Homo economicus

Pioneered by Adam Smith, one of the founders of capitalism, the idea of homo-economicus is used as a base to construct theories on consumption and investment. In his famous book The Wealth of Nations, Adam Smith emphasizes the importance of self interest in human behaviors and describes the self-interest as the key driver of social prosperity. An economic agent has been constructed as a representative one which typifies the economic behavior of a typical person in the society and it is assumed that this agent systematically behaves rationally when deciding on any issue, especially the economic issues. If we define rationality, from the economics standpoint, as an act that aims for the maximum possible degree of acquirements with given limited resources, this constructed agent will be rational by behaving in favor of his/her own self-interest, hence he/she will always be optimizing.

Are we really rational?

In fact, the core belief in the idea of homo-economicus that homo-sapiens, the wise man, acts selfishly is a realistic assumption as self-interest is an important part of the innate human nature and an important intrinsic motive. We always want the best for ourselves and this motive is not exactly greed, but an intrinsic motivation to behave on one’s interest. But, it is also true that not everyone is rational in the society and not all behaviors are considered rational in an economic sense. To test whether the individuals make rational choices or not, Nobel Laureate Daniel Kahneman and Amos Tversky conducted numerous experiments to test the human rationality and they reached this conclusion that human behaviors are not as rational as predicted by the homo-economicus assumption, instead they found that depending on how the question is framed or how things are measured people can make different choices. Also, they observed that not all behaviors are utility maximizing, sometimes people act altruistically, and sometimes people have the tendency to stay in the status quo. An interesting result of their experiment is that, when people make decisions, they emotionally value losses twice as much as they value an equivalent gain. In an experiment, they ask the subjects the following question:

Would you accept this gamble?
– 50% chance to win $150
– 50% chance to lose $100

They realized that, even though the expected value of gain in the above gamble (50% x $150= $75) is higher than the expected value of loss (50% x $100= $50), there are fewer takers of the gamble. Instead of showing their other experiment results, we can easily look at some of the marketing tricks to have an idea about the irrational choices we make in our daily life.
In a marketing strategy called Decoy marketing, marketers observe a boost in their sales of an expensive offer when they offer a similar item that is inferior in quality but about the same price of the expensive item. In his book Predictably Irrational Don Areily conducts an experiment using magazine subscription offers where subjects were offered two alternative subscription choices to The Economist magazine, one print only subscription (the inferior option which serves to make the combined offer look like a better value) and one internet and print subscription and they observe huge jump in sales due to the decoying effect.

In another experiment in Predictably Irrational, the author shows that people would walk 15 minutes to save $7 on an $18 item but wouldn’t take the same 15-minute trip to save the same amount on a $455 item. In fact, it is the same amount of savings, and a rational person is expected to behave consistently at each case.

The current financial turmoil is a typical example for how people can make irrational decisions. Currently, the world is experiencing a catastrophic financial and economic meltdown started at the subprime mortgage markets in United States and spread out to other financial markets. Some people claim that the irrational behavior of sophisticated investors was the root cause of the recent meltdown. To get a better understanding of the issue, we need to look at the balance of greed and fear in the investors’ behavior. While greed leads to overconfidence in the economy and excessive risk taking, the fear in the market leads to inactivity in the market and excessive aversion to risk. When investors make a decision about whether buying a stock, bond or any sophisticated security, they are expected to evaluate the expected reward versus the risk of possible expected loss. As predicted in Kahneman and Tversky study, the wisdom in the Wall Street is that “Fear always trumps greed.” Neuroscientists describe the situation when greed dominates the fear as a “moral meltdown,” and this is the situation where human brain loses control of reward and loss comparison and completely ignores risks. Take the trading in collateralized debt obligations (CDOs) which was perceived as one of major problems that leads to the recent financial crises. Since the security was rated excellent by the rating agencies and all losses were insured by AIG insurance company, the investors observed too much reward opportunities while no weight was given to the risk of a collapse in the market. That is the point when greed dominates fear in the market and fear fails to balance greed in the normal investor’s brain. In the aftermath of the financial collapse, what we see right now is just the opposite of what was the case in the buildup of the financial bubble. Now, both investors and bankers are in a mode of excessive fear where negative news significantly decrease the stock prices and instead of providing credit to the markets, investors sit on a huge pile of cash.

If the excessive greed and overconfidence in the economy results in catastrophic events, should we ask investors to be less greedy? According to the Adam Smith, all humans have sympathy for the rich and famous. We can even find this in Holy Scriptures as well. There is always a sympathy for, and envy of, the rich. Hence, asking people to act against their innate nature may not be a wise decision but we should also keep in mind that this inherent human tendency can lead to moral corruption in the society. What we need is the balance of fear and greed in our behaviors and if one dominates the other, there will be misery for the whole.

