Homo Economicus: The Rational Economic Actor and Its Critics

Q: What should you know about what the model assumes?

There is no single official definition of Homo economicus , but most versions share a few assumptions.

Homo economicus, or "economic man," is the model of a human being used in much of economic theory. It pictures people as consistently rational and largely self-interested agents who pursue their goals as well as they can given what they know and what they can afford. The Latin name is a play on Homo sapiens, the scientific name of our species. It suggests a stripped-down version of a person, built for analysis rather than for realism.

Few ideas in social science have been criticized so often or defended so stubbornly. To its critics, Homo economicus is a caricature: a cold calculator who never cares about fairness, never makes mistakes, and never acts from habit, love, or duty. To its defenders, it is a deliberate simplification, no more meant to describe a real person than a frictionless plane in physics is meant to describe a real road. Both sides have evidence. Over the past half century, laboratory experiments, field studies, and research across cultures have shown where the model fails and where it works surprisingly well.

This article explains where the idea came from, what it assumes, how economists use it, what the main critiques say, what the experimental evidence shows, and how the model has been revised.

What the model assumes

There is no single official definition of Homo economicus, but most versions share a few assumptions.

Assumption	Plain meaning
Well-defined preferences	The agent knows what it wants and can rank any two options
Consistency	Its rankings do not contradict each other. If it prefers A to B and B to C, it prefers A to C
Optimization	It chooses the best available option given its budget and other limits
Self-interest	Its goals are mainly about its own consumption, income, or well-being
Stable preferences	What it wants does not change because of how a choice is described or what it already owns
Good information processing	It uses available information sensibly and, in strong versions, can compute the best choice however complex the problem

In consumer theory this agent maximizes utility, a measure of how much it values different bundles of goods. In the theory of the firm, the corresponding agent maximizes profit. In game theory, where several agents interact, the standard assumption is that each player is rational, knows the others are rational, and reasons through the possible outcomes to choose the best strategy.

Self-interest is a separate assumption

An important point, often missed, is that rationality and selfishness are different assumptions. Formally, a utility function can include anything. A person's utility can depend on the well-being of their children, their neighbors, or strangers. A rational agent with such preferences might give to charity, vote, or volunteer, and still be perfectly consistent. Only the narrower, stronger version of Homo economicus assumes that people care only about their own material payoff. Much of the debate over the model comes from confusing these two versions. A study showing that people are generous is evidence against the selfish version, but not necessarily against the rational one.

Strong and weak versions

It helps to separate a few versions of the model:

The narrow version. People are rational and care only about their own material payoffs, usually money. This version makes sharp, testable predictions and is often wrong in experiments.
The broad version. People are rational in the sense of having consistent preferences and acting on them, but those preferences can include fairness, altruism, reputation, and other concerns. This version is harder to refute, but critics say it risks explaining everything and therefore predicting nothing.
The "as if" version. People need not actually calculate anything. The model is only claimed to predict what they do on average, especially in markets where competition and learning punish mistakes.

Origins of the idea

Adam Smith

The model is often traced to Adam Smith, though Smith himself held a richer view of human nature. In The Wealth of Nations (1776) he wrote a much-quoted line: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Smith's point was that markets can coordinate the work of many people who are each pursuing their own ends. But in his earlier book, The Theory of Moral Sentiments (1759), Smith gave a central place to sympathy, the human tendency to share the feelings of others and to care how others see us. Reading Smith as a pure theorist of self-interest leaves out half his work.

John Stuart Mill

The clearest early statement of the model's logic came from John Stuart Mill. In his 1836 essay "On the Definition of Political Economy; and on the Method of Investigation Proper to It," Mill wrote that political economy is concerned with man "solely as a being who desires to possess wealth." Mill did not claim that real people were like this. He openly said the approach rested on "an arbitrary definition of man," chosen because it made analysis possible. He also allowed for a few motives that he called "perpetually antagonizing principles to the desire of wealth": an "aversion to labour" and a "desire of the present enjoyment of costly indulgences." In other words, Mill's economic man wanted wealth, disliked work, and liked spending now rather than later.

