What is ‘rational choice theory’ and who is ‘homo economicus’?

Rational choice theory tries to understand the economy by thinking about the actions of one individual and adding up what would happen if everyone acted like them. To do this, rational choice theorists need to settle on what the average, or representative, person looks like, and how he or she acts. One of the oldest, and most popular versions of a representative person, and the one typically used in rational choice theory, is called ‘economic man’, or homo economicus.

Homo economicus is the ‘ideal’ decision-maker, a master of rationality, a logician’s poster child. Every choice he (and it’s usually assumed he’s a ‘he’)¹ makes is meticulous. He wants to be as happy as he can possibly be. When he woke up this morning, he considered all possible choices for breakfast, and then picked the combination of juices and cereals that maximized his happiness. He works exactly the number of hours he needs to to balance his desired income with his desired time off.

He has full information about all the decisions he makes. When he wants to buy an apple, he knows the price and quality of every apple in town, and has a good idea just how happy each apple will make him. He not only knows what interest rates and inflation rates are today, but has a decent idea what they will be 10 years in the future.

Homo economicus doesn’t care about you; he’s only looking out for #1. In economics talk, he is completely self-interested. That doesn’t necessarily mean he’s a total jerk – he might still do things to help others. But if he does, it’s because it makes him happy to do so, or because he thinks it will help him in the long run.

Finally, homo economicus knows what he wants, and what he wants doesn't change all that often. He has has concrete tastes and preferences, so he knows exactly how happy buying a banana will make him in relation to buying a chocolate bar. He usually knows what he will want years in the future so he can save just the right amount to make himself as happy as possible over his lifetime.

Obviously, not everyone acts this way all the time (or ever). Economists know this. But they use him as the main character in their economic theories, or models, anyway, because he allows them to cut out some of the complexity of human behavior and focus on the behaviors that are important for the economy and that represent some level of predictability.

A lot of economists think he is a useful tool, but a lot disagree too. Seeing people as economic-superheroes, they argue, will lead to models of the economy that don’t make a lot of sense in the real world, and can even give people dangerous ideas about how they are ‘supposed’ to act in economic situations. Instead they try to look close at how people actually behave, and build models based on people having limited, or bounded rationality.