Homo Economicus

AAA

DEFINITION of 'Homo Economicus'

A term that describes the rational human being assumed by some economists when deriving, explaining and verifying theories and models. Homo economicus, or economic human, is the figurative human being characterized by the infinite ability to make rational decisions. Certain economic models have traditionally relied on the assumption that humans are rational and will attempt to maximize their utility for both monetary and non-monetary gains. Modern behavioral economists and neuroeconomists, however, have demonstrated that human beings are, in fact, not rational in their decision making, and argue a "more human" subject (that makes somewhat predictable irrational decisions) would provide a more accurate tool for modeling human behavior.

BREAKING DOWN 'Homo Economicus'

Daniel Kahneman, an Israeli-American psychologist and Nobel laureate, and Amos Tversky, a leading expert in judgment and human decision making, founded the field of behavioral economists with their 1979 paper, "Prospect Theory: An Analysis of Decision under Risk." Kahneman and Tversky researched human risk-aversion, finding that people's attitudes regarding risks associated with gains are different from those concerning losses. Homo economicus and the idea that humans always act rationally, is challenged by risk aversion. Kahneman and Tversky, for example, found that if given a choice between definitely getting $1000 or having a 50% chance of getting $2500, people are more likely to accept the $1000.

RELATED TERMS
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects ...
  2. Social Economics

    A branch of economics that focuses on the relationship between ...
  3. Dismal Science

    A term coined by Scottish writer, essayist and historian Thomas ...
  4. Classical Economics

    Classical economics refers to work done by a group of economists ...
  5. Economics

    A social science that studies how individuals, governments, firms ...
  6. Laissez Faire

    An economic theory from the 18th century that is strongly opposed ...
Related Articles
  1. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  2. Fundamental Analysis

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  3. Options & Futures

    Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.
  4. Economics

    The Uncertainty Of Economics: Exploring The Dismal Science

    Learning about the study of economics can help you understand why you face contradictions in the market.
  5. Investing Basics

    Deadly Habits Of Destructive Traders

    Many traders develop destructive habits that, left unchecked, trigger washout and failure.
  6. Active Trading

    The Right Way To Set Up Your Trading Screens

    Well-organized trading screens sum up intraday market action, breaking it into digestible bites that can speed up complex decision making.
  7. Charts & Patterns

    Avoid The Perfection Trap In Trading

    Avoid the perfection trap and make peace with the market’s high levels of systematic noise.
  8. Trading Strategies

    What Is The Crystal Ball Indicator for Traders?

    If you want to be a succesful trader in the market, here we show you the indicators that will help you achieve it long term. Do you have what it takes?
  9. Active Trading Fundamentals

    Five Biggest Obstacles Facing First-Year Traders

    Address these five obstacles and you'll make significant progress as a first-year trader.
  10. Trading Strategies

    Pros And Cons Of Paper Trading

    Most market novices should paper trade for a considerable amount of time, despite key drawbacks.
RELATED FAQS
  1. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
  2. Is it better practice to use a stop order or a limit order?

    Both stop orders and limit orders have their advantages and disadvantages; traders need to decide between the two based on ... Read Full Answer >>
  3. What is the difference between a buy limit and a sell stop order?

    A buy limit order is a specific type of buy order used to enter a market, while a sell-stop order is a sell order that can ... Read Full Answer >>
  4. What is the difference between a short squeeze and a long squeeze?

    A short squeeze and a long squeeze are situations that can force traders and investors out of their positions. A short squeeze ... Read Full Answer >>
  5. Why does the efficient market hypothesis state that technical analysis is bunk?

    The efficient market hypothesis (EMH) suggests that markets are informationally efficient. This means that historical prices ... Read Full Answer >>
  6. What does it mean to be absolutely risk averse?

    Some people are absolutely risk-averse, which means that they cannot tolerate sustaining any sort of loss, even a temporary ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  2. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  3. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  4. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  5. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  6. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
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!