A:

Homo economicus or

"economic man" is the characterization of man in some economic theories as a rational person who pursues wealth for his own self-interest. The economic man is described as one who avoids unnecessary work by using rational judgment. The assumption that all humans behave in this manner has been a fundamental premise for many economic theories.

The history of the term dates back to the 19th century when John Stewart Mills first proposed the definition of homo economicus. He defined the economic actor as one "who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labor and physical self-denial with which they can be obtained."

The idea that man acts in his own self-interest often is attributed to other economists and philosophers, like economists Adam Smith and David Ricardo, who considered man to be a rational, self-interested economic agent, and Aristotle, who discussed man's self-interested tendencies in his work Politics. But John Stewart Mills is considered the first to have defined the economic man completely.

The theory of the economic man dominated classical economic thought for many years until the rise of formal criticism in the 20th century from economic anthropologists and neo-classical economists. One of the most notable criticisms can be attributed to famed economist John Maynard Keynes. He, along with several other economists, argued that humans do not behave like the economic man. Instead, Keynes asserted that humans behave irrationally. He and his fellows proposed that the economic man is not a realistic model of human behavior because economic actors do not always act in their own self-interest and are not always fully informed when making economic decisions.

Although there have been many critics of the theory of homo economicus, the idea that economic actors behave in their own self-interest remains a fundamental basis of economic thought.

(For more on this topic, read Economic Basics: Introduction.)

This question was answered by Richard C. Wilson.

RELATED FAQS

  1. How does days to cover a short position relate to a short squeeze?

    Learn about days to cover and how it relates to a short squeeze. Smart traders can use this metric to help them avoid getting ...
  2. Is it better practice to use a stop order or a limit order?

    Discover whether it is considered best practice to use stop losses or limit orders. Both options have their advantages and ...
  3. What is the difference between a buy limit and a sell stop order?

    Understand the differences between the two order types, a buy limit order and a sell stop order, and the purposes each one ...
  4. What is the difference between a short squeeze and a long squeeze?

    Learn about short long squeezes, the difference between short and long squeezes, and how investors and traders can be squeezed ...
RELATED TERMS
  1. Head-Fake Trade

    A trade where a stock or market appears to be making a move in ...
  2. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  3. Outcome Bias

    A decision based on the outcome of previous events without regard ...
  4. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
  5. Centipede Game

    An extensive-form game in game theory in which two players alternately ...
  6. Cournot Competition

    An economic model that describes an industry structure in which ...

You May Also Like

Related Articles
  1. Charts & Patterns

    Avoid The Perfection Trap In Trading

  2. Trading Strategies

    Uncovering Evidence Of Sector Rotation

  3. Trading Strategies

    Strategies For Playing The Confirmation ...

  4. Trading Strategies

    Three Types Of Profit Protection Stops

  5. Active Trading

    Twitter and Stock Trading: A Real Strategy?

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!