The origins of self-interest in economic theory can be traced back to Adam Smith, who wrote The Wealth of Nations in 1776. The canonical book is a foundational text in classical economics, as it outlined the supposed societal benefit of individual self-interest. Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
The term “economic man” is often traced back to the philosopher and political economist, John Stuart Mill. In the mid-19th century, Mill had set out to define the political economy, describing man’s nature as a “being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end.” While Smith had suggested society is ruled by self-interest, Mill went a step further in advocating that individuals have the means to adequately meet this self-interest. Though Mill never actually used the term, “economic man,” it emerged as a reaction to his work.1 For example, in 1888, John Kells Ingram, an Irish economist, criticized Mill as dealing “not with real but imaginary men – ‘economic men’…conceived as simply money-making animals.”
Despite these criticisms, mathematical theories built upon the pioneering assumptions of Smith, Mill, and others that followed them, would help give rise to rational choice theory as the prevailing view in economic thought. In 1944, John von Neumann and Oskar Morgenstern published Theory of Games and Economic Behavior, introducing the field of game theory to economics. In the book’s second edition released in 1947, they unveiled the axioms of expected utility, a formulaic account of how people choose rationally under uncertain conditions. Like Smith’s Wealth of Nations, von Neumann and Morgenstern’s text became a landmark piece in economics and was used not just as a mathematical model of rational behavior, but as a description of how people actually make decisions.
Although challenges to expected utility theory such as the work of Maurice Allais emerged shortly after von Neumann and Morgenstern’s book, such criticisms didn’t immediately gain traction in mainstream economics. In 1973, Israeli psychologists Daniel Kahneman and Amos Tversky published On the Psychology of Prediction,2 writing that when “making predictions and judgments under uncertainty, people do not appear to follow the calculus of chance or the statistical theory of prediction.” Six years later, they published their paper on prospect theory, a descriptive theory and empirically-based view of decision-making that presented an alternative to the normative account of expected utility theory.
Kahneman and Tversky’s work would inspire the career of Richard Thaler, who has been credited with bringing psychology to economics and popularizing the field of behavioral economics. In 2001, Thaler published a paper titled From Homo Economicus to Homo Sapiens.3 The paper’s abstract reads: “In responding to a request for predictions about the future of economics, I predict that Homo Economicus will evolve into Homo Sapiens, or, more simply put, economics will become more related to human behavior. My specific predictions are that Homo Economicus will start to lose IQ, will become a slower learner, will start interacting with other species, and that economists will start to study human cognition, human emotion, and will distinguish more clearly between normative and descriptive theories.”