Mill's method was to isolate one motive, study its effects, and then correct for other motives when applying the results to real cases. He compared this to the way physical science studies one force at a time.

The name

Mill did not use the phrase "economic man." The term was introduced by his critics in the late nineteenth century, who felt that his abstraction had been mistaken for a description of real people. The Oxford English Dictionary cites C. S. Devas's The Groundwork of Economics (1883), which complained: "Mill has only examined the Homo oeconomicus, or dollar-hunting animal." John Kells Ingram used the English term "economic man" in A History of Political Economy (1888). The economist Joseph Persky, in a 1995 article in the Journal of Economic Perspectives, traced the Latin form Homo economicus to Vilfredo Pareto's Manual of Political Economy (1906), while noting that it may be older.

Persky's article, "The Ethology of Homo Economicus," also argued that Mill's model was less crude than critics claimed. Mill's economic man had wants for leisure, luxury, and family life, and Mill was interested in how social institutions shape what people want, a field he called "ethology." Persky suggested that modern critics who want to add richer motives to the model should also take seriously Mill's caution about keeping assumptions few.

The marginal revolution and mathematical economics

In the late nineteenth century, economists such as William Stanley Jevons, Léon Walras, Francis Ysidro Edgeworth, and Pareto began to describe economic choice mathematically. They treated consumers as maximizing utility and firms as maximizing profit, and they used calculus to find the choices that would result. This made economics more rigorous, but it also made the assumptions about human behavior more explicit and easier to attack.

In the twentieth century, Lionel Robbins defined economics as the study of how people allocate scarce means among competing ends. Under that definition, economic theory became a general theory of rational choice that could be applied to almost any decision, not just buying and selling.

Early critics

Thorstein Veblen

The American economist Thorstein Veblen wrote one of the sharpest early critiques. In "Why Is Economics Not an Evolutionary Science?" (1898), he mocked the view of human nature behind the theory of his day:

"The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact."

Veblen's complaint was that this picture had no history and no development. Real people, he argued, are shaped by habits and institutions, and those change over time. An economics built on a timeless calculating machine could not explain how economies evolve.

Keynes and uncertainty

John Maynard Keynes and others stressed uncertainty: in many important decisions, such as whether to build a factory, people cannot calculate probabilities, because the future is genuinely unknown. They rely instead on conventions, confidence, and what Keynes called "animal spirits." Economists of the Austrian School also emphasized uncertainty and limited knowledge, and some preferred a different model, Homo agens, the acting human, which stresses purposeful action over optimal calculation.

Economic anthropology

Anthropologists such as Marcel Mauss, Karl Polanyi, and Marshall Sahlins documented societies whose economies were organized around gift-giving, reciprocity, and redistribution rather than market exchange. In such societies, giving something away can raise one's standing, and accepting a gift creates an obligation. These studies suggested that the self-interested trader is not a universal type but a product of particular institutions.

Herbert Simon and bounded rationality

The most influential critique from inside economics came from Herbert A. Simon. In "A Behavioral Model of Rational Choice," published in the Quarterly Journal of Economics in 1955, Simon argued that the classic model asked too much of human minds. Real decision-makers cannot list every option, predict every outcome, and compare them all. They face limits of time, attention, information, and computing power.

Simon proposed that people are boundedly rational. Instead of maximizing, they satisfice, a word he coined by combining "satisfy" and "suffice." A satisficing agent sets a level of what would be acceptable, searches until it finds an option that meets that level, and stops. If options are easy to find, it may raise its standard; if they are hard to find, it lowers it.

Simon's point was not that people are irrational. It was that rationality is a matter of using reasonable rules given real limits. He received the Nobel Memorial Prize in Economic Sciences in 1978 for his research on decision-making in economic organizations.

