Rational economic man (REM) describes a simple model of human behavior. REM strives to maximize his economic well-being, selecting strategies that are contingent on predetermined, utility-optimizing goals, on the information that REM possesses, and on any other postulated constraints.
The amount of utility that REM associates with any given outcome is represented by the output of his algebraic utility function.
Basically, REM is an individual who tries to achieve discretely specified goals to the most comprehensive, consistent extent possible while minimizing economic costs. REM’s choices are dictated by his utility function.
Often, predicting how REM will negotiate complex trade-offs, such as the pursuit of wages versus leisure, simply entails computing a derivative. REM ignores social values, unless adhering to them gives him pleasure (i.e., registers as a term expressed in his utility function).
The validity of Homo economicus has been the subject of much debate since the model’s introduction. As was shown in the previous chapter, those who challenge Homo economicus do so by attacking the basic assumptions of perfect information, perfect rationality, and perfect selfinterest.
Economists Thorstein Veblen, John Maynard Keynes, and many others criticize Homo economicus, contending that no human can be fully informed of “all circumstances and maximize his expected utility by determining his complete, reflexive, transitive, and continuous preferences over alternative bundles of consumption goods at all times.”
They posit, instead, “bounded rationality,” which relaxes the assumptions of standard expected utility theory in order to more realistically represent human economic decision making. Bounded rationality assumes that individuals’ choices are rational but subject to limitations of knowledge and cognitive capacity.
Bounded rationality is concerned with ways in which final decisions are shaped by the decision making process itself. Some psychological researchers argue that Homo economicus disregards inner conflicts that real people face. For instance, Homo economicus does not account for the fact that people have difficulty prioritizing short-term versus long-term goals (e.g., spending versus saving) or reconciling inconsistencies between individual goals and societal values.
Such conflicts, these researchers argue, can lead to “irrational” behavior.
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