Alternate name: Homo economicus
For example, if you have the opportunity to put $50 in savings or donate $50 to a charity, economic man theory suggests you’d put the $50 in savings because it helps you the most financially. It’s the “rational” optional of the two that would maximize your self-interest.
How the Economic Man Theory Works
The economic man theory assumes that all humans are motivated solely by self-interest, which means they will always try to maximize their wealth. It was first introduced by late economist Adam Smith. The economic man theory can be used to explain a wide range of economic behaviors, including consumer choice, labor supply, and financial decisions. For instance, when you decide which products to buy as a consumer, you typically consider things like price, quality, and convenience. If two items are completely identical but are sold at two different price points, the “economic man” would go with the cheaper option because it is in their self interest. Finally, you could argue that investors also demonstrate rational behavior under the economic man theory. When you buy stock, you’re betting that the stock will go up in value and that you’ll earn a profit. This decision is based on the expectation that the investment you’re choosing now is more beneficial to you than any other alternative.
Advantages of the Economic Man Theory
The economic man theory describes how humans have an innate drive to better their current situation. The “economic man” in you may be nudging you to negotiate a raise at work, save for retirement, build your net worth, or other steps to better your situation.
Criticisms of the Economic Man Theory
While the economic man theory is a well-established principle in neoclassical economics and it provides a basic theory on why you make certain choices, it has criticisms.
Economic Man Theory Assumes People Always Act Rationally
Economic man theory assumes people always act rationally and in their own self-interest. However, scientific research proves this isn’t the case. Rather, most people actually make decisions based on emotions, cognitive biases, and social norms, rather than rationality. A company’s 401(k) match is another example. Economic man theory assumes you’d always take the company match when given the chance because it’s free money. If your employer offers a 50% match on your contributions, that’s an instant 50% return on your money. In real life, numerous people never take advantage of this company perk. Maybe they have more pressing matters to take care of like bills, childcare, or health care costs that are in their self interest. Or, on the other hand, they could be driven by an emotional impulsion to spend that money now instead of saving it.
Constraints of Time and Information in the Economic Man Theory
The economic man theory also suggests that people have perfect knowledge about all the options available to them when making a decision—and that there’s always one clear decision. But this isn’t always the case. When making decisions, sometimes you’re stuck between two seemingly good options and you may not have time to gather all the information.
