On “Humans” vs. “Econs”, the mystery of human psyche, and the domain of economic inquiry

On “Humans” vs. “Econs”, the mystery of human psyche, and the domain of economic inquiry

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Axiomatic economics models are populated with utility maximizers, a.k.a. “Econs”. These models have predictive power - an practical value - in situations in which real human qualities, such as bounded rationality or emotions, play no role.

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You may think that the subject matter of economics is human behavior. Well, not so fast. There is a growing body of behavioral economics literature suggesting that the subject matter of mainstream economics has been behavior by “Econs”, not “Humans”. Consider this journalistic account of “Nudge”, an influential book by Richard Thaler and Cass Sunstein: 

Economics has traditionally ignored psychology. In NUDGE, Richard Thaler and Cass Sunstein take a step toward greater realism about it. […] The authors start off by differentiating "Econs" from "Humans." The former are the efficient calculators imagined in economic theory, able to weigh multiple options, forecast all the consequences of each, and choose rationally. The latter are ordinary people, who, like the analysts on Wall Street, fall well short of homo economicus. Humans operate by rules of thumb that often lead them astray. They are too prone to generalize, biased in favor of the status quo, more concerned to avoid loss than make gains, among other shortcomings. So they often fail to manage their personal affairs to the best advantage.

Thaler and Sunstein’s “Humans” are different from “Econs” in that they lack infinite computing power and could therefore benefit from gentle (and not so gentle) nudges. Their “Human” is a “Homo Economicus Light”: an individual utility maximizer with “bounded rationality”.

If you think “Nudge” is a great step toward embracing psychology, consider this:

Most economic models are based on the self-interest hypothesis that assumes that material self-interest exclusively motivates all people. Experimental economists have gathered overwhelming evidence in recent years, however, that systematically refutes the self-interest hypothesis, suggesting that concerns for altruism, fairness, and reciprocity strongly motivate many people. Moreover, several theoretical papers demonstrate that the observed phenomena can be explained in a rigorous and tractable [emphasis mine, EL] manner. These theories then induced a first wave of experimental research which offered exciting insights into both the nature of preferences and the relative performance of competing fairness theories. […] We also discuss recent neuroeconomic evidence that is consistent with the view that many people have a taste for mutual cooperation and the punishment of norm violators. We further illustrate the powerful impact of fairness concerns on cooperation, competition, incentives, and contract design.


By incorporating altruism, fairness and reciprocity, Fehr and Schmidt‘s strand of work represents a much more significant departure from standard microeconomics in the direction of realism (and psychology, and sociology). Fehr and Schmidt construct a “Human” that is a social animal, yet, they stay within the realm of economics because of their emphasis on “rigorous and tractable” mathematical modeling, i.e. maximization of “utility”. Of course, they use “utility” in a broader sense, including not only banal material utility but also emotional satisfaction (or dissatisfaction) from dealing with others.

For Fehr et al, the conclusion from the “spectacular failure” of standard economics in explaining observed behavior (in real life and in experiments) is that economists should use more complex models that incorporate e.g. other-regarding preferences into “Human” utility functions. Add to this behavioral economics mix Herbert Simon’s concept of “bounded rationality” (as done by Thaler and Sunstein) and here we have a real change of paradigm, a revolution in social sciences!

Now let’s look at the problem from a different point of view.

By incorporating certain aspects of psychology, behavioral economics may be able to explain certain non-intuitive results or “puzzles” in game theory and microeconomics. Yet, how does behavioral economics perform relative to, say, psychology? The fact that “Humans” are human is not even yesterdays’ news for psychologists. What exactly could behavioral economics contribute to psychology? What great insights into human behavior can psychology or sociology gain by incorporating the axioms of “utility maximization”? When “axiomatizing” real human behavior, such as care of the elderly and children, honesty, friendship, etc., what weights should psychologists attach to the pursuit of direct material benefits, as opposed to expectation of reciprocity, adherence to moral principles, biological instincts? How are they supposed to find out? How robust would be their findings? How good would be “economic psychology” in explaining or predicting actual behavior?

The same body of “overwhelming evidence” that motivates behavioral economics should serve as a reminder that economists should be better aware of the scope of their discipline. The economics paradigm of "optimizing individuals" can explain an awful lot, but it cannot explain everything. Moreover, it should not strive to do so. After all, what's the "behavioral" or "neuroscientific" evidence on our actions always being a result of individual utility maximization?

While the contribution of economics to understanding human psyche is likely to remain very limited, let us not forget that economics can provide qualitative and, sometimes, quantitative answers to many useful policy questions concerning the real world. For instance, consider the following:

    • How would a bad harvest of wheat impact prices and quantities consumed (of wheat itself, any final products that use wheat as an intermediate input, its complements and substitutes)?
    • What would be the impact of a new licensing requirement on competition in the pharmaceuticals market (the number of firms operating in the market, the range of medicines available, prices, quality of service, corruption risks)?
    • What would be the impact of tougher labor regulations on the job opportunities for women, disabled and ethnic minorities?
    • How should an insurance contract be designed to overcome moral hazard and asymmetric information?
    • How many firms can be expected to operate in a certain market given its size, the country’s trade regime and access to neighboring markets?

[note the absence of any macroeconomics questions, reflecting a personal bias].

Economists should take pride in being able to answer these very important questions, however, they also should develop a sense of humility. Economists make many simplifying assumptions about “Humans”, and populate their models with straightforward utility maximizers, namely “Econs”. Their predictions are more or less accurate when they apply their tools of analysis to situations in which “real” human qualities play a relatively minor role. “Humans” and “Econs” should not be mistaken for each other. “Humans”, as opposed to “Econs”, are just too subtle and complex for their behavior to be “axiomatized”. For instance, I would not use economics axioms to analyze or predict "transactions" within my family precisely because I love my wife and children, and they love me. I would much rather consult a therapist or psychologist to understand what's going wrong in the family.

Abraham Maslow wrote in “The Psychology of Science” (1964) – “if all you have is a hammer, everything looks like a nail to you”. Substitute “utility maximization” for “hammer” and you get my idea. As much as economists would like to use their toolbox to help open up the mysterious black box of human psyche, something must be left to other sciences and … God.


Tbilisi, Georgia
Email : advisors@tbilinomics.com