Homo economicus is a theoretical concept that describes people as self-interested individuals in terms of economic behavior. Economists use this theory to create generalizations on expected rational behavior according to the utility theory of economics. When combining self interest and the economic utility theory, economists expect people to make decisions that result in the highest satisfaction amongst several possible choices. In short, Homo economicus is an amoral individual who makes decisions and judgments that lead to an expected or planned end.
Behavioral economic theory has roots stretching back several centuries. John Stuart Mill, Adam Smith, and David Ricardo all presented theories relating to Homo economicus. Mill’s theory states that each person will make decisions allowing him or her to earn copious amounts of wealth. Smith and Ricardo parroted this theory by writing on the ability of individuals to make decisions that best benefit their lives. Each decision includes rational behavior and is absent from specific direction given by outside forces.
Economics is a social science. At best, the assumptions made or interpreted from data are mere approximations. The creation of economic models allows economists to predict how an individual or group of individuals will make choices given certain conditions. The use of rational theory to make assumptions on behavior is necessary to understand the logic behind choices of the Homo economicus. The identification of variables is also possible as new conditions introduced can change individual behavior.
Unfortunately, attempting to place too much psychological analysis in the study of Homo economicus is a drawback of this theory. For example, claiming that current weather conditions can affect the buying and selling of stocks is an absurd proposition. Researchers who continually try to draw distinctions among two or more nonlinear events can disrupt this study. The identification of nonexistent factors can also distort the future study of this economic theory.
Another flaw in the Homo economicus theory is the belief by economists that the rational person has too great an understanding of economic theory. When making the most rational or logical choice, a basic assumption is that each individual understands the implications of his or her choices from a macroeconomic and microeconomic standpoint. For example, an individual makes the most rational purchase decision based on current inflation or purchasing power levels.
Even more important to this model is the absence of education, opinion, and social context of economic decisions. The theory also forgoes the assumption that an individual can make choices based on current trends or other influences. The lack of preference is also absent in this theory. Substitute goods can affect how an individual choose the goods he buys. Strong substitute goods can possibly force a rational individual to change his or her normal behavior, weakening the Homo economicus theory.