Update: I try to synthesize the comments from this post here.
Warning: this post is long, but hopefully thoughtful and at least somewhat original. Also, if you’re new to the blog, subscribe in the upper right hand corner via RSS. Check out my recent posts on epistemic closure and fiscal sustainability.
At an off-campus discussion toward the end of my senior year of college, the topic of behavioral economics came up. Leading the discussion was a professor of mine, David Ruccio- whose blog I link to regularly- who argued that to really move forward with these iconoclast ideas, we still have to get rid of the max u thing- it’s holding everything back. I didn’t really agree with him at the time, or I just didn’t know, but a recent panel I attended helped clarify why Ruccio, and other heterodox economists before him, are right, even if the panelists themselves don’t want to see it it or admit.
The topic of the panel, hosted by the Brookings Institution, was “Happiness in a Time of Uncertainty.” The panel was striking in it’s premise- 4 mainstream economists discussing the topic of subjective well-being. A number of interesting points were raised. For instance, it was pointed out that people seem to be very adaptive with regards to happiness, such that they can settle into what one might consider a “bad” equilibrium but regain subjective happiness, and thus show little incentive to leave.
CAROL GRAHAM: But there is one major complication or a fly in the ointment so to speak, and that’s adaptation. People seem to be able to adapt to high levels of adversity, poor health and all kinds of things and retain their natural cheerfulness or their natural happiness…People really can adapt to adversity. They also adapt to prosperity. As I thought about this around the world and how it aggregated up across societies I thought it’s probably really good from an individual psychological perspective that people are able to adapt to adversity and maintain their natural cheerfulness, but it may also result in collective tolerance for bad equilibrium.
The comments from panelists also touched on what behavioural economics has been saying for a while- people do a lot of things that don’t seem to be maximizing anything; there are myriad inconsistencies across time and across situations.
During Q&A, I raised the issue that these points seem to undermine the whole utility maximization assumption, and that we may need to completely overhaul the so-called microfoundations of neoclassical models (EJ Dionne, the moderator, called it an “attack on old-fashioned economics). Here’s the exchange, copied from the event transcript (pdf):
Q: A lot of the comments that all of you have made point to the idea that people don’t really seem to be maximizing happiness or utility at least not in measurably consistent way. Thinking about theoretical economics, how do we continue to go forward with neoclassical models that are based on a maximizing utility assumption?
ALAN KRUEGER: Behavioral economics is an important and growing branch of economics. It’s been recognized. Daniel Kahneman won a Nobel Prize for his work on the limits of people’s decision making. I think the real challenge for economics is to know when to apply lessons we’ve learned from the psychologists and when to return to revealed preference. I’d also caution on how we define utility because I don’t think happiness is utility. Maybe it’s an element in the utility function along with some of the other emotions that I mentioned before like spending time in a good mood or not being angry all day long and so on. I think we need to be careful not to equate our measures of subjective well-being with utility, and at the same time I think we have to be very careful to define utility in a way that’s not tautological because often the way some of our colleagues in economics define utility, it’s impossible to reject and what I think the work of Kahneman and others has shown is that people will make inconsistent choices depending upon the way that they’re framed. You can change the parameters and they’ll make choices which were not consistent with choices that were their interests before, so I think it’s possible to demonstrate that people don’t always behave in correspondence to the axioms that are necessary for utility maximization. But at the same time I think our measurement of subjective well-being is at a relatively early stage and I would be very cautious about going too far in the direction of equating well-being with utility.
KAREN DYNAN: I’ll just jump in and say I think Alan did a nice job of describing both the potential good that’s going to come out the behavioral research and the complications. I’m not a person who believes we need to throw out everything that we’ve been working with. I think if we could have incorporated cognitive limitations and information costs and biases into our standard models we could have gone a long way toward avoiding what we’ve been through in the last couple of years.
