Modeling Economic Agents
Humans are inherently complex creatures, and of all the areas of economics, few can be more difficult than deriving a model for how people make choices and act within an economic context; it is in the modeling of economic agents that the limitations of our existing economic framework become most apparent. Agents are so called because they have agency, which means a thing or person that acts to produce a particular result. The basic premise of economics is that people have some conception of what they value. They will try to be efficient in the expenditure of their resources in order to achieve these valued ends, what is called economizing, and they will respond to external interventions called incentives in order to try and achieve these ends. These agents in the course of doing the activity of economizing will have to make choices. Thus a full and coherent microeconomic theory will need some account to all of these things. That is to say, what do people value, how do they make decisions, act on those decisions and how do they respond to incentives.
Ideas about people acting rationally that were first put forward as conjectures, got mathematized during the twentieth century into highly abstract models of human behavior that today form the basis of microeconomics. But the disconnect between the foundational assumptions of the rational agent and how people really act in an economic context are becoming ever more apparent to us as reality once again bites back. As people increasingly reject the model of the rational agent this is once again opening up the debate as to how to model people within an economic context. The area today is rife with new experiments and new research as an area of economic science that became highly removed from other domains of social science begins to receive a flood of attention from many other areas of the behavioral sciences; such as neuroscience, psychology, and evolutionary psychology. In this new research, we are starting to see emerge an alternative conception of how people make decisions and act – models that are empirical and data driven in their origins, leaving the theory aside and starting once again by looking at how people really act.
Out of this new behavioral approach a new model is emerging, one that is greatly more complex in that it incorporates heterogeneity, it includes a diversity of psychological motives, it includes interdependency, and most of all it includes context. Everything that had been removed from the previous set of models is now flooding back in, to try and give us a richer model of human economic decision making and choice. In this paper, we will be exploring two different models given to capture this. We will talk about how standard economics offers this model of the rational individual sometimes called homo economicus, and we will draw upon the new area of behavioral economics which presents an alternative model to human behavior within an economic context.
