The concept of "Homo Economicus" and Experimental Games

CONTENTS

1. Introduction

2. The concept of Homo Economicus
2.1 Properties of Homo Economicus
2.2 Criticism

3. Experimental Games
3.1 Dictator Game
3.2 Findings
3.3 Criticism of experimental economics

4. Conclusion

LITERATURE

1. Introduction

“Traditional economic theory postulates an ‘Economic Man’, who, in the course of being ‘economic’ is also ‘rational’. This man is assumed to have knowledge of the relevant aspects of his environment which, if not absolutely complete, is at least impressively clear and voluminous. He is assumed also to have a well-organized and stable system of preferences and a skill in computation that enables him to calculate, for the alternative courses of action that are available to him” (Simon, 1955, p. 99).

The findings of research in experimental behavioural economics over the past two decades have been impressively convincing. Until recently, economists assumed that individual behaviour is controlled by rationality. The consumer was perceived as a rational person who strives to maximize his utility. This is the concept of homo economicus, a prototype of an economic person and starting point for model formulation.However, this theory often overlooks the fact that homo economicus is not a person of flesh and blood, but a conceptual notion. Experimental evidence shows that the behaviour forecast by the standard model often does not correspond to reality. Factors like fairness, trust and moral values also play a role in the decision-making of the real economic actor. The knowledge gleaned from the observation of different negotiation plays provides the possibility for the derivation and representation of individual behaviour patterns. But the studies’ findings reveal that feelings of fairness, generosity and trust play a crucial role for the results. The object of this work is to find an answer to the question if homo economicus is still alive or not. Therefore I will consider different experiments of the dictator game from the literature. Experimental games offer good possibilities for the representation and derivation of individual behaviour patterns.

Chapter 2 presents the concept of homo economicus and describes his properties. Chapter 3 deals with experimental games, with the major focus being on the dictator game. Individual studies will be presented. The last chapter concludes.

2. The concept of Homo Economicus

Until recently economists assumed that individual behaviour is controlled by rationality. Homo economicus acts exclusively in his own interest and strives for the maximization of his individual utility, which is usually understood as net economic gain. His preferences are constant and he has complete information. This is the concept of homo economicus, a prototype of an economic person and starting point for model formulation (Kirchgässner, 1991, p. 31). The last hundred years have seen some developments in and changes to this model of the “economic man”, but all approaches still have a common core (Manstetten, 2000, p. 20). This basic concept of economic man is the starting point for a large part of the economic application models recognized today as well as for numerous experimental games. However, the model cannot represent all the characteristics of a real individual, but is a simplified representation of the typical actors seen in the economy. The ability to display fully rational behaviour is the main characteristic of homo economicus. He strives for utility maximization (this applies equally to consumers and producers and here refers to the special form of profit maximization). He is also continuously informed about all decision alternatives and their consequences. Thus, homo economicus acts as an objective function seeking to optimize wealth or income (Lofthouse and Vint, 1978, p. 586). The model of homo economicus can thus be regarded as a simplified model of the real man, which serves to explain certain social realities and human behaviours and their consequences (Tietzel, 1981, p. 118).

2.1 Properties of Homo Economicus

Due to the always present shortage of resources, an economic actor regularly finds himself facing decision situations which he must master in the best way possible. The standard model aims to serve as guidance for behaviour in such decision situations and therefore to better understand the economic actors. The characteristics of homo economicus are summarized below.

Rationality

Homo economicus makes his decisions rationally. He looks at all facets of a problem and weighs the advantages and disadvantages of possible solutions. He selects the solution that maximizes his own utility. Besides, he is ordinarily limited by restrictions in his scope of action. It should be noted that rational action is descriptive and not a normative demand within the scope of (economic) behavioural theory. In reality though, the two levels often merge, partly because one of the aims of economics is the ability to produce instructions for rational action (Tietzel, 1981, p. 120). Here rationality serves the empirical macroeconomic explanation of human action – regardless of whether that action is good or desired. In economics an actor acts rationally if he acts according to the economic principle: with the given resources, he reaches a maximum target, or achieves a given aim with a minimum of resources. Rational action thus is caused by shortages, here the shortage of the available resources. While this is clear enough, a second look at these central behavioural patterns of homo economicus is essential to be able to understand him as an explanatory model for economic methodology. In general one makes a distinction between two forms of rationality: formal and substantial rationality (Tietzel, 1981, p. 121f). Formal rationality refers to the way in which an actor makes decisions. A decision and the action following from it are rational when the actor has selected them systematically from the known action alternatives available to him. In formal rationality the logic and the consistency of all actions is tested. Such an examination is possible for an external observer if the present elements of the situation are known to him. Therefore nearly every action can be rational. The explanatory power of behaviour patterns and models becomes imprecise under consideration of all these factors, at least in the national economy theory. In this respect the action of homo economicus is not only formally but also substantially rational (Tietzel, 1981, p. 122).

