Homo economicus

Economists use theories and mathematical models to describe certain economic phenomena observed in real-life. Such theories can be parsimonious and make specific assumptions about how individuals should and do actually behave. One very popular such theory is the standard economic theory assuming that individuals are rational and selfish, caring only about maximizing their own material self-interest. In economics, rational individuals are those who have a consistent objective that they want to achieve.1 When individuals’ objective is to maximize their own material gains from undertaking a certain action, such decision-makers are often described as Homo economicus who are assumed to have strong computational abilities, allowing them to weight accurately the costs and benefits of a decision that monetarily benefits them the most. Standard economic theory has been the central framework of analysis for many decades. But why this theoretical model has attracted so much interest in economics?

The main reason is that standard economic theory is a very simple model of economic behaviour, abstracting from the complications of natural environments where different factors are operative at the same time. Building economic models is like drawing a map. In both cases, it is important to consider which details are relevant to be specified and which are less relevant: maps are drawn including those details that enable travellers to arrive at their destination and economic models are built including those details which are relevant in that they can make predictions that describe well observed behaviour.

To the extent that the selfishness assumption can describe observed behaviour accurately, standard economic theory does a good job. It is therefore natural to gain a better understanding about whether and if so, under which conditions selfishness is a good or bad assumption? The general answer is that it depends on what our research question is. Sometimes selfishness is a relevant assumption for people's behaviour; however, in many decision-making situations, it is not a good assumption and standard economic theory fails to explain economic behaviour. Take for example the case where we would like to understand why individuals engage in philanthropic activities or why they leave a tip in a restaurant or why they decide to volunteer in their free time?