If this is your first time reading, please check out the overview for Poor Ash’s Almanack, a free, vertically-integrated resource including a latticework of mental models, reviews/notes/analysis on books, guided learning journeys, and more.

Executive Summary Of The Humans vs. Econs Mental Model:

If you only have three minutes, this introductory section will get you up to speed on the humans vs. econs mental model.

The concept in one quote:
“If you look at economics textbooks, you will learn that homo economicus can think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the willpower of Mahatma Gandhi.  Really.

But the folks that we know aren’t like that.  Real people have trouble with long division if they don’t have a calculator, sometimes forget their spouse’s birthday, and have a hangover on New Year’s Day.  

They are not homo economicus; they are homo sapiens.”

– Cass Sunstein and Richard Thaler in “ Nudge”

Key takeaways/applications: one of the most common schema bottlenecks around is that we tend to see the world either through the lens of our own perspective, or through the lens of desire bias (the way we’d like the world to be).  It would be awfully convenient if people acted in an orderly, logical faction, but a lot of times they don’t, and we have to design our lives (and businesses) to accommodate that reality.

Three brief examples of humans vs. econs:

Full rational “econs” would never sit on the couch for an hour watching a TV show they don’t really like because the remote is a few steps away… yet because of finite willpower, status quo bias, and activation energy, real humans behave this way.  Like many traits, this reality is neither good or bad: it can be adaptive under certain circumstances if we harness it the right way.

“Econs” would always respond perfectly to incentives and maximize their own charitable self-interest, but under various circumstances real “humans” act differently: they value fairness and thanks to social proof, are sometimes willing to give up some of their “rightful” property to be seen as fair… but in other cases (like divorce court and simulated lab experiments), humans will intentionally make themselves worse off to spite someone else who wronged them.  This is a critical understanding in negotiation, as discussed in Fisher/Patton/Ury’s “Getting to Yes” .

Finally, “econs” would never discount hyperbolically and be subject to recency bias or salience/ vividness bias, but real humans do – rendering the “efficient market hypothesis” and much of the academic finance based on it (like the Fama-French model) into complete nonsense, as thoroughly demonstrated by Thaler, Howard Marks, and others.

If this sounds interesting/applicable in your life, keep reading for unexpected applications and a deeper understanding of how this interacts with other mental models in the latticework.
However, if this doesn’t sound like something you need to learn right now, no worries!  There’s plenty of other content on Poor Ash’s Almanack that might suit your needs. Instead, consider checking out our discussion of the network effects, man-with-a-hammer, or planning fallacy mental models, or our reviews of great books like “ To Engineer Is Human” , “ The Goal” , or “ The Violinist’s Thumb” .

A Deeper Look At The Humans vs. Econs Mental Model:

“Amos [Tversky] asked Mike [a professor who believed in the rational-actor economics premise] to assess the decision-making capabilities of his wife.  Mike was soon regaling us with stories of the ridiculous economic decisions she made, like buying an expensive car and then refusing to drive it because she was afraid it would be dented… [he] rattled off silly mistakes [his students] made, complaining about how slow they were to understand the most basic economics concepts…

Then Amos went in for the kill.  “Mike,” he said, “you seem to think that virtually everyone you know is incapable of correctly making even the simplest of economic decisions, but then you assume that all the agents in your models are geniuses.  What gives?”

– “ Misbehaving” by Richard Thaler, p. 51

In Don Norman’s phenomenal “ The Design of Everyday Things,” Norman – a former engineer himself – cites the classic engineer’s frustration:

“If only people would read the instructions[!]”

Norman, like Sunstein/Thaler, recognizes that we’re all humans, not econs, the foundation of his “human-centered design” approach – or, what I call structural problem solving.

It’s a crime against humanity that Daniel Kahneman’s dull, pessimistic “Thinking Fast and Slow” is cited so frequently (TFS review): Thaler’s “Misbehaving” is an infinitely superior read on behavioral economics and cognitive biases, so much so that it’s my favorite book of all time.