EDUARDO LORA: My only reaction to that question about the value of standard economics given all these developments I think is very much along the lines of what Alan said. I don’t think that we should throw away what we had. What these new developments lead us to is to understand phenomena that were important for people’s well-being that could not be related with standard economics and that’s precisely why I see that this area of public goods is so important and so amenable to this approach because certainly the way that we economics were trying to approach many of these problems of public goods didn’t go anywhere, they were just approaches that were too convoluted, while this view provides an approach that is very simple and really takes you very far. So I think that the toolkit of economics is a very powerful one and I don’t think that it’s to be discarded with these developments. I think it’s going to be complemented with these developments and I think that there is a strong consensus in the profession about that.
CAROL GRAHAM: Quickly let me echo what everybody said that you can’t throw out the baby with the bathwater on this one particularly because even though we found a great way to think about things differently and to identify quirks in the way people make choices and all kinds of irrationality, we still I don’t think have a lot of questions answered for example about the definition of happiness, how does happiness relate to subjective well-being and all the domains that Alan mentioned, which ones matter more, what definition of happiness do we care about in the policy domain. So it’s a new tool, it’s great, but it’s not ready to replace everything and I think it will always be an important complement and may make us rethink some of our traditional tools.
The point of my question was not that happiness should replace utility. It was that, if as these panelists had noted, adaptiveness in terms of happiness is natural, it’s likely that adaptiveness occurs in other elements of the utility function. Utility maximizing behavior in one time period may give way to a more indifferent, “just get by” strategy, in another. My Game Theory prof once defined rational as “strategic”- however, people aren’t necessarily strategic. Instead of maxing, they may just satisfy- get just enough. How do we model this? To stick with reasonable premises, I think we have to throw away that whole thing. Looking at how individuals actually behave, with which both the happiness economics and behavorial economics literature helps us, it becomes hard to argue that individuals are maximizing anything. If we do cling to this argument, it’s more likely that we are merely defining utility in a way that Krueger appropriately terms “tautological” (and warns against).
The panelists’ responses are striking in another way too- they see hope for behavioral economics as a way to tweak the inputs into utility maximization function. It’s not that surprising, though, that mainstream economists can be a defensive bunch- they’ve spent many years learning the maths and plying the trade, and each in this group has achieved significant status by using these sorts of tools (although Krueger was nearly rendered apostate by challenging the notion that a minimum wage will reduce employment, and Graham spent years trying to make the concept of studying happiness credible). Each of their responses referred to these sets of tools, and if we abandon the assumption of utility maximization, it makes the standard models useless, as it introduces untold degrees of heterogenity.
This sort of denial is frustrating to me, because behavioral economics is becoming more accepted in the mainstream and it makes clear that people do not behave in rational or predictable ways. However, making that next leap is difficult because there is an inconvenient consequence of throwing away max u (not just the loss of the “toolkit”). The degree of complexity that removal would introduce would chip away at economics’ drive to become more like physics. A recent paper (h/t Economic Logic) discusses this phenomena, pointing out how entire theories can blossom from any one unrealistic assumption:
And much of the economics and finance literature since Foundations has followed Samuelson’s lead in attempting to deduce implications from certain postulates such as utility maximization, the absence of arbitrage, or the equalization of supply and demand. In fact, one of the most recent mile- stones in economics—rational expectations—is founded on a single postulate, around which a large and still-growing literature has developed.
The authors rightly criticize the excessive mathematization of economics, and they argue that a large degree of uncertainty should be incorporated into models.
By acknowledging that financial challenges cannot always be resolved with more sophisticated mathematics, and incorporating fear and greed into models and risk-management protocols explicitly rather than assuming them away, we believe that the financial models of the future will be considerably more successful, even if less mathematically elegant and tractable.
So, however troubling or intractable it may be, I think economists need to pull themselves away from the max u assumption. It may result in a complete trashing of their neoclassical model. It may even result in a situation where microfoundations are no longer the basis for our macroeconomic thought. However, being wedded to unrealistic assumptions, falling prey to methodological individualism and methodological utilitarianism doesn’t get us anywhere. It preserves the status quo of poor models with poor conclusions that ultimately harm people. There are a number of ways in which economics does this, but let’s start by doing away with the most basic methodological one.
Let me hear it- what am I missing here?
