theory, models, agentFor decades Homo oeconomicus was/is the paradigm in economics. To my knowledge the view on this model of a human agent has changed. Several experiments show that humans does not act 100% rationally, also when he has sufficient information.
What are the main flaws of this human model, can they be corrected and the model extended or do alternative models in current economic research focus on totally different agent models?
I will let someone else tell you what the flaws of the rational man paradigm are. Let me dive straight into the alternatives.
The work of Kahneman and Tversky (two psychologists) was awarded the Nobel in Economics for the way they broke down the rational man paradigm. Since then, three alternatives have emerged:
(1) What I call soft behavioural economics (e.g., Matthew Rabin’s work). The premise here is that people are irrational and are motivated by things like jealousy, anger, etc. No holds barred irrationalities are allowed (as long as the model is still solvable!)
(2) Hard behavioural economics (e.g., Gul and Pesendorfer). People have a behavioural quirk (e.g., tendency to procrastinate), but except for that they still behave in a fully rational manner. In slightly more technical terms, the content of one’s preferences have changed, but the procedure to find the optimal choice is still fully rational. Under the same category is Procedural Rationality (e.g., Rubinstein’s work). People adopt a procedure which is not fully rational, but follow it consistently and logically. For example, while choosing from a menu, you might not pay attention to some options on the menu.
(3) Prospect Theory. Developed by Kahneman and Tversky themselves, this is a descriptive model. They incorporated elements from their experiments to come up with a ‘utility function’ (actually, its shape). Its main characteristics are “loss aversion” and the “zero effect” which I won’t go into here. Prospect Theory is popular among experimentalists, but the problem is that it has no microfoundations at all. As a result it is unclear how it should be modified to fit settings outside the laboratory.
There is a fourth response mentioned below: bounded rationality. That is, to me, the most appealing. Unfortunately, it’s also currently the least fashionable among microeconomic theorists. I think the reason is that it quickly leads to intractable models.
If you want to know more, I think there are three main avenues to explore:
Humans are not selfish
I think the best paper about this is:
Sen(1997) Rational fools: A critique of the behavioral foundations of economic theory
The best experimental paper about it is:
Henrich(2001) In search of homo economicus. (altruism in games that should display none, across the globe).
Humans aren’t good at making choices
Read:
Conlisk(1996) Why bounded rationality?
And also grab:
Simon(1987) Sciences of the Artificial
Humans are approximately selfish and rational and we should keep studying them so
Read:
Gintis(2001) A framework for the unification of the behavioral sciences
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