While you should definitely check out that model (it’s probably my favorite), one of the key takeaways is that you can’t go around expecting people to behave the way they should… you should expect people to behave the way they do.

This seems obvious, but research by Thaler and others demonstrates clearly that it’s not.  Why? First of all, there tends to be selection bias for the engineers, lawyers, and business people who design, regulate, and sell the products in the world around us: they tend to be analytical, and thus imagine the rest of the world is analytical too.

Second, people in these professions are often provided with formal education on important concepts like sunk costs and opportunity costs, which Thaler’s research suggests has the effect of making them think more like “econs.”

This is generally good, in the sense that we usually should think like econs, but it has a perverse n-order impact: it can blind business leaders to “human” concerns like fairness or memory, leading to policies or products that make total theoretical sense but don’t work out in the real world.

Of course, as Thaler’s “ Misbehaving” illustrates vividly, even economists aren’t immune from acting like humans when it comes to their theories (and their offices).  Similarly, Jerome Groopman notes in the fantastic “ How Doctors Think” that doctors are humans, too:

“Most people assume that medical decision-making is an objective and rational process, free from the intrusion of emotion […] yet the opposite is true.”

The concept is pretty straightforward and I know y’all get the point by now, so let’s dive straight in to the interactions.

The AI Angle: Human… or Econ?

Machines are supposed to be everything humans aren’t: logical, consistent, immune to bias. But when you train machines on human-generated data, they start to act an awful lot like us. Large language models show confirmation bias (doubling down on an existing path rather than thinking laterally), and rationalize their hallucinations in a way that looks eerily like self-justification.

This is both the warning and the opportunity. If we want AI to help us make better decisions, we have to treat it as a hybrid of human and machine. The way we frame a question shapes the answer we get, just as with people. Prompt engineering can act as a cognitive nudge; however, a vague or leading prompt can feed AI our own blind spots and gets them reflected back to us at scale.

Humans vs. Econs x Incentives

Many readers may be aware of the famous Charlie Munger quote on “two-track analysis” as it relates to investments:

“Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful but often malfunction?”

Peanuts had something to say about this:

Application/Impact: many businesspeople and investors tend to overfocus on the rational, spreadsheet-able factors.  In the real world, incentives are a much more complicated issue, and a thorough understanding of human psychology, including intrinsic vs. extrinsic motivation (not yet written – coming soon!), will provide a more accurate perspective.

Humans vs. Econs x Local vs. Global Optimization

Local vs. global optimization – the idea that sometimes, decisions that seem best in the short-term make no sense in the long-term (and vice versa) – is one of the most overlooked mental models I know of.  It pops up all the time in business contexts, and I saw it play out.

One company I followed made consumable perforation products for oil wells.  By perforation products, I mean shaped charges and all the other parts needed to make them blow holes in a well casing to let the oil flow through… getting to, ahem, test one of those shaped charges (behind thick reinforced concrete safety barriers, of course) might have been one of the highlights of my due diligence trip.

Anyway, the company introduced some unique, high-technology products during the major oil downturn in 2016, which cost more than existing products on the market but delivered meaningful total-cost-of-ownership savings.  You would think that in a downturn, companies would be looking to maximize their return on investment in new wells, so this sort of product would be clamored for, right?

Well, not exactly.  Most managers at exploration and production companies acted like humans, not econs.  Adopting a cost-saving product would have been the rational decision, but instead, most companies optimized locally, invoking a sense of fairness: it’s a tough environment and we are not, under any circumstances, going to pay more for newfangled technology.

In fact, it seems like many companies explicitly incentivized their purchasing departments – perhaps not with extra money, but with loss aversion (do this or you’ll lose your jobs) – to push for discounts on all products.

Application/impact: even well-trained business managers can succumb to “human” tendencies to discount hyperbolically and prioritize near-term fears and concerns over the long-term view.  As with most human traits, this should be viewed as neither universally good or bad, but rather selectively adaptive – and whether or not it hurts or helps you depends on how you frame it.