I’ve also grown bored of the regular kudos given to behavioral economics by the mainstream. Especially since the crisis, it has been constantly touted as one of the hot new branches of economics, one of the new directions to veer the profession back on track. I just want to point out two things. First, they always say they are bringing insights from psychology back in to economics, but do they seriously expect us to believe that? They do not seriously read any psychology, and as far as I know you will not see many utility functions in any psych course. Secondly, behavioral economics claims to be changing economics, and perhaps could be powerful enough to prevent future crisis. But I have yet to see one aspect of core neoclassical theory that behavioral economics has changed.
D. Wade Hands has a paper that reviews and challenges the standard narrative that psychology was in economics, then fell out during the ordinal and revealed preference revolutions, and is now back in thanks to behavioral and experimental economics. Case in point of why it is important to worry about history once in a while
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=988125
Economists need to get out more. They are stuck in long-outdated notions like maximum utility and trying to fit these ideas into models based on assumptions that don’t pass empirical muster, on one hand, or the moral smell-test, on the other.
People are individuals that act from a variety of motivations.Cognitive science reveals what thinkers have known for ages. People are not exclusively rational but ideological and influenced by “passions.”
Not only are wants in conflict with oughts, but also the subliminal worldview of most people is not internally consistent, because it is not consciously constructed or intentional arrived at. A lot of people don’t pursue goals that they would if they had different norms, for example.
As a result, most people are conflicted much of the time. They control their “base nature” through the imposition of value-structures, religious and moral codes, ethical standards, and positive, for example, and this is an internal conflict that manifests in decision-making. Some of these decisions are economic choices that are not necessarily utility maximizing in the rather simplistic way that many economists consider, e.g., pursuit of self-interest.
The extreme of utility-maximization is found in the logical conclusion of utility as self-interest, namely, the philosophy of Ayn Rand. This is free market capitalism compressed into a nut. John Galt is the “representative agent” pursuing self-interest as the evolutionary imperative. Beyond the extreme is the underworld of crime. At the opposite end of the spectrum are the monks and nuns, yogis and lamas, and others who reject the world altogether as illusory glamor that distracts from the true purpose of life, the unfolding of spiritual potential.
The problem with utility is that it overlooks millennia of human in religion, philosophy, theology, and the arts and humanities that is grounded in the notion of the human person as the “fountainhead” of value. Utility means “good for, i.e., a hypothetical imperative, and ignores the categorical imperative of conscience. Moreover, utilitarianism has never been stated in a philosophically satisfactory way that avoids problems.
Liberal democracy, a child of the Enlightenment, is based on equality of persons, which is to say, all persons are endowed with equal rights, as the Declaration and Constitution with its amendments assert.
What are rights? They do not exist in the world of facts. They are constructs involving value that human being endow with a privileged character personally and socially. They are “sacred,” not in necessarily a religious sense (although they may be), but in the sense that that they are what make humans to be human, as humanism proclaims. They are part and parcel of “reason” broadly construed as the specific difference of homo sapiens sapientis.
Economics in abstraction from norms conduces to a race toward the bottom. Utility theory is a form of hedonism based on a stimulus-response mechanism that ignores the human dimension. It is not only amoral in its misguided effort to appear scientific, it is inadequate to the facts of behavior and stands in need of correction.
Here are the economists, who having successfully mastered economics, are ready to incorporate their vast knowledge of psychology into the mix.
Here are the economists, who having not progressed beyond 1971 (the end of the gold standard), still believe federal taxes pay for federal spending, and the federal debt is unsustainable, when these ideas are factually incorrect.
Here are the economists, whose beliefs have led us to an astounding ratio of one recession every five years, and who now wish to tack on to their erroneous beliefs a whole other discipline, about which they also know nothing — as though adding an unknown to wrong idea, somehow improves the knowledge.
It would be far better for the economists to understand the basics of their own science (See: Basics ), before venturing into an entirely different realm.
What next? Quantum theory and Relativity?
Rodger Malcolm Mitchell
Rodger, I’m not sure that economists need to add a lot of extraneous knowledge to economics. They just need to become aware of that knowledge and use it to purge their theories of untenable assumptions that lead to gross oversimplification of complex issues.
Admittedly, some economists admit that their models are oversimplifications, only designed to be used heuristically on that basis, as rules of thumb, so to speak. But then everyone acts as if these models have the scientific standing of the hard sciences. Of course, when this logical jump bleeds over into policy-making, the result is often human disaster.
