Finally, ‘callous’ refers to the assumption that homo economicus is concerned solely with his own personal gains, and does not have any concern for others. Psychologists who learned of this bizarre theory of the economists, decided to test it in a simple lab experiment. They gave some amount of money, like $10, to a subject, X, and asked him to divide the money with another subject, Y. Subject X was completely free to choose how to divide the money, including keeping all $10 for himself and leaving none for subject Y. In fact, almost no one did this. Many subjects split the money into equal shares, while nearly all gave at least $3 to the other subject. Only economists, blinded by their theories, found these results strange. According to economists, all subjects should keep all $10 for themselves and give nothing to others. Interestingly, in experiments among college students, economics students behaved the most selfishly, occasionally even keeping the entire amount for themselves.
The discovery of the great divergence between homo economicus and real people led to the creation of behavioural economics. This discipline studies actual behaviour of people via experiments like the one described above. This goes against modern economic theory, which uses mathematics to calculate human behaviour. For a long time, behavioural economics was an outcaste subject within the economics discipline. Actual human behaviour was complex and varied, and conflicted strongly with the mathematical laws according to which homo economicus behaves. Leading behavioural economists advised their students not to study the subject, since they would have difficulty finding jobs as economists. The situation changed gradually as the radically different predictions of behavioural economists often turned out to be more accurate than conventional economic theory. Robert Shiller used behavioural theories to show that stock markets were overpriced, something which was not possible in the world of the cold, calculating, and callous homo economicus that conventional economic theories study. After the global financial crisis proved him right, Shiller was awarded a Nobel Prize, and behavioural economics acquired a new respectability among economists. Nonetheless, mainstream economists continue to treat behavioural theories as a sideshow, and homo economicus continues to occupy the central place in modern economic theory. We cannot hope for a realistic economic theory until this situation changes, and a more realistic theory of human behaviour is adopted for use by economists.
Published in The Express Tribune, April 4th, 2016.
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