Hypothetical example: maximizing versus satisficing

This example is invented to show the difference.

A person needs an apartment. There are 300 listings in the city. A strict maximizer would inspect all 300, score each on rent, location, size, and condition, and pick the highest score. That might take months.

A satisficer sets a rule: under a certain rent, within 30 minutes of work, with two bedrooms. They look at listings until they find one that meets the rule, then sign. They may miss a slightly better apartment, but they save weeks of searching. If they had included the cost of searching, the satisficer's choice might well be the more sensible one. This is why many economists now treat search costs as part of the problem rather than a deviation from rationality.

Milton Friedman's defense: "as if"

The best-known defense of the model came from Milton Friedman in "The Methodology of Positive Economics," published in Essays in Positive Economics (1953). Friedman argued that a theory should be judged by how well it predicts, not by how realistic its assumptions look.

He gave an example of an expert billiard player. We could predict the player's shots very well, he said, by assuming the player knew the complicated mathematical formulas for the paths of the balls and calculated them exactly. Of course the player does no such thing. But if the player could not reach essentially the same results, they would not be an expert. In the same way, firms may behave as if they maximize profit, even if no manager ever solves the equations, because firms that stray too far from profit maximization lose out to those that do not.

Friedman's argument was very influential and is still debated. Critics point out several problems:

The argument works best where competition and feedback are strong and repeated, as with expert players or firms in competitive markets. It is weaker for one-off decisions, such as choosing a pension or a mortgage, where people get little feedback.
It is hard to know in advance whether a market is competitive enough for the "as if" assumption to hold.
If a model's assumptions are clearly false, it may predict well in ordinary conditions but fail badly in unusual ones, such as financial crises.

Gary Becker and the expansion of the model

While some economists were narrowing the model's claims, others expanded where it was applied. Gary Becker of the University of Chicago used the rational-choice approach to study topics that had seemed outside economics: discrimination, crime, marriage, family size, and investment in education, which he called "human capital." He received the Nobel Memorial Prize in Economic Sciences in 1992 for extending microeconomic analysis to a wide range of human behavior, including behavior outside markets.

Becker did not claim people were selfish. In his Nobel lecture, "The Economic Way of Looking at Behavior," published in the Journal of Political Economy in 1993, he described his approach as one that incorporates into the theory "a much richer class of attitudes, preferences, and calculations" than narrow self-interest. His agents could be altruistic toward their families, and he wrote about how altruism shapes household decisions. What made the approach "economic" was the assumption that people respond to incentives and make consistent choices given their goals.

Critics responded that this broad version of the model can explain almost any behavior after the fact by adding a suitable preference, which makes it hard to test. Defenders reply that it has produced many testable predictions, for example about how changes in wages affect women's employment or how changes in punishment affect crime.

The behavioral challenge

From the 1970s onward, psychologists and economists began testing the model's assumptions directly in experiments. The results launched the field now called behavioral economics.

Prospect theory and loss aversion

Daniel Kahneman and Amos Tversky, two Israeli psychologists, published "Prospect Theory: An Analysis of Decision under Risk" in the journal Econometrica in 1979. They showed that people's choices under risk departed from the standard model in systematic ways.

A key finding was that people evaluate outcomes as gains or losses relative to a reference point, such as what they already have, rather than in terms of total wealth. They also weigh losses more heavily than equal gains, a pattern called loss aversion. People tend to be cautious when choosing among possible gains and willing to take risks to avoid a sure loss. The same choice can produce different decisions depending on whether it is described in terms of what might be gained or what might be lost.

Kahneman received the Nobel Memorial Prize in Economic Sciences in 2002, partly for this work. Tversky had died in 1996, and the prize is not awarded after death.

The endowment effect: the mug experiments

One of the clearest experiments on loss aversion was reported by Daniel Kahneman, Jack Knetsch, and Richard Thaler in "Experimental Tests of the Endowment Effect and the Coase Theorem," published in the Journal of Political Economy in 1990.

