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.

INVESTOPEDIA EXPLAINS '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 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 >>
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. Trading Strategies

    When To Follow The Crowd And When To Lose It

    Our profits ultimately depend on the misfortune of other market players.
  6. Active Trading Fundamentals

    The Shiny Object Syndrome that Kills Trader Productivity

    People get distracted and, in their excitement, they end up trying to learn everything rather than focusing on the subject they had originally set out to learn.
  7. Trading Strategies

    How To Cover Your Bases After Making A Trade

    Follow up your trade entry with these time-tested risk management strategies.
  8. Chart Advisor

    Commodity Traders are Watching These 3 Charts

    As we head towards the summer months, many commodity traders are looking to diversify their holdings and to protect themselves against inflation.
  9. Trading Strategies

    Micro-Patterns: Looking At The Smaller Picture

    Micro-patterns within trading ranges reveal hidden characteristics of the bull-bear struggle.
  10. Active Trading Fundamentals

    Managing Forex Trading Profits for Better Returns

    How to balance anticipated vs. confirmed trades to manage potential profits and lower risks.

You May Also Like

Hot Definitions
  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  2. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  3. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  4. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  5. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  6. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
Trading Center