The failure is in the initial assumptions. As Nick points out, the definition of utility is grossly oversimplified and the notion of rational market participants is contradicted by a long list of known cognitive biases. These are the source of problems in the math – the problem is not mathematization itself. If the math was done right the flaws and uncertainties in current models would be glaringly obvious.
Economists themselves are victims of their own cognitive biases: their overconfidence in and oversimplification of their models. Physics envy may be a problem, but I fail to see why the drive to become more like physics should be abandoned. The only way to have useful models in 10/100/1000 years time is to use a scientific approach.
Tom, if you are an astronomer who believes the world is flat, neither your mathematical models nor your inclusion of psychology will improve your knowledge. You first must understand the world is not flat.
The economists “flat world” theories include the beliefs that the federal government needs to borrow (it doesn’t), that it borrows too much (it doesn’t), and that our grandchildren are liable for this borrowing (they aren’t). Having wrong beliefs as a basis, it doesn’t matter what mathematical models or psychology are applied.
It’s a perfect example of GIGO — garbage in, garbage out.
Rodger Malcolm Mitchell
Rodger, I agree with that, of course. But the post is discussing Classical and New Classical economics based on utility theory, which is the mainstream view. New Keynesians also work in terms of the mainstream universe of discourse, thereby compromising themselves.
There is the further problem that you mention. Few economists understand money & banking or finance, because they don’t study it operationally. They rely on theories whose assumptions are also untenable, based on primitive or Robinson Crusoe barter models. But that is a separate issue, I believe, and all economic errors cannot be reduced to this.
Yea, I think Tom got it right in his first comment- the max U thing is ideological in its roots, and ignorant of insights from other social sciences.
Rodger, GIGO applies to a whole range of issues in economics, including the ones you raise. Just as MMT has transformative power for thinking about monetary economics and public spending, I think that subverting the neoclassical synthesis can change how we think about the way the economy is structured. So too, economic valuation through environmental economics tends to commodify and discount the value of natural resources, whereas ecological economics refuses to take a simplistic approach.
All of these mini-revolutions can have great bearing on public policy.
PUrdeep: “Physics envy may be a problem, but I fail to see why the drive to become more like physics should be abandoned. The only way to have useful models in 10/100/1000 years time is to use a scientific approach.”
I think “physics envy” is a problem for economics and any social science. The social sciences need to model themselves on the life sciences, as a Aristotle realized millennia ago.
The organism (Greek entelechy) is the basis of the life sciences. The Greek term is apt. It signifies an entity whose organizing principle is purpose directed at an end (telos). This is where utility theory goes astray when it equates human good (desirability) with material satisfaction.
This is hedonism, Greek hedone, meaning “pleasure” as equated with happiness (eudaimonia). Aristotle observed that human happiness is more complex than that. It is the by product of excellence (arete), conceived as the unfolding of full human potential. Aquinas adapted Aristotle to Catholic theology and philosophy.
But the essence was present at the time of the Greeks, and their thought forms the philosophical basis for Western civ. These ideas were spread through the Enlightenment, which stripped them of their religious clothing while retaining the essence of the teaching.
It’s the evolutionary experiment that humanity is still working on through liberal democracy grounded in humanism.
[…] of contemporary neoclassical economics remains wedded to utility-maximizing individuals. And, as Nick Krafft discovered, neoclassical economists just don’t want to give it […]
I think both Nick and the commenters here are confused about what utility theory is. Utility theory (in one period) says that I can assume (economists say “represent”) preferences over objects/states of the world by a numerical function if those preferences are complete (I can rank A at least as good as B, or vice versa) and transitive (if A>=B and B>=C, then A>=C). In a world with uncertain outcomes, the axioms are slightly more complicated, but economists have a number of theorems which deal with, say, time inconsistency, regret, ambiguity, spite, etc.
*Many* results from behavioral economics are nothing special as far as max u is concerned. Consider a person who “satisfices” – i.e., he sees a set of objects coming his way and chooses the first one that is “good enough”. Satisficing turns out to satisfy the requirements of a utility function, so that person can be assumed to “max u”. The same is true for people who “lock into set points” of happiness, among other things. None of this is strange to economists, and none of it is strange to economics.