Devrim Bulut holds a PhD degree in economics. Having taught at several universities in the United States for the last 5 years, he conducts research on market irrationality.

When we look at the current situation, those who study science are required to have a philosophical background of secular concepts and judgments; all the scientific activities and the required methods to be carried out by this person are to be built on this secular basis.

The method of scientific research

In the course of history scientific methods developed first in Mesopotamia, the cradle of humanity and the prophets, then in Central Asia and Andalusia, and finally in Western Europe, with efforts to make use of science so that human life would be easier. Nowadays these methods have a universal character and they include observation, experimental observation, experimentation, measuring, statistics, definitions along international standards, analogy, development of theories, antitheses and others.

Surely, this is not the only way to learn about the universe, life, and humanity. Furthermore, the true source of information is the One Who created everything that is studied by science-all the world of existence and the physical laws-that is God, the Almighty, the All-Wise. The Lord of the worlds created causes as a thin veil over His divine power and He has given the universe to the use of humanity. He gave us consciousness, intellect, reasoning, and curiosity to explore, and then He sent us messengers to convey His commands. In this way He always invited us to reflection and to use our mind. So, one of the means of satisfying our inherent curiosity to explore, of benefiting from what has God given us, and of reaching the truth-the knowledge of God-has been the methods of modern science which are always open to criticism and reform.

Observation

One needs to fulfill certain standards in order to obtain reliable information about the subject that is being observed and to compare this information with the results of other observations. These standards require that the measurements (distance, time, atmospheric conditions, the quality and sensitivity of the tools of observation, etc.) be recorded and correctly evaluated. The observation-watching the objects in the sky or following the life of a lion family in the savannah for instance-might seem to be a passive and objective study at the beginning. When there is conscious human intervention, however, the time of observation, the experience of the observer, their attentiveness, the accuracy of their devices, and their purpose of study bears importance in terms of the outcome. In addition, different observers in theoretically equal conditions may come up with different results. In short, the observer is an indispensable part of what they observe and measure. According to Einstein the assumption that there is an outer world abstracted from the perceiver is common to all natural sciences. On the other hand, perception only through the senses provides indirect information about the outer world, and we can only understand physical reality through reasoning. As a result, our knowledge of the physical reality can never be conclusive.

Experiment, measurement, and universal statement

All experiments are a scientific study where the experimenter contributes actively (as a determining factor). The drawbacks which occur for observation also occur for experiments to an even greater extent. The conditions of the experiment may not be always under strict control and there could be some factors that have been overlooked which affect the outcome.

Like observation, minimizing the mistakes of an experiment and expressing it in a universal statement depend on how much place has been given for standard measurements, mathematics, and common terminology. From the local environment to the world scale, the findings of scientific activity that has not been shared with others cannot be an inspiration for other original studies (science is a common value of humanity). Therefore, the developmental level of a science is understood from that science’s ability to use standard measurement techniques and mathematics, and then state the findings in internationally accepted ways.

In its broadest sense, measurement means numbering objects and events in accordance with certain rules. In any case, it should not be forgotten that these numbers represent those objects in only some aspects, not completely. The records taken during an observation or an experiment, particularly mathematical measurements, impose certain systematical limitations on the data and turn them into comparable values which give way to statistical analysis. Therefore, they pave the way for classification and generalization.

Generalization and induction

Classification and generalization are important schematic steps for they facilitate identifying the objects and events in the physical world, defining them, and understanding their function. The next step is to analyze things and events individually and this constitutes a reliable way of defining general rules, discovering the principle of the “system” that exists in the whole universe, and then obtaining complicated knowledge of the world around us. The deduction principle of Aristotle, which prevailed in Europe and the Muslim world during the Middle Ages, was replaced by this new understanding, namely the induction method. Induction is an analytical approach which studies events separately in order to reach a certain synthesis (an idea about the whole) for the sake of understanding nature and the universe. Particularly in natural sciences, generalizations require every thing and event to be tested one by one and then to be compared with the general rule; this way, important advancements have been made (e.g. after having tested all metals, the resulting principle was “all metals expand when they are heated”). However, the notion of accepting these generalizations as definite and unchangeable principles lost its reliability after Popper.

Theory, but how?

According to Popper, the verification of a scientific theory does not mean that it has been proven. Actually, what matters is not whether a theory is veritable or not, but whether a theory is disprovable or not. So to say that a theory is not open to criticism, that it cannot be disproved or tested is not scientific.

