Thaler and Caplan on Homo Economicus
By David Henderson
I have in my pile Richard Thaler’s latest book, Misbehaving: The Making of Behavioral Economics. I’m reviewing it later this month for a quarterly publication.
But this morning I had time, while doing other things, to listen to a delightful Freakonomics podcast on the topic. It addresses whether it would even be desirable for us to behave as homo economicus. It featured Richard Thaler and also contained a shorter interview with co-blogger Bryan Caplan.
I can’t do justice to the show in a few words. But, in a word, I found it delightful. Thaler pokes holes in the idea that we are all rational calculators following our self-interest. And, while he is often thought of as someone who believes in government solutions to problems, he points out that it is the very fact that we are not totally self-interested that solves, or at least, mitigates some free-rider problems. He also argues that it wouldn’t be desirable in some ways for us to be homo economicus.
Bryan Caplan is his typical charming and endearing self also. And I won’t steal his thunder by telling how he answers the inquiring reporter who wants to know if he should vote. Obviously, the answer is no, but Caplan lays out the exception nicely.
I do want to make one criticism of Thaler’s view. You might regard it as picky–it might even be picky. But here goes.
Thaler argues that the homo economicus would not take only one to four pennies from the “Take a Penny” tray at checkout counters, but would take them all. I don’t think so. And the reason is simple: the person on the other side of the counter would regard him as a thief. Would the retailer call the cops? Not likely. But his reputation with that particular retailer would be damaged. And homo economicus would, because he maximizes over a long period, worry about this reputation. Charley Hooper and I have written about this at some length in our chapter on ethics in Making Great Decisions in Business and Life. One excerpt:
As hard as this may be for many to believe, P.T. Barnum actually deserves credit, not for knowing the birth rate of suckers, but for discovering that it is easier to make money honestly than dishonestly. Barnum went so far as to write, “Poor fool! Not to know that the most difficult thing in life is to make money dishonestly!” To take advantage of P.T. Barnum’s experience, we suggest two techniques. One comes from the pharmaceutical powerhouse Merck & Co., named as America’s Most Admired Corporation seven years in a row by Fortune magazine. Merck had an informal policy for avoiding ethical mishaps while I (CLH) worked there. “Ask yourself how you would feel to see your latest policy or behavior on the front page of the New York Times. If you don’t feel proud knowing this, don’t do it.” Try this yourself and you’ll see how much more clearly you think about questionable practices.
Of course, homo economicus doesn’t have feelings, so the feeling part of the quote above is not a good guide. Still, homo economicus does care about reputation.
Bryan also points out two huge upsides of people being homo economicus:
(1) No terrorism (he should have said no suicide terrorism). Why blow yourself up for other people’s benefit?
(2) No war. The optimal strategy for homo economicus is what I call the Monty Python strategy: Run away.
Listening to Richard Thaler reminded me of the “good old days” at the University of Rochester Graduate School of Management where we were both young assistant professors. His work was largely dissed by his U. of R. colleagues, but what I always admired about him was that he persisted in the face of a fair amount of hostility.
It reminds me one other thing too. Although it might be hard to understand why a 26-year-old without tenure (me) was put in charge of recruiting an economist in the winter of 1976-77 or 1977-78 (I’ve forgotten which), I was. That winter, the American Economic Association had its employment/interview meetings at the Chicago O’Hare Hilton. Dick, the late Bill Meckling (the dean), and I went to interview people. At lunch in the middle of one long day of interviews, we were all kind of playing “ain’t it awful” about how mathematical and uninteresting even the group we had selected to interview were on average. I think it was Dick who said, “I would love it if someone would say ‘Here’s an interesting thing I’m thinking about and here’s why it matters.'” Bill and I grinned and laughed in agreement.