ESSA

ESSA

The Economic Man 2.0


Cynthia Huang

By

March 26th, 2014


Cynthia Huang examines the link between technology and economics. Can gadgets enhance human rationality?


“For most of the past two centuries, economic thinking has been dominated by the concept of Homo economicus. The hypothetical Economic Man knows what he wants; his preferences can be expressed mathematically in terms of a ‘utility function.’ And his choices are driven by rational calculations about how to maximize that function: whether consumers are deciding between corn flakes or shredded wheat, or investors are deciding between stocks and bonds, those decisions are assumed to be based on comparisons of the ‘marginal utility’, or the added benefit the buyer would get from acquiring a small amount of the alternatives available.”Paul Krugman on the rational-agent model

Despite his boring predictability, don’t we all wish we could be the Economic Man sometimes? Especially when sitting in front of the TV on a Sunday night instead of catching up on those missed lectures, despite knowing that the utility of not failing econometrics is significantly higher than consuming another episode of Border Patrol.

Alas, we mere mortals have to settle for some version of bounded rationality; our decisions constrained by time, information and cognitive capacity. However, in a world where technological breakthroughs are an everyday occurrence, and our tiny little smartphones hold more computing power than some of the most powerful computers of the past, could technology actually improve our rationality and bring us closer to being true rational agents?

Despite the fact that e-commerce has been around since the 1990’s, the ability to track and manage your finances on-the-go is a relatively new phenomenon –  though one that is rapidly expanding. App stores now boast a proliferation of banking, budgeting and expense tracking apps for your smart phone, with features varying from simply checking your account balances and making payments, to complex analysis of your monthly spending habits.

For example, there are apps that interact directly with banking systems to track your every digital transaction – from that $1 apple pie from McDonalds you tapped to your credit card when you thought no one was looking, to the pair of shoes you couldn’t resist because they were ‘on-sale’ for 5% off the RRP (read: ridiculous retail price). Then, whenever you dare, you can take a look at your spending habits, conveniently categorised by some awesome algorithm that you would have no idea how to code.

It is important to realise these apps are not simply convenient budgeting tools, but that they allow us to access and analyse economic information about our spending habits, and preferences; information that we previously could only dream of in the form of mythical utility functions. Surely, this must mean something for our rational decision-making abilities.

In fact, some savvy product designers are even taking the decision-making burden away from our irrational minds. To illustrate, the Living Wallet is a Japanese gadget that looks just like an ordinary wallet from the outside, but is actually paired with a bookkeeping app that tracks your spending for you. To help the owner save money, it can roll away on its four wheels, crying “don’t touch me!”; or, in the most dire situations, it can even call the owner’s parents. Such gadgets bring us ever closer to the economist’s dream of spending rationally.

True rationality might be beyond our flawed human minds, but the ability to augment our rationality with technology is a reality today. With the help of aspiring entrepreneurs, savvy programmers, and a bit of economic theory, soon we might all be having heart-to-hearts with Economic Man 2.0. No longer will he simply be our imaginary friend, whom all our non-economist friends poke fun at; the digital Economic Man could be our best friend, helping to prevent poor financial decisions, and fix those strange, slightly irrational, spending habits of ours.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Dean

    Great first piece Cynthia! Look forward to reading more of your work over the coming months

    • http://timidwriting.wordpress.com Cynthia Huang

      Thanks Dean, looking forward to hearing your thoughts as well

  • Dave Sharpe

    Nice article Cynthia. I one of those who believe that true rationality is a flaw not a virtue or something we should seek. What makes us innovative, inventive, soulful and capable of creations of art and stirring beauty is our irrationality. I say leave rationality to the economic theorists and let the rest of us get on, savour and embrace the wonderful irrationality of being human! Dave

    • http://timidwriting.wordpress.com Cynthia Huang

      Thanks for the encouragement Dave. I appreciate your comment on the value of irrationality, but I feel more often than not ‘human irrationality’ is used as an excuse for laziness in expression and decision making. We all have some kind of internal logic or ‘rationale’, and I think its important to understand the biases we carry. On that note, I think regardless of what degree of rationality, or model of human behaviour you subscribe to, technology has something to extra to reveal. Of course, ‘economic rationality’ is simply an example, and whether we decide to be more consistent with it is a personal choice, but either way an enhanced ability to process information has to mean something for ‘better’ decision making.

  • Bobby Chen

    Was a great read Cynthia! I think another interesting consideration on the flip-side is the proliferation of aspects of technology that promote anti-rationality, such as the bombardment of targeted advertisements through smartphones etc.

  • Marcus Fetherston

    Really great article! It’s interesting to think how technology can help improve rationality these days, though the only concern I have is that this rationality is based on work done by an app or computer, so without the greater understanding of how the information calculated and collected for you works, do you really have complete rational thought over these issues? or is it more so how you said an “augmentation of our rationality”? Either way it’s a decent read and I look forward to future articles!

    • http://timidwriting.wordpress.com Cynthia Huang

      Hi Marcus, thanks for the encouragement! I do think my article could have been clearer on this point, but I personally thing that we ultimately have the choice of what degree of rationality to subscribe to, and technology really just provides the tools or means to make better decisions, however you define better decisions. So it is more about ‘augmenting’ our rationality, or our ability to process decision information. More broadly, I think there are also interesting implications for economics and behavioural economics, since we can examine economic behaviour using real world data to a much greater extent than before.

  • Natasha Watkins

    I also think that e-commerce is making it easier to make irrational (impulsive) decisions. One minute you’re just browsing the internet at 3AM, next minute you’re getting a confirmation email for a $150 order on ASOS… :)

    • http://timidwriting.wordpress.com Cynthia Huang

      Natasha, I definitely agree with that one; I definitely have a few sneaky confirmation emails sitting in my inbox. I suppose retailers are always going to try and fight our better decisions. :P

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