On the other hand, assuming someone doesn’t maximize over preferences seems very, very strange. Surely we are guided by passions, but we are not machines. To the extent that we have what philosophers call “human agency”, then we are attempting to do what we think is best for us. That simple idea turns out to be a very powerful paradigm of the world, and is the reason economics became a successful social science. For instance, compare models of innovation diffusion in economics and in other social sciences. Economists generally assume that, when I see my neighbor using an innovation, I form some beliefs about how good the innovation is from watching him, and then accept the innovation if it makes me better off. Other social scientists prefer to model diffusion as if the innovation were a disease, and when I see my neighbor using the innovation, I adopt with, say, 40% probability. This strikes me as a crazy way to model human behavior.
Finally, counterexamples to max u does not prove uselessness. A model of the world is that – a model. It is not meant to be a replication. Parsimony in models lets us learn what processes might be leading toward an outcome. Social science is too complicated to know *exactly* why something happened. As such, our models will, by definition, be wrong sometimes. A better criteria for models is whether they are useful! When you calculate how fast an apple falls from a tree, surely you prefer to use Newton’s formula where masses attract (a formula which is incorrect, as Einstein shows, but roughly accurate for predicting non-tiny and non-enormous masses) rather than Einstein’s curvature of space-time equations, right?
[…] economics remains wedded to an analytical approach based on utility-maximizing individuals. And, as Nick Krafft discovered, neoclassical economists just don’t want to give it […]
Kevin,
Thanks for your thoughtful comments. I do take issue with this point:
“To the extent that we have what philosophers call “human agency”, then we are attempting to do what we think is best for us. That simple idea turns out to be a very powerful paradigm of the world, and is the reason economics became a successful social science.”
You are right that economics has “succeeded,” i.e. come to dominate, in many ways because of this “simple idea.” I argue as much in other words in my post. However, this simple idea is what is wrong with the theory. I think Tom put it well in the first comment above:
“Not only are wants in conflict with oughts, but also the subliminal worldview of most people is not internally consistent, because it is not consciously constructed or intentional arrived at. A lot of people don’t pursue goals that they would if they had different norms, for example.”
This fallacy, that humans are so purposeful, is what is woefully misguided. This may be a cheap shot, but I think the main reason it persists is because people who are attracted to economics tend to act so “purposefully” themselves. My girlfriend, for instance, routinely calls me “calculator brain,” because every decision I make is carefully measured. Most people do not think that way, but economists tend to. Thus, they theorize that they are the representative agents.
Constrained maximization. It’s not that they aren’t maximizing when they “just satisfy,” it’s that their constraints are greater than you think or their utility diminishes faster than you think. I’m surprised you say “it’s hard to argue that individuals are maximizing anything.” People are maximizing things all the time! They buy more during sales, they relentlessly seek cheapness, they pollute less when there are pollution taxes, they price discriminate, they signal, etc. Behavior economics is very good at pointing out new costs and benefits; that’s a big deal but that’s it.
Does this risk being tautological? Perhaps, but if you want to expand the number of things economics explains, that’s a natural danger. And yes, I agree there’s some physics envy (or some overly-strong signalling) going around and economics has too much complex math it doesn’t need, but derivatives aren’t that complicated.
I meant to say, they aren’t consistently maximizing anything, at least not in a measurable way. I think my comment responding to Kevin clarifies my thoughts on this. The tradeoff of simplicity for a tractable model is not a worthwhile one when the model turns out to do an awful job of predicting how the economy actually works. Yet economists cling to it. I do believe it’s ideological.
Economist Steve Keen takes this on in Debunking Economics: The Naked Emperor of the Social Sciences (2001), Chapter 2, “The Calculus of Hedonism,” if you are interested in curves and numbers.
NIck” “My girlfriend, for instance, routinely calls me “calculator brain,” because every decision I make is carefully measured. Most people do not think that way, but economists tend to. Thus, they theorize that they are the representative agents.”
Exactly. Which is why I say things like, “Economists should get out more.”
