What is 'Homo Economicus'

Homo Economicus is 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.

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