“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.