When we apply this to a concrete example, the theory of evolution, which is defined as a biological phenomenon that took place in the geological time scale, we find that it is not open to observation or experiment. Therefore, it cannot be proven in terms of natural sciences. More importantly, theory of evolution is not scientific, as it seems impossible to prove the opposite of what this theory suggests. We are not saying that we cannot prove the opposite; the theory is built in such a way that we have no chance to prove the opposite, and it is just not scientific.

Scientific data is accepted as an agreed value of humanity. The neutrality of science, or the neutrality of a scientist to be exact, suggests that things and events existing in the universe are all beyond personal and subjective judgments and they should be dealt with accordingly. Neutrality is in a way an honest attitude that has been adopted for seeking for truth with a skeptical approach while trying to reach a sound result. In any case, we need to keep in mind that in some branches of science we cannot remain absolutely neutral and our worldview may have an effect as well. Just as in daily life, our perception tends to be selective about what is happening around us in scientific activities as well. So neutrality in science cannot always be accepted as an absolute, but rather is something that is open for discussion.

The human conflict

The position of mankind presents a dual nature in the world which points to its Creator and the paths that lead to Him from every direction. Mankind has been created in a planet of negligible size in comparison to the vastness of the universe. We are just impotent guests. The sphere of our power is awfully narrow. On the other hand, our Creator gave the universe for our use, and He protects the planet where humans live against dangers in advance. He has bestowed upon us mental ability and the power to reflect upon the world, to explore, and to benefit from it. He has created all the living or non-living things and the physical laws for the sake of humanity. As mentioned before, we continue to explore the world around us and give this activity a name: “science.”

In spite of being feeble creatures, we human beings in time have taken the abilities granted to us, the scientific advancements, the achievements we made and the power brought by them as our own work and we have idolized our own bodies and mind. Then we claim that science is the ultimate reliable source, in spite of its being an activity with its own weaknesses. We began to see science as a separate being, independent from us, even from the Almighty Lord, and finally we take science as a conscious superior being that is able to explain everything, the only source of information, and a “sacred” concept, together with its methods. This outrageous ingratitude and rebellion against our Creator shakes the spiritual values of societies and causes them to degenerate by confusing minds, leading to the use of science against humanity in an uncontrolled way, like a dangerous weapon.

After Darwin, evolutionists began to explain the facts about all species in nature through the presumption of “evolution by natural selection.” However it is not correct to take natural selection as being deterministic. There is some partial truth in it; but it is not an ever-valid essential rule. The criterion of weakness for a species or an individual being cannot be clearly defined. Evolutionists had overlooked the fact that the species created in different structures and capacities in order to perform different functions in the system of nature could not be evaluated for a criteria of common weakness. So the natural selection mechanism they suggested was seemingly attractive, but a rough and over-generalizing assumption, chalk and cheese, were mixed together.

Seeing nature as an arena of struggle is another mistaken approach adopted by those who use scientific studies as a tool for denial which threatens the moral value of humanity (the mistake of adopting excessive approaches was constantly repeated through the history of Western philosophy). Nevertheless, the admiration we feel for nature shows how beautifully it has been created and kept alive. Being a perfectly working system with all its faculties, where solidarity and a cooperative balance play the major role, nature appeals to our heart and inspires aesthetically. In the physical or social systems we establish we try to imitate the examples nature presents us. Millions of different species, countless living things live in different habitats, in different ecosystems. All of them-big or small- are parts of a smoothly running system. Discovering and making detailed analyses of the micro or macro biological mechanisms that contribute to the system only became possible in the 20th century thanks to scientific developments. In any case these discoveries have not raised any metaphysical excitement among the scientists whose hearts were hardened by their denial.

Unfortunately, the cost of the damage we caused to ourselves and to the entire world have been great. Again, we forgot the (small) lesson we learned in a short time and could not help but originate chronic evils that revealed the harm we caused to people and nature in the long run.

Humanity needs to ponder on such pictures and possible ones of the future. They need to be somehow introduced to the divine message God sent us through His Messengers. They need to discover the revelation of the True Owner of the universe, realize the miracle of creation, acknowledge their own impotence, and understand the conditions of the balance-material and spiritual-of being human. They should give up their mistaken struggle in opposing their Creator which harms themselves and the world. All people who believe in the vital importance of the matter should act in accordance with the responsibility brought by this emergency and keep in mind that faith is of ultimate worth before God. As believers, we should pray to this end, with our actions as well.