Concepts like decisions, rationality etc. that play no role in the explanation pattern e.g. of physics are however central to the analysis of human action (Suchanek, 1994, p. 85f). Thereby it also becomes clear that the quality of homo economicus is to “act rationally”.

Utility maximization

Utility maximization is the ultimate goal to which rational human action is directed. In this case, similarly to the rationality assumption, almost every action can be regarded as personal utility-maximizing – depending on the definition of the benefits, the objective function. In economic theory, profit maximization (or consumption) is usually used as the supreme “benefit” and hence the supreme or ultimate goal. In a biological approach, this would probably be the instinctive reproduction of one’s own heritage.

The definition of the objective function is therefore dependent on the respective study subject. If reproduction is viewed from an economic perspective and if economic activities are examined through biological behaviour. Since the economic approach has its origins in the study of economic actions, selfishness is often equated with profit maximization. Actors use the resources available to them rationally to achieve this objective. In other words, the player behaves rationally if he maximizes his utility function under the given restrictions. He then achieves the maximum target value with the available resources or a given target with a minimum use of resources. He acts according to the economic principle. Homo economicus knows only economic goals and is motivated particularly by properties such as rational behavior, the pursuit of maximum benefit (utility maximization), the full knowledge of economic choices and their consequences, as well as complete information on all markets. Homo economicus is “neutral” to people; he is not concerned about whether the consequences of his actions are good or bad for other people. He looks at them neither with envy nor with malicious pleasure, nor does he take any pleasure in their well-being (Kirchgässner, 1991, p. 47). Nevertheless, the acceptance of utility maximization should not only be interpreted egoistically. But when actors co-operate, the disinterest understandably weakens – out of self-interest. Therefore, superficially disinterested action, or altruism, follows the self-interested logic of cooperative plays. To sum up, homo economicus acts in his environment and together with theirs to achieve his aims.

Self-interest

The prototype of the economic person incorporates no considerations about the well-being of others in his decision-making process. Only his own utility should be maximized. Whether others suffers is neither positively nor negatively valued except insofar as it results in a benefit or loss. If after the methodological individualism[1] the behaviour of the individuals taken together proves social action, this implies that the individuals act in their own interest and the self-interest axiom of the economic behavioural model is called:

“The individual acts (only) according to his own interests and preferences” (Kirchgässner, 1991, p. 16). It is believed that people’s behaviour is not influenced by the way of other people act.

Reaction to constraints

Changes in the behavior of homo economicus can be attributed to structural conditions. The environmental conditions provide the space for the actions of the actor, but on the other hand they limit him. The environmental conditions or restrictions include, for example: disposable income, the legal framework of action and the (expected) reactions of the other. Within the room for action lie the individual possibilities for action that are available the individual, and he can make a choice between them. This prevents focus on the restrictions that any behavioral change of the actors is attributed to changes in preferences. Homo economicus has one goal and it is to achieve his preference in the changing environment (Kirchgässner, 1991, p. 36f).

Constant preferences

It is generally assumed that the preferences of an economic man are constant, provided that the environmental conditions and restrictions do not change. One can therefore assume that an individual will always assess situations based on the same moral principles and therefore exhibit the same behaviour. The utility function and thus the preferences of homo economicus are assumed to be stable. Individual changes are usually ignored, also because they are relatively difficult to measure. In macroeconomic terms, the preferences may change in one person or in a group by changing the population structure. The restrictions or environmental conditions that govern the actions of individuals, however, are relatively easy to detect. If the changes in the ratios are determined, the items that are subject to the external conditions are kept identical in order to derive the various action sequences from the different situation conditions (Suchanek, 1994, p. 93).

Perfect information

Homo economicus is assumed to be perfectly informed about each alternative and its consequences. If the player responds to the restrictions in a certain way, then he fulfils the assumptions of homo economicus. He should pay no particular transaction and information costs, or “learning costs” (Soukup et al., 2014). He is fully aware of his alternatives, and he can assess the impact and consequences of the various alternatives. The adoption of full information results firstly from the rationality assumption. Rationality requires the actor’s knowledge and predictability (up to foresight) of the possible consequences that will arise from each choice. Choosing the best alternative course of action can only be met in terms of its objective function. Secondly, the assumption of complete information is obviously an abstracting auxiliary assumption of economic methodology to analyse economic processes. Thus, homo economicus acts as an objective function seeking to optimize wealth or income (Lofthouse and Vint, 1978, p. 586).

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