The Adequacy of the Homo Economicus Assumption

Edgeworth on Self-Interest as the First Principle of Economics

Two competing businesses, A and B, are located on the same river, which is their only source of water for production. Each business must decide independently whether to install an expensive water filtration system that recycles water, reducing their draw from the river. If both businesses install the system, the river remains healthy, and both can operate indefinitely. If only one installs it, the river's water level drops, but both can still operate, though the one who didn't install the system has a significant cost advantage. If neither installs the system, the river will be depleted within a year, forcing both businesses to shut down. Assuming both business owners behave as perfectly rational, calculating, and self-interested agents focused solely on maximizing their own individual profit, what is the most likely outcome?

The Rationality of Contribution

Evaluating the 'Economic Man' Assumption

In a one-time interaction, Person A is given $100 and must offer a portion of it to Person B. Person B can either accept the offer, in which case they both keep the proposed amounts, or reject it, in which case neither person receives any money. Assuming both individuals behave as perfectly rational, calculating agents focused solely on maximizing their own personal gain, which of the following outcomes is most likely?

Evaluating the 'Economic Man' Assumption

The model of 'economic man' (homo economicus) assumes that an individual's decisions are primarily driven by a desire for personal gain, but can also be influenced by feelings of fairness or a sense of duty to their community.

Match each behavioral description with the corresponding model of human decision-making. Each model represents a different set of assumptions about how individuals act.

Analyzing a Decision Through the Lens of Self-Interest

The theoretical model of 'economic man' posits that the primary motivation driving all of an individual's actions and decisions is their own __________.

The Found Wallet Dilemma