Neoclassical economics is the mainstream economic paradigm of the present era and has certain assumptions such as rationality, perfect knowledge and unique equilibrium. In this regard, homo economicus, namely rational economic man is the main agent of mainstream economics. However, this main agent has aspects that are inconsistent with reality. In other words, decision units are likely to be irrational in the real word because individuals are emotional and social beings. Considering that this conception of rationality contradicts with the instability of economies and crises that have happened, it seems that the dominant economic view cannot exactly explain current events. This chapter questions the concept of homo economicus, the compatibility of homo economicus with homo sapiens and attempts to reveal the shortcomings of the dominant view. It substantially tries to explore why behavioral economics is necessary and how behavioral economics can make up for the shortcomings of the mainstream economic paradigm by the help of its branches; experimental economics and neuroeconomics.
TopThe Main Actor Of Mainstream: Homo Economicus
Mainstream economics generally refers to neoclassical economics, which has several assumptions such as rationality, perfect knowledge, unique equilibrium, and diminishing returns. In this respect, rationality is one of the main assumptions of neoclassical economics, which is correlated with maximizing the net revenue. Entities have the knowledge of all alternatives and limitations and thus makes the best possible choice to achieve the goals (Soukup, Maitah, & Svoboda, 2015, p. 2). Homo economicus1 is the rational economic man who is the main agent of mainstream economics. In a more detailed sense, homo economicus is a person who tries to maximize his or her welfare under the budget constraint (Nyborg, 2000, p. 309), who has to make a choice with given and determinate preferences, who is self-interested and outcome-oriented, and who is concerned with social interactions as long as they affect his or her wealth (Gintis, 2000, p. 312). Homo economicus is an individual with complete knowledge of all economic issues such as goods and markets. This entity always makes a rational choice among available options, usually prefers many to less, and is always consistent (Candan & Hanedar, 2005).
Homo economicus is accepted to be one of the main assumptions of mainstream economics; however, the question to ask is to what extent the term “homo economicus” can function without problems. Doucouliagos discusses that the homo economicus of neoclassical thought has a set of characteristics such as (1) maximizing (optimizing) behavior, (2) the cognitive ability to exercise rational choice, and (3) individualistic behavior and independent tastes and preferences. However, the compatibility of homo economicus with homo sapiens has been questioned. There are two groups of criticisms. The first group is concerned with the bounded rationality that has three components: “(1) there are cognitive limitations to rational choice, (2) agents adapt but do not optimize; and (3) agents are not maximizers, they are satisficers”. The second group is centered on “the role of institutions and group behavior, with two main criticisms: (1) agents may not act individualistically, and (2) agents’ tastes and preferences are neither exogenous nor independent” (1994, pp. 877-878).