“SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.” This was Daniel McFadden’s memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFadden’s point. The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus “a rare species”. In his latest paper* he outlines a “new science of pleasure”, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of behaviour that do not fit the standard models. Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity.
Examples mentioned in the article include:
• [T]he “people” in economic models have fixed preferences, which are taken as given. Yet a large body of research from cognitive psychology shows that preferences are in fact rather fluid.
• People value mundane things much more highly when they think of them as somehow “their own”: they insist on a much higher price for a coffee cup they think of as theirs, for instance, than for an identical one that isn’t [the “endowment effect”].
• Cognitive scientists have also found that people dislike losing something much more than they like gaining the same amount [“loss aversion”].
• Unlike homo economicus, real people are strongly influenced by such things as the order in which they see options and what happened right before they made a choice.
• Pumping people with oxytocin, the so-called “love hormone”, has been found to make them much more generous in games where they have to decide how much of their money to entrust to another person who has no real incentive to return any of it.
Much of this may be alien to modern-day economists, but it is in line with the conception that other disciplines have of human decision-making. Psychologists have long known that people’s choices and preferences are influenced by others. Biologists have a much clearer understanding of altruism and kindness, whether to kin or strangers, than economists, who typically emphasise the dogged pursuit of self-interest.
Taking the path Mr McFadden urges might also lead economists to reassess some articles of faith. Economists tend to think that more choice is good. Yet people with many options sometimes fail to make any choice at all: think of workers who prefer their employers to put them by “default” into pension plans at preset contribution rates. Explicitly modelling the process of making a choice might prompt economists to take a more ambiguous view of an abundance of choices. It might also make them more sceptical of “revealed preference”, the idea that a person’s valuation of different options can be deduced from his actions. This is undoubtedly messier than standard economics. So is real life.