A real estate development group has bought the land next to the house of someone I know and they are now planning to build an apartment complex. To do so they need planning permission and one step in that process involves the developers meeting with the neighbors, and anyone else that may be concerned, to present the building project. This is moderated by a magistrate of some kind, who also takes note of all possible concerns that the neighbors and others may have. I was asked to come along. In this blog post, I want to share some aspects of my experiences at this meeting that speaks to two things: one, the homo oeconomicus assumption, some version of which is often made in economic models, and two, corner solutions of constrained maximization problems.

When I started to study economics, coming from math, I was a bit surprised by some of the assumptions that are made in economic models. It was easy to see that many, well actually all of them, were just empirically wrong. In my studies, I didn’t have classes on the philosophy of science or the art of producing new knowledge and insights. So, it took me a long time to appreciate what economic models are good for. They are not meant to be anywhere near a completely empirically accurate account of the real world. Rather they are highly simplified toy models that make a point, identify a theoretical force or relationship, or clarify the validity of an argument, all of which help us understand certain real-life problems better, even if they do not provide a perfect fit to any real-world data that you might be looking at.

In particular, I had huge misgivings about the often-recurring homo oeconomicus assumption of economic agents as fully informed razor-sharp mathematical optimizers with clear objectives, expressed as very precise utility functions. To me, everyday economic agents seemed far away from such an ideal. I felt that I, for instance, often didn’t know what I wanted, wasn’t fully informed of my options and their consequences, and was often unsure, even when I knew what I wanted if I ended up choosing the best path forward. Of course, there is now a lot of useful economic literature on weakening all these assumptions, and I am still very sympathetic to this literature. But I have also learned to appreciate the extreme homo oeconomicus assumption in the following simpler form: many people in many situations have pretty clear goals, which they pursue, be it consciously or unconsciously, given whatever limited options they have at their disposal.

For instance, and now we finally get to the meat of this post, let me look at these property developers. They showed us their, admittedly rather beautiful, architectural plans of the new proposed housing complex. They explained it to us. They then took questions from the concerned neighbors, who (I inferred) would have preferred nothing to be built next to them. Let me zoom in on an interesting bit of dialogue between some of the neighbors and the architect. I don’t recall the numbers perfectly anymore, so please forgive me if they are wrong. Also, they all spoke German, and I will provide a fairly liberal translation only. A first neighbor (FN): “So, basically, there will be a huge wall just at the end of my property that will overshadow my whole garden?” The architect (A): “No, of course not. We deliberately planned that the house will be some distance away from the boundary between the two properties.” FN: “Ah, how far away will it be?” A: “At least 2 meters.” FN: “Aren’t there some government rules that specify a minimum distance between houses and their neighbor’s properties?” A: “Yes, there are. The minimum distance is 2.10 meters.” FN: “And how far away is your planned house?” A: “Hm, let me see. Ah, here it says. It looks like it is 2.10 meters.” A second neighbor (SN): “But you are planning three floors, isn’t that too high?” TA: “No, three floors are allowed.” SN: “But that makes that wall facing my garden about three times two and a half meters tall, about seven and a half meters altogether. Is that really allowed?” A: “No, that is not allowed, but the wall that you will see will only have two floors and is just 5 meters tall and that is allowed.” SN: “But aren’t there three floors on your plan here?” A: “Yes. But the third floor is placed back a bit, so it is not so visible from your garden.” SN: “Is that allowed?” A: “Yes, if you place the floor back sufficiently, 75 centimeters back in fact.” SN: “Ah, and how far back are you planning the third floor?” A: “Hm, let me see. If you look here, you will see that it is, what is it, ah 75 centimeters. Perfectly ok.”

There was plenty more along these lines. I guess, it is not too bad an assumption, at least in this present case, that the property developers knew what they wanted (as much floor space and as many units as possible), subject to planning permission constraints, and they optimized. And, in the present case that delivers corner solutions of the underlying mathematical problem that they seem to be solving.