Homo Economicus and perfect information

TheGrandmaster What Every Economics Student Needs to Know Leave a Comment

The utility function is an abstraction; it does not exist in reality as our ability to feel temperature or see light does. Not being able to optimize an imaginary utility function does not mean that we are altogether silly, but we need to recognize that in actual decision-making optimization is beyond our capacity. It would be too burdensome even if we had the cognitive ability to do so. Off the blackboard we have too many serious limitations that constrain us from attaining an optimum consumption bundle. These limitations might be lack of information of price or quality, limitations of our own intelligence to ascertain the conditions specified in a contract, inability to assign probabilities to future events, inability to pay attention to a salesperson’s presentation, forgetting to ask all relevant questions, or misunderstanding the terms of a contract. The limitation might also be information overload by which one has too much information for the brain’s working memory capacity and it leads to confusion, misinterpretation, or misjudgment, or it might be time pressure—not having enough time to think about a problem.13 If we are harried or under stress we may not be able to concentrate on understanding all the properties of the product we are buying. The causes of bounded rationality are innumerable. (What Every Economics student should know, page 44)

An all around passage and argument that undermines the Conservative myth of Homo Economicus, or perfectly rational man, and suited to address countless arguments of the family “It’s your own fault.” This does not absolve everyone of all poor choices and conscript everyone else into paying for all others mistakes. It serves to remind us that we cannot navigate the world without mistakes or “poor choices.” That pooling risks collectively results in a far less cruel “floor” than an atomistic view that everyone has to bear the cruelest possible brunt of living in a world of imperfect information, i.e., just because you weren’t perhaps a genius who started a worldwide online book company and became a billionaire, it does not follow you deserve to die from lack of medical treatment because you couldn’t afford $500,000 in medical costs. 

You couldn’t have known everything, and to assume one could have, is to assume perfect information and limitless time horizons, involving aspects of psychology, chaos theory, and economics. It’s not reasonable. “It’s always your own fault” is a ridiculous argument. To argue against it isn’t an excuse, it’s human reality. 

Now assuming it’s not your own fault, it still does not follow that others are required to fix your problems. Separate arguments are necessary to support many forms of welfare, which are often individually given. But large-scale public health and societal concerns wherein collective action work best – universal healthcare, infrastructure, and education can be addressed here.  

In short, you are always going to fuck up, and it’s not always going to be your fault. Some arguments like BD’s “Everything is always your fault” would rely on the premise of perfect information and perfect decision making. It isn’t one’s fault if they cannot bench press 1000 lbs. It was not physically possible for them using the muscle fibers they had and the motor control they were born with. Mental tasks and decision making aren’t fundamentally different. It’s not someone’s “fault” that they cannot count every star in the heavens or remember pi to 8000 decimal places, or beat Magnus Carlson in chess. Some things are beyond an information horizon, locked behind a wall of knowledge some people cannot get to. 

Leave a Reply

Your email address will not be published. Required fields are marked *