Rational Economic Man is a Bastard

Also known as Homo Economicus, rational economic man is the staple of economics, game theory, and libertarian fantasies. And you should be glad you don't know him. Or maybe you do.

Rational economic man, that construct beloved of many economics textbook authors, is hardly a superhero. Indeed, a nontrivial fraction of the population behaving as him can seriously weaken a number of our social institutions.

For instance, imagine that rational economic man is getting up in years and wants to leave his estate to his heirs, but to avoid all estate taxes and the like. Normally, we don't allow this, imposing a rather stern estate tax on large estates. But rational economic man is clever, and gives not a damn for any transcendent properties of our institutions. So he strategically divorces his wife, strategically marries his granddaughter in law with a clever prenuptial agreement, and then divorces her to remarry his former wife while his grandaughter in law remarries his grandson.


But rational economic man is just getting started. During the real estate boom, he purchased a house valued at 400,000 dollars, taking out a standard 30 year mortgage in a non-recourse state (California of course). Owing to the housing market collapse, his house is now valued at 200,000. Rational economic man therefore stops bothering to send his mortgage checks (which he can still easily afford, as he is RATIONAL economic man, and did not take a mortgage that he couldn't afford). He knows that it'll be upwards of a year before he is foreclosed upon, and might even accept a principal reduction (to 200,000) if such was offered by the lender. He's quite the ruthless borrower. He knows that inside 7 years any damage to his credit rating will be effaced, and rationally values the 200k (and the 12-18 months of rent-free living) more than it.