What’s wrong, in the end, with Homo Œconomicus ?
Everyone likes to bash Homo œconomicus – not one stone was left uncast at the poor chap. Now, don't get me wrong, I enjoy a good stoning just as much as the next religious fanatic, but this may be a case in which we executed the right fellow for the wrong reasons.
Most people argued that Homo oeconomicus (henceforth HE), as described in economics textbooks, was way too smart for his own good. He had complete information and all the computing power required to hold that information; he also had the cognitive capacities to derive valid inferences from all that information, to ignore all trivial or irrelevant inferences, and was able to do all that instantaneously; he was dealing with scarcity but these tremendous computational feats were essentially free.
This was clearly pushing it. To peg him down a notch, many people pointed out that actual economic agents are rather more limited. They do not have full rationality but some form of "bounded rationality". They are swayed by biases and heuristics in situations of uncertainty. Behavioral economics suggested that in many cases they simply ignore their own interest and are motivated by norms of fairness and moral sentiments (although this last point may be misleading, see comments by Nicolas Baumard).
This is all wrong, wrong, wrong. The problem with HE is not that he is too smart – but that he lacks smart instincts. It is not that he is super-human, but that he is infra-cognitive. To explain economic behaviour, we need a model of human beings that is more sophisticated than HE, not less.
It would take a whole book or series of books and articles to justify this – and I expect that these books are being written as we speak, as these are fairly simple points – but here are two illustrations, admittedly far from standard market processes, but clearly relevant to economic theory.
Rioting as collective action
In economics, collective action is a difficult problem. A typical collective action is one in which various agents may engage in some coordinated behavior that is costly to each individual, that would result in positive payoffs to individuals if successful, and whose success depends on the fact that a minimal number of people choose to participate. A problem, obviously, is that the payoff to any individual is even better if many others participate while she abstains, which should guarantee, by recursion, that no-one ever participates. Ever since Mancur Olson's seminal work on the question, a variety of models have been put forward to formalize these difficulties. There is no straightforward solution to the problem in economic theory. There are only some rather awkward fixes. Olson for instance suggested that people are more likely to join a trade union (a form of collective action for the provision of public goods) if they receive direct rewards for just joining (e.g. A discount in the union shops).
This may seem puzzling, as collective action behaviors are extraordinarily common, indeed ubiquitous in social life and have been observed in all human societies for as long as the record goes.
In their descriptions of these issues, economists often take as a prime, and supposedly pure, example of collective action the occurrence of a spontaneous uprising against a hated regime (Medina, 2007), of the kind seen at Tien An Men in 1989, or in Tunisia and Egypt these past weeks.
I will not try to explain why such events occur, but simply point to the reasons why standard economic models cannot explain their occurence. To consider just one problem, Medina points out that in most game-theoretic treatment of the collective action problem, his own included, [a] the agents do not know or care about the identity of the other agents involved in the collective action, they are not affected by how the final result is achieved, and [c] they are not interested in the payoffs to other agents (they are only motivated by their own payoffs).
These are all, note, straightfoward consequences of the characterisation of HE in rational choice models.
These three assumptions stand in stark to what we observe in actual human coalitional enterprises, where [a] the identity of individuals acting for or against "us" is a matter of great importance, the ways results are achieved may have important effects on how committed people are, and most important [c] what other agents may or do get out of the coalitional enterprise is a matter of great importance and of constant scrutiny.
In other words, in such a situation the standard HE seems to process less information than the standard human being.
Benoit Dubreuil's "Paleolithic Public Good Games"
In an excellent article, Benoit Dubreuil has argued that various forms of extensive cooperation among humans certainly pre-dated the cultural explosion of the late Paleolithic. Dubreuil mentions collective hunting and allo-parenting. Both clearly result in the provision of public goods. They also require the kind of cooperative preferences and capacities that a great deal of anthropological theory is trying to explain. Yet both developed in Homo heidelbergiensis long before the appearance of expansive trade, cultural markers, sophisticated technology and other hallmarks of the Late Paleolithic cultural explosion.
This poses a problem, if you assume, as some do, that cooperation and the provision of public goods require culturally transmitted norms of "strong reciprocity". These are the outcome of a cultural group selection that was won by the more cooperative groups. It is a problem because it suggests that people had cooperative activities long before they had all the marks of cumulative, group-specific cultures of the kind envisaged in group-selection models. (Dubreuil graciously opines that it is not an insuperable problem; I beg to differ. But that is neither here nor there).
What matters here is the specificity of cooperative norms. That is, at some stages of evolution some Homo lineages evolved the capacity for cooperation on breeding, and the capacity for coperation in hunting, without apparently evolving a capacity for cooperation in general, for cooperation as a general norm.
Again, think of our standard HE. To the extent that HE is capable of cooperation (that is, not much), that capacity applies to all domains. He thinks on terms of rewards and sanctions. But if punishment is what maintains a norm, it can maintain any odd norm.
Humans do not seem to be like that. At some stages of evolution, the sight of an infant triggers cooperative behaviours, but not the sight of a less fortunate forager or that of a diseased person. So the cognitive system seems to contain more specification than that of HE.
Collective hunting in the Stone Age, by an artist of the time.
Parsimony requires more evolved structure, not less
Not to put too fine a point on it, Homo sapiens in his economic decision making seems to be, not at all the dumbed down version of Homo oeconomicus suggested by many, but on the contrary a baroque collection of highly intelligent and highly specific capacities. For some reason, that is anathema to many social scientists, who prefer to take as a starting point the description of a multi-domain agent, whose capacities and preferences have some structure but less content – that is, are applied the same way to all domains.
If I wanted to be polemical, I would say that this is mostly a product of evolution-blindness and cognition-blindness, two endemic maladies of the social sciences. Even a short study of mice, say, will convince one that these animals have a foraging psychology and a danger-avoidance system and a reproductive strategy, but not a unified utility-maximization process. Even the most cursory glance at visual perception will convince one that cognition is a highly domain-specific business. But this will be for another post, and at ICCI we do not want to encourage controversy.