By There’s a guy at the center of a lot of economics. You’ve probably never been introduced, but you’ve been living in his world for a while.
He knows exactly what he wants. He’ll want the same thing tomorrow as he did yesterday. He has all the information, he reads the terms and conditions, and he has never bought the bigger popcorn because it was “only fifty cents more.” Economists have a name for him. Homo economicus. The rational actor.
I’ve never met him. I work in marketing, which means I spend a good part of my time trying to guess what real people will do, and he has never once shown up.
To be fair to economists, most of them know he isn’t real. He’s a simplification, like the frictionless surface in a physics class. You need him to make the math work. The trouble is that a simplification used long enough stops feeling like one. Pricing, policy and whole financial systems got built on the assumption that people mostly behave like him. Then everybody acted surprised when they didn’t.
The person who did the most damage to his reputation was a psychologist. Daniel Kahneman, working with Amos Tversky, spent decades running simple experiments that kept producing the same inconvenient result. People aren’t irrational, exactly. They’re rational about different things than the model expected.
The best known is loss aversion. Losing €100 hurts more than winning €100 feels good. Not a little more. Roughly twice as much, in most of the experiments. Offer people a coin flip where tails costs them €100, and most won’t take it unless heads pays somewhere around €200. On paper, anything above €100 is a good bet. In real life, almost nobody takes it at €120. (There’s a version of this in the Lab if you want to find your own number.)
Then there’s framing. Tell people an operation has a 90% survival rate and most will go ahead with it. Tell them it has a 10% mortality rate and a lot of them won’t. Same operation. Same odds. Same surgeon. The only thing that changed was the sentence.
And then there’s time. Most of us would take €100 today over €110 next week. But ask us to choose between €100 in a year and €110 in a year and a week, and suddenly waiting the extra week is fine. The rational actor would be consistent about this. We aren’t.
Or take a game economists love, the ultimatum game. I get €10 and have to offer you some of it. If you accept, we both keep our share. If you refuse, we both get nothing. The rational actor would accept any offer at all, even one euro, because one euro is more than zero. Real people routinely turn down offers of two or three euros. They’d rather walk away with nothing than accept something that feels insulting. Fairness, it turns out, is something people will pay for.
And we don’t even see money in straight lines. In one classic experiment, most people said they’d drive twenty minutes across town to save $5 on a $15 calculator. Far fewer would make the same drive to save the same $5 on a $125 jacket. Same five dollars. Same twenty minutes. It just felt smaller next to a bigger number.
Kahneman won the Nobel Prize for this work in 2002. In economics. A psychologist who had never formally studied economics. That tells you how big the gap between the model and the people had become.
Richard Thaler, who won the same prize in 2017, has a nice way of putting it. He splits the world into Econs, the imaginary people in the textbook, and Humans, the rest of us. Econs don’t need any help. Humans forget to cancel free trials.
Here’s the thing nobody in my industry says out loud. Marketing always knew. We didn’t need the Nobel committee. Nobody who has ever designed a price tag believed in the rational actor, because the rational actor doesn’t buy anything interesting.
He doesn’t pay extra for the brand. He doesn’t get talked into the medium coffee because the large is right there next to it. He feels nothing about a countdown timer. He has never grabbed a chocolate bar at the till. If everyone behaved like him, most of what’s on your kitchen counter wouldn’t exist, and neither would my job.
So in a strange way, every business that makes real money from real people is a bet against him. And they mostly win.
I’m not saying we should throw the models out. You can’t think without some kind of model, and some of them are genuinely useful. I’m saying remember what they are. A model is a map, and a map leaves things out on purpose.
That’s fine, right up until the map tells you there’s no river, and you’re standing in the river.