I’d also add that it’s striking how many economists are married to other economists. Perhaps it’s rare to find a non-economist that will tolerate one.
Nick,
I agree completely that people often act in accordance with heuristics. Does this contradict the max u model? The point is that it does not. I think the satisficing model I gave is a good one – a satisficer is entirely consistent with utility maximization (a proof of this can be found in many theory textbooks). Clearly an agent who is not internally consistent is not consistent with utility theory, depending on how you define the term – “learning about the world” and then changing preferences, or acting differently when feeling spiteful, or something similar are all perfectly fine, but if I ask you “A or B” and you say “A”, then I immediately ask you “A or B” and you say “B” would not be.
Note further that max u does not require people to do what’s “in their best interest”: as an economist, I don’t even know what term could mean. I only care that they have some preferences and maximize over them, harmfully or beneficially.
Even if you find that restriction too strong, max u may still be salvaged to the extent that most economic models only care that people act “as if” they maximize utility. The famous example here is Friedman’s pool hall: we are able to play pool without actually knowing how to do the physics calculations.
I think it’s madness to say that humans aren’t purposeful. It is very, very easy to get people to react to incentives, economists or not. But again, as noted above, even if you reject a strong agency theory of human behavior, that still doesn’t mean you would want to disregard max u, since many heuristic-like behaviors are perfectly consistent with utility theory.
The world of economics changed in 1971. Prior to that, we were like Greece — unable to control our money supply. Now, we have total control over our money supply.
I suspect most economists either were educated before 1971, or were taught by teachers who were educated before 1971. That is why they believe money is scarce to then U.S. government, and they base all their writings on that one erroneous belief.
Rodger Malcolm Mitchell
Kevin-
You overestimate the extent to which humans are internally consistent, I think.
The “as if” line is a distinction without a difference, as my whole point is that evidence does not bear the maximizing behavior.
I was too strong when I said humans aren’t purposeful. I meant they are not consistently purposeful. They also consider a host of changing norms and ideals that cannot be modeled. These things can neither be measured (at least right now) nor assumed away. Human behavior is too varied to allow enough degrees of freedom to churn this through a computer model.
The gestalt theory of figure and ground is apt here. What counts as figure and what counts as ground is a cognitive choice the mind makes based on subjective experience. Maximizing utility is something that only occurs after we’ve identified what we think the figure is. The illustration of Rubin’s vase demonstrates what happens when the information is ambiguous and could be read either way. It’s also a simplification in that the ambiguity is only two-way. There can also be multi-layered ambiguity. This is what people mean when they talk about uncertainty.
Kevin presents a very articulate defense of utility maximization that sidesteps the fundamental nature of uncertainty. It’s not a matter of satisficing meeting the criteria of maximization, it’s a matter of not knowing and not being capable of knowing what one’s preferences are. The problem with neoclassical economics is that economists have picked some trivial examples of consumer preference and generalized from them. It seems intuitive if you’re talking about preferences between, say, beans and brocolli. The whole preference ordering game works there only because… it doesn’t really matter. For all intents and purposes it’s “reversable”.
On big ticket items, though (things like career, life partner, domicile), the distinction between figure and ground is fundamentally uncertain. Economists have swept that huge difficulty under the rug by treating these as a “normal goods” the preferences for which can be modeled by generalizing from trivial and totally dissimilar examples of commodity preferences. Even the choice between war and peace can be trivialized to choosing between guns and butter.
The rationality hypothesis simply states that individuals try to do the best they can under the circumstances. This easily translates into a constrained maximization problem, captured completely in the utility maximization hypothesis.
Doing the best one can is restated as maximizing utility, and the circumstances are just the constraint set.
Tell me how you refute that.
Now, what cognitive psychology and behavior economics show is that people make cognitive errors. That is, they make cognitive mistakes. If this is pointed out to them, will they ignore the information?
People do not say they are content making cognitive errors, as such errors reduce welfare by their own estimation.
The utility maximization framework is not a theory of everything, but it certain does capture well what we try to do in many human contexts.
HCG-
Your restatement elucidates what I’m getting at. Individuals do not try to do the best they can. Read sandwichman’s point:
“Maximizing utility is something that only occurs