In their first experiment, 44 students in an advanced undergraduate law and economics class at Cornell University took part in a series of markets. First they traded "induced-value" tokens, which had a fixed cash value set by the experimenters. Those markets worked just as theory predicts: buyers' and sellers' median prices matched, and the number of trades equaled the predicted number.

Then half the students, on alternating seats, were given Cornell coffee mugs that sold for 6 dollars at the campus bookstore. Markets were held in which mug owners could sell and the others could buy. Because the mugs were handed out at random, standard theory predicts that about half of them should change hands: about half the time, a mug would land with someone who valued it less than a randomly chosen non-owner did.

That is not what happened. Across the trials, the median price at which owners were willing to sell was 5.25 dollars, while the median price non-owners were willing to pay was between 2.25 and 2.75 dollars. Only about a fifth of the predicted number of trades took place. Owners valued the mugs at more than twice what non-owners would pay, simply because they owned them. The authors called this the endowment effect. They found similar results with ballpoint pens.

The mug experiment matters because it tests a basic feature of the rational model: the value a person places on a good should not depend much on whether they happen to own it. The experiment showed that, at least for ordinary goods, it does.

Myopic loss aversion

Shlomo Benartzi and Richard Thaler applied loss aversion to financial markets in "Myopic Loss Aversion and the Equity Premium Puzzle," published in the Quarterly Journal of Economics in 1995. Over long periods, stocks have earned much higher returns than safe bonds, more than standard models can easily explain. Benartzi and Thaler argued that investors who are loss-averse and who check their portfolios often see many short-term losses and therefore demand a high reward for holding stocks. They called this combination myopic loss aversion.

Thaler and "Econs"

Richard Thaler, who became one of the founders of behavioral economics, received the Nobel Memorial Prize in Economic Sciences in 2017. The Royal Swedish Academy of Sciences credited him with incorporating psychologically realistic assumptions into analyses of economic decision-making, in particular limited rationality, social preferences, and lack of self-control. In the book Nudge (2008), Thaler and the legal scholar Cass Sunstein popularized a distinction between "Econs," the idealized agents of economic theory, and "Humans," the real people who procrastinate, follow defaults, and are swayed by how choices are presented. Their policy idea was that because humans are not econs, careful design of choices, such as enrolling workers in pension plans by default while letting them opt out, could improve decisions without forcing anyone.

Fairness and the ultimatum game

Many experiments test not whether people calculate well but whether they are selfish. The best-known is the ultimatum game.

How the game works

Two players are offered a sum of money. The first player, the proposer, decides how to split it and makes an offer. The second player, the responder, can accept, in which case both get the proposed amounts, or reject, in which case both get nothing.

If both players care only about money and both know this, the prediction is simple. The responder should accept any positive offer, because something is better than nothing. Knowing this, the proposer should offer the smallest possible amount.

What people actually do

The game was introduced in a 1982 experiment by Werner Güth, Rolf Schmittberger, and Bernd Schwarze, and it has been run thousands of times since. The standard pattern among university students is very different from the narrow prediction. Proposers commonly offer between a third and a half of the sum, with half the most common offer, and responders frequently reject low offers, giving up money in order to punish what they see as unfair treatment.

There are two ways to read this. One is that people care about fairness for its own sake. Another is that proposers are simply being strategic: they offer more because they expect low offers to be rejected. The rejections themselves are harder to explain with narrow self-interest, because a responder who rejects a positive offer loses money for certain, in a one-time game with a stranger.

The fifteen societies study

A natural objection to these findings was that they came almost entirely from university students in wealthy countries. Perhaps students were unusual. Perhaps people in other societies behaved more like Homo economicus.

To test this, a team led by Joseph Henrich, with Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, Herbert Gintis, and Richard McElreath, organized one of the largest cross-cultural experiments in economics. Their short report, "In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies," appeared in the American Economic Review in May 2001.

