest.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Characteristics

From the perspective of economic theory, rational choice, and self-interest are two defining characteristics of the concept of Homo economicus. This theory assumes that humans are always motivated by self-interest and seek to make decisions that will benefit them most efficiently. As consumers, Homo economicus seeks to maximize value, while producers seek to maximize profit. In addition to these traits, the economic man is motivated to maximize earnings and exhibits traits such as reasoning, intellectual capacity, perfect knowledge, narrowed self-interest, and choice consistency.

However, it is important to note that the assumption of Homo economicus is a simplified and idealized representation of human behavior. In reality, humans are influenced by a variety of factors. Therefore, the decisions made by individuals are not always fully unbiased and may be influenced by personal prejudices.

Examples

Example #1

Dan has two job offers. One at an MNC in the city with great pay and another in the suburbs with half the salary offered. Like any rational person, Dan works for an MNC for higher pay because it is important to him.

Example #2

Dave is a software engineer who wants to live a life close to nature and decides to live life as a school teacher, leaving behind big company offers. The pay he is offered by companies present in the city is far greater than what he would get as a school teacher. However, he still chooses the teaching job, as the pay is enough to live a decent life away from the fast-paced city world. He wants to live his life free of tight deadlines, plus he could always choose independent projects to earn more money. This may not be the rational choice in conventional terms, but the need to act for one’s well-being and self-interest is present.

Economic Man Vs Administrative Man 

Key pointsEconomic ManAdministrative Man
MeaningThe definition of the economic man is a hypothetical person with an infinite capacity for reasoned decision-making.In making decisions, the administrative man adopts the satisfaction approach instead of the maximizing technique used by the economic man. 
ChoicesEconomic man chooses the best option from all those at his disposal. The administrative man satisfies—looks for a plan of action that is adequate or “good enough.”  
ViewpointThe economic man decision-making model works with the “actual world” in all its complexity. Administrative man is aware that his perception of the world is greatly simplified. Therefore, he uses a straightforward analysis of the situation to make informed decisions, taking into account only a few elements that he believes to be most important and relevant.

Frequently Asked Questions (FAQs)

1. What is the difference between an economic and social man?

An economic man is primarily concerned with maximizing personal gain. He seeks laissez-faire freedom to pursue their interests. At the same time, a social man is motivated by a desire to be involved in the issues that their fellow humans face and seeks self-realization in a cooperative setting. The social man prioritizes the well-being of society as a whole, while the economic man prioritizes individual success.

2. What is the economic man model of decision-making?

The economic man decision-making model is a theoretical framework that assumes individuals make rational choices based on self-interest and complete information, aiming to maximize their utility or satisfaction. It suggests that individuals weigh different options’ costs and benefits before deciding.

3. What are the disadvantages of applying economic man theory?

The disadvantages of applying economic man theory include:
· Ignoring social and environmental factors.
· Assuming perfect knowledge and rationality.
· Neglecting non-monetary values like emotions and ethics may lead to unrealistic assumptions and inaccurate predictions.

This has been a guide to what is Economic Man. We explain its examples, characteristics, and comparison with administrative man. You can learn more about from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *