VALUE: After Hours (S07 E45): The Myth of the Rational Economic Man

During their recent episode, Taylor, Carlisle, and Russell Napier discussed The Myth of the Rational Economic Man. Here’s an excerpt from the episode:

Russell: There is. There is. That is the rational economic man who I am yet to meet. I have a library of 5,000 books. He’s not in any either. [Jake laughs] And of course, there’s a problem, because he’s not rational, he’s not entirely motivated by economics, and of course, he’s not even a man, because half the population of the world are not men.

So, the problem is that the field of economics has chip away at the rational economic man. He’s not completely rational, he’s slightly irrational. But fundamentally, it’s the edifice, as you say, there’s something wrong at the core of this.

And of course, we live in an age where we can understand human behavior much better, because we have MRI machines, rapid eye scanners, with our breakthroughs going on in neuroscience and psychology. But economics hasn’t really adapted that yet, because if you take out the rational economic man, that cornerstone, many of the equations really make a lot of sense anymore. In fact, the whole mathematization of the field, to turn it from a social science to a wannabe physical science, crumbles.

So, the rational economic man, he’s a bit like those guys in the old Westerns. Probably take him a long time to die. He’ll stumble around, hit a few chairs, crash through a desk, go through a saloon wall, over a window, through a horse, and only then will he be dead. But the death of the rational economic man, I think, has begun. But I think it’ll be a long, slow death. Max Planck famously said, “Science advances one obituary at a time.” So, we’re not expecting revolution here, but we can do our little bit for evolution.

Tobias: Do the behavioral economists– Does their line of inquiry appeal to you as people who are rejecting rational economic men?

Russell: Well, I think they’re chipping away. I think that’s the problem. They’re looking for the irrational bits. And that isn’t enough. I think you need to go back to the very core of this and say, “Well, what is this person, rather than to modify the rational economic man?” So, I’m not critical. I mean, it’s a huge breakthrough. It’s a tremendous thing. But if you think of the work, particularly, I’m thinking of the work of Daniel Kahneman, a lot of it relates to the psychology of the individual.

One thing we know about this business is its group psychology. I think there’s so much more we can do. I think it won’t be the chipping away by behavioral. All the behavioral stuff will fit very neatly into a new theory once we find out what this person really is like. And as I said, advances in neuroscience and psychology mean that can happen. And the behavioral economist will be incredibly useful in being part of that, but they’ll just be part of it. I think the root cause lies deeper than slight irrationality.

Jake: And Russell, do you think there’s any of this– maybe the slow death of this could be attributed to– We’ve seen rates from, let’s say, early 1980s to maybe 2021, going from 15 to 0. No one needs to be that smart or needs to really be that self-reflective when everything’s just going up into the right and levitating from rates. So, if we were to imagine ourselves, as maybe I’ve heard Jim Grant say here recently, that we could be in another rates regime for the next 30 years, or however much these rate cycles take. Maybe we will have to be a little bit more reflective of these things and maybe there– Any thoughts on that?

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