Design

Twelve experienced field researchers, working in 12 countries on five continents, ran ultimatum, public goods, and dictator games with people from 15 small-scale societies. The sample included foragers, groups practicing slash-and-burn horticulture, nomadic herders, and small-scale farmers. The researchers used the same protocols across groups as far as possible, and stakes were real.

Results

The authors summarized their findings in several points. First, "the canonical model is not supported in any society studied." Second, behavior varied much more between groups than earlier studies had found. Third, differences in how groups organized their economies explained much of the variation.

Some details:

In industrial societies, average ultimatum offers are typically close to 44 percent of the stake. Across the fifteen societies, average offers ranged from 26 percent to 58 percent. The most common offers ranged from 15 percent to 50 percent.
The Machiguenga of Peru made the lowest average offers, 26 percent, and responders rejected almost none of them.
Among the Hadza of Tanzania, responders rejected 24 percent of all offers and 43 percent of offers of 20 percent or less.
The Ache of Paraguay and the Lamalera whale-hunters of Indonesia made average offers above 50 percent.
The Au and Gnau of Papua New Guinea often rejected not only unfair offers but also offers of more than half. The researchers linked this to local gift-giving customs in which accepting a large gift creates an obligation to repay and can put the receiver in a subordinate position.
In public goods games, the Orma of Kenya, who quickly likened the game to a local custom of voluntary contributions to village projects, contributed 58 percent of their stake, while the Machiguenga contributed an average of 22 percent.

What explained the differences

The researchers ranked each society on two measures: how much people depended on cooperation with non-family members to make a living, which they called payoffs to cooperation, and how much people relied on market exchange in daily life, which they called market integration. Together, these two measures explained 68 percent of the variation in average offers across groups. Higher market integration and higher payoffs to cooperation went with more generous offers. Individual traits such as sex, age, and relative wealth were not significantly related to offers.

One possible interpretation is that when people face a new situation, such as an experimental game, they look for something familiar it resembles and act as they would in that familiar case. The Lamalera, who hunt whales in large crews and share the catch, behaved as if dividing a joint catch.

What the study did not claim

The authors were careful about their conclusion. They wrote that their results "do not imply that economists should abandon the rational-actor framework," but that they suggested major revisions: the standard model needs to account for preferences that are shaped by culture and social institutions, and for concern with fairness and reciprocity.

The study is also notable for a finding that later research built on: people in wealthy, industrialized societies, especially university students, are not a good stand-in for humanity as a whole.

Other critiques

Amartya Sen: "Rational Fools"

The economist and philosopher Amartya Sen made a widely cited critique in "Rational Fools: A Critique of the Behavioral Foundations of Economic Theory," published in Philosophy and Public Affairs in 1977. Sen argued that a person who acts only on narrow self-interest, and who cannot distinguish between different reasons for acting, would be a kind of "rational fool." He distinguished between sympathy, where helping others makes you better off, and commitment, where you act on a principle even if it makes you worse off. Commitment, he argued, cannot be captured simply by adding others' welfare to your utility function, and it matters for things like work effort, voting, and public life. Sen received the Nobel Memorial Prize in Economic Sciences in 1998.

Crowding out

The Swiss economist Bruno Frey has argued that the model overemphasizes money and other external rewards. Paying people to do something they already do for its own sake can sometimes reduce how much they do it, a phenomenon he called crowding out of intrinsic motivation. If true, this matters for policy, because a narrow model would predict that adding a reward always increases effort.

Sociology: Homo sociologicus

Sociologists have long argued that the model treats people's tastes as given from outside, when in fact they are shaped by family, class, culture, and social pressure. The German sociologist Ralf Dahrendorf described an alternative model, Homo sociologicus, a person who acts by playing social roles and meeting the expectations attached to them, rather than by pursuing private goals. Neither model is complete; most social scientists now see behavior as shaped by both incentives and norms.

