Economics Redux

Homo economicus – that autonomous utility-maximizing creature of ancient lore – has been dead for a long, long time. Economists today drag its rotting corpse through textbooks and academic studies and econometric models in a kind of Wealth of Nations and Zombies mash-up because – well, because that’s what  economists do. It’s time and then some to give the poor creature a decent burial and a proper epitaph: “Here lies Homo Economicus: Not a Bad Start, But Fatally Flawed .”

This is hardly a new or radical observation. A quick examination of the works of Ludwig Von Mises, Murray Rothbard, Herbert Simon and Gary Becker show that both the critique of homo economicus and substantive alternatives have been around in the works of respected economic theorists for over 50 years. Behavioral economists such as Amos Tversky and Daniel Kahneman have been expanding the model of the economic person since at least the 1970’s. And as New York Times columnist David Brooks points out, the economic events of 2008-2009 “exposed the shortcomings of the whole field. Economists and financiers spent decades building ever more sophisticated models to anticipate market behavior, yet these models did not predict the financial crisis as it approached. In fact, cutting-edge financial models contributed to it by getting behavior so wrong — helping to wipe out $50 trillion in global wealth and causing untold human suffering.” (March 25, 2010)

What people really do instead of maximizing utility

A recent research study turned up some delightful results that are both not intuitively obvious to a five-year-old, and absolutely at odds with the predicted rational utility-maximizing behavior of homo economicus.

As reported in the January 14, 2010 edition of The Economist, Tanjim Hossain of the University of Toronto and John List of the University of Chicago “… worked with the managers of a Chinese electronics factory, who were interested in exploring ways to make their employee-bonus scheme more effective ... At the beginning of the week, some groups of workers were told that they would receive a bonus of 80 yuan ($12) at the end of the week if they met a given production target. Other groups were told that they had “provisionally” been awarded the same bonus, also due at the end of the week, but that they would “lose” it if their productivity fell short of the same threshold.

“Objectively these are two ways of describing the same scheme.” But as it turned out, “The fear of loss was a better motivator than the prospect of gain (which worked too, but less well). And the difference persisted over time: the results were not simply a consequence of workers’ misunderstanding of the system.”

Behavioral health economics?

One of the biggest economics issues of our time is health care. Can we use the Homo Communitatis framework (see posted paper), which is essentially a mathematical version of the concepts of behavior and communities in Descriptive, to get a better handle on the economics of health care? For example, about 10% of the health care costs in the US today are due to obesity-related problems. That will rise to 20% in 8 years. We know what it takes to change that: change the diet and exercise habits of the populace. But we know how hard it is to do that. If we formulate the decisions using the 4-dimensional formulation of value (H, P, E, E), rather than the undifferentiated notion of "value" used in economics (even behavioral econ) today, and deliberate action, can we get any insights into what might work?