Rational economic man refers to the concept in economics that individuals are interested in their own interests. Humans tend to avoid risk ( risk-averse ) when making judgments using all available information in order to maximize their expected utility.
Description of “Rational Economic Man”
Rational economic man is a key foundation in mainstream economic theories and models. The economic theory that many of us have studied assumes that individuals will tend to make rational economic decisions, both when meeting their own needs and when running a company.
For example, when we buy oranges. The first thing we think about is money and the type of orange. We will not choose a type of orange that is more expensive than the money we are holding, even though we like it. Likewise, when we have enough money, we will choose the oranges we want most.
Implications
Individuals will choose to act in their own interests and choose the best alternative for themselves. They will try to maximize the satisfaction/value they get from every economic decision made.
For example, when spending money, individuals will spend it on goods and services that can maximize their satisfaction. This satisfaction can come from low prices or unique/special product features. Of course, each individual has their own criteria related to satisfaction.
This concept also assumes that companies will try to maximize the value they obtain. Here, value refers to the profit they get from their business.
Assumptions can be widespread, depending on what role the individual is playing. For example, as employees, individuals will try to earn the highest wages possible when they get a job. As investors, individuals try to earn the highest possible returns on their investments in the capital markets.
Why is that
In economics, the self-interested behavior of individuals also tends to be in the best interests of society. In other words, if each individual is self-interested in every economic decision taken, then the results will also be optimal for society.
For example, when the price of an item rises sharply, as rational consumers, of course we don’t want it. We will probably reduce purchases. This reduction decision occurs not only in one individual but also in all consumers in the market, because each of them acts rationally. As a result, market demand falls, putting pressure on producers to lower prices.