Feminist economics

Feminist economists have argued that the model reflects a particular picture of a person: independent, self-sufficient, and engaged in market exchange. Nancy Folbre, in The Invisible Heart, argued that care work, such as raising children and looking after the sick, is undervalued partly because it is unpaid and partly because it does not fit the self-interested model. Others, such as Mary Mellor, argued that the model leaves out both people's dependence on others and their dependence on nature.

Neuroscience

Neuroeconomics, which studies the brain during economic decisions, has added a different kind of evidence. One well-known study, by Michael Kosfeld and colleagues, "Oxytocin Increases Trust in Humans," was published in Nature in 2005. It found that giving people the hormone oxytocin through a nasal spray increased how much money they were willing to entrust to a stranger in an investment game. Later attempts to repeat oxytocin results have had mixed success, so findings like this are best treated as suggestive rather than settled.

Responses and revisions

The model has not been abandoned. It has been revised in several directions.

Social preferences

Economists now often build social preferences into their models. An agent might dislike inequality, reward kindness, and punish unfairness, even at a cost to itself. These models keep the rational-choice framework but change what agents care about. The term Homo reciprocans is sometimes used for an agent who cooperates with those who cooperate and punishes those who do not. Because the general utility framework allows such preferences, these models can be seen as an extension of Homo economicus rather than a rejection of it.

Bounded rationality in models

Theorists have also built models of agents with limited attention, limited memory, or a tendency to put off unpleasant tasks. Models of present bias, for example, describe people who sincerely plan to save next month but keep putting it off when next month arrives. These models can produce predictions that differ sharply from the standard model, such as the large effect of default options on pension enrollment.

When the simple model works

Experiments have also found settings where Homo economicus predicts well. In the induced-value markets of the mug experiment, trading matched the theory exactly. In competitive markets with many buyers and sellers, repeated trading, and clear feedback, prices often move toward the levels the standard model predicts, even when individual traders are not perfectly rational. This supports a version of Friedman's argument: the model can work well for markets even when it fails for individuals.

Using the model sensibly

A practical way to think about Homo economicus is as a tool whose usefulness depends on the setting.

Setting	How well the narrow model tends to predict
Competitive markets with repeated trades and clear feedback	Often well
Firms facing strong competition	Often reasonably well
One-time, complex decisions, such as pensions or mortgages	Often poorly; defaults and framing matter a lot
Situations involving fairness between identifiable people	Poorly for the selfish version; better with social preferences
Choices involving risk, gains, and losses	Poorly without loss aversion and reference points
Behavior shaped by social norms and roles	Poorly without considering culture and institutions

Hypothetical example: a policy question

This example is invented to show how the choice of model affects advice.

A city wants to reduce litter in a park. A narrow Homo economicus model suggests a fine: raise the cost of littering until it exceeds the benefit of not carrying trash to a bin. A behavioral model might add that people respond to what others do, so a clean park stays cleaner, and that clear signs and well-placed bins lower the effort of doing the right thing. A crowding-out view would warn that if the city starts paying people a small fee to pick up litter, some who used to do it for free out of civic pride might stop.

None of these models is simply right. Each points to effects the others might miss. Good policy analysis often uses the simple model as a starting point and then checks where its assumptions are likely to fail.

Common misconceptions

Economists believe people are actually like Homo economicus. Most economists see the model as a simplification. Mill called it "an arbitrary definition of man." Behavioral economics, a large and well-established part of the field, is built on studying where real behavior departs from it.

The model assumes everyone is selfish. Only the narrow version does. The general theory of rational choice allows people to care about others, and many modern models include fairness and altruism.

Rational means unemotional. In economic theory, rationality means consistency and acting on one's goals. It says nothing about whether those goals come from reason or emotion.

Experiments have disproved the model. Experiments have shown that the narrow version fails in many settings, especially those involving fairness, risk, and ownership. They have also shown that it predicts well in some market settings. The more accurate summary is that the model's range of usefulness is narrower than its early users assumed.

