In 1836, the brilliant political theorist and sort of economist John Stuart Mill introduced a character to the world of thought known as Homo Economicus or Economic Man.
There were, in my view, three basic tenets to the idea:
1) Many people are ideal decision makers who make perfectly rational economic decisions.
2) Consumers have perfect access to information.
3) People, especially in business, pursue their goals consistently and are largely self-interested.
When I was first introduced to this as an economics major, I had to shake my head in wonder. It seemed as everyone whom I knew (and including myself) often made irrational purchases. Another joke to me was the idea of perfect access to information. Today, we have the internet, consumer reviews of all kinds and can engage in a comparative analysis of competing brands. Back then, you talked to a few people but often were flying blind. I remember terrible angst trying to buy a used car as a 20-year-old. And, of course, often you knew you were spending more than you should to impress someone (invariably a young woman).
The third leg of the stool, being self-absorbed and focused on profit to the exclusion of all else in business was certainly true (sadly) for some people.
After a few weeks of struggle with my thinking, I approached one of my economic professors and great mentors and gingerly made the case for Homo Economicus being absurd.
The great man broke into a soft smile and said he agreed with much of what I was saying. However, he said that the seemingly unrealistic assumptions regarding Homo Economicus seemed to work more often than not when putting together forecasting models.
I went to graduate school and Economic Man never came up nor did it for my first 10 years in advertising. Just before my time, Rosser Reeves of Ted Bates had succeeded with very factual or even a bit dry creative executions most famously for Anacin (The tagline was “Anacin means fast pain relief”).
A creative revolution emerged in the 1960’s led by Doyle Dane Bernbach where humor and cleverness came front and center along with selling dreams.
In 1979, Daniel Kahneman and Amos Tversky essentially founded a new field, Behaviorial Economics. They challenged the long-held views of Economic Man and focused on risk aversion and demonstrated that human beings do not always act rationally. The concepts snowballed and were joined by others especially in the field of Consumer Behavior and Psychology.
In 2001, Kahnemann was awarded the Nobel Memorial Prize in Economics.** This caused more than a little stir as Kahnemann was a research psychologist who freely admitted that he had never taken an economics course!
Clearly, consumers do not have perfect knowledge and they do not behave rationally all the time. One area that has grown exponentially given wealth inequality around the world is that of luxury products, often referred to as Veblen goods (Thorsten Veblen was a fiery late 19th-early 20th century economist who attacked the noveau-riche with an acid wit best exemplified in his book, THE THEORY OF THE LEISURE CLASS).
Veblen goods are those that seem to defy the law of supply and demand. Rolex watches, Rolls Royces, Louis Vuitton luggage, and designer clothes seem to see sales growth as their prices rise. Bernard Arnault, the chairman of luxury conglomerate LVMH, has been the wealthiest man in the world at times during last few years. People often buy these products for status or to highlight their wealth. Some cannot reasonably afford them but purchase them to send a message to others. Veblen goods do not stop there. A hot hair stylist or caterer in a locality also fall into that category.
So, we seem to be entering a new era. As Amazon reviews and other sources allow us to comparison shop far easier than ever and with conventional advertising facing a slow but steady extinction, selling dreams may fade a great deal. Social media and viral efforts will break through, but the world is changing. So, even though our knowledge is increasing, or at least available, irrational behavior still lives.
Homo Economicus (Economic Man) was suspicious to me over 50 years ago and is even more so now. Long live Behaviorial Economics!
**A note of clarification so I do not get angry e-mails from some purists out there. Technically, there is no Nobel Prize in Economics. In 1968, The Sveriges Riksbank (Bank of Sweden) approached the Nobel committee and asked if they could give a prize in Economics made in memory of Alfred Nobel. They agreed and were gracious enough to allow the economic prize winner(s) to receive the award at the same time as those in the sciences and be addressed as Nobel Laureates. It is the only social science in the Nobel stable.
If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.
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