Adam Smith invented the selfish economic man. Smith's butcher-and-baker passage is about how markets channel self-interest, but his Theory of Moral Sentiments puts sympathy at the center of human nature. The term "economic man" was coined by critics of Mill a century later.

Behavioral economics replaced mainstream economics. It has been absorbed into it. Ideas such as loss aversion, present bias, and default effects now appear in mainstream textbooks and policy, often alongside standard models rather than instead of them.

How strong is the evidence?

The experimental findings described here are among the most replicated in social science. The endowment effect, framing effects, and generous offers and costly rejections in the ultimatum game have been observed many times in many countries. That said, the size of these effects varies. Some later studies found that the endowment effect shrinks when people have more trading experience or when the experimental procedures are changed, and debates continue over how much of it reflects loss aversion as opposed to other factors.

Laboratory experiments also raise questions of external validity: do small stakes, artificial settings, and student subjects tell us how people behave with their own money in real life? The fifteen societies study was designed to address one part of this problem, the narrow subject pool, and it found larger variation than expected. Field experiments and studies of real markets add further evidence, and they have generally confirmed that behavioral effects such as default effects matter outside the lab.

Finally, some evidence is weaker. Neuroscience studies with small samples, such as early oxytocin research, have not always replicated, and readers should be cautious about strong claims based on them.

Frequently asked questions

What does Homo economicus mean? It is Latin for "economic man," the model of a person as a consistently rational, largely self-interested decision-maker used in much of economic theory.

Who invented the term? The idea is associated with John Stuart Mill's 1836 essay, but Mill did not use the term. It was coined by his critics in the late nineteenth century. The Oxford English Dictionary cites C. S. Devas in 1883, and the Latin form has been traced to Vilfredo Pareto's 1906 Manual.

Is Homo economicus the same as rational choice theory? They overlap. Rational choice theory is the broader framework of agents with consistent preferences choosing optimally. Homo economicus often refers to the narrower version in which those preferences are mainly self-interested.

What is bounded rationality? Herbert Simon's idea, from 1955, that people make reasonable decisions within limits of time, information, and mental capacity, often by choosing the first option that is good enough, a strategy he called satisficing.

What is the endowment effect? The tendency to value something more once you own it. In Kahneman, Knetsch, and Thaler's 1990 experiments, students who were given mugs asked for more than twice as much to sell them as other students would pay to buy them.

What does the ultimatum game show? That many people reject unfair offers even when doing so costs them money, and that many proposers offer much more than the minimum. Both behaviors contradict the narrow self-interested model.

Do people in all cultures behave the same way in these games? No. The 2001 study of 15 small-scale societies found average ultimatum offers ranging from 26 to 58 percent, with differences linked to how much each society relied on markets and on cooperation.

Why do economists still use the model? Because it is simple, makes clear predictions, and works reasonably well in many market settings. Many economists now combine it with behavioral findings rather than treating it as a complete description of people.

What are the alternatives? Models with social preferences, sometimes called Homo reciprocans; boundedly rational agents; Homo sociologicus, who follows social roles; and models from evolutionary and institutional economics that stress habit and culture.

Key takeaways

Homo economicus is a model of people as rational, consistent, and largely self-interested, used to make economic analysis manageable.
Mill introduced the method in 1836 and openly called it an arbitrary definition. The name came from his critics.
Rationality and selfishness are separate assumptions. Many critiques target selfishness, not rationality.
Simon argued that people satisfice rather than maximize. Friedman argued that the model only needs to predict well, not to be realistic.
Experiments on loss aversion, the endowment effect, and the ultimatum game show systematic departures from the narrow model.
A study of 15 small-scale societies found the narrow model failed everywhere, with behavior shaped by each society's economy and customs.
Modern economics has revised the model rather than abandoning it, adding social preferences and limited rationality, and recognizing that it works best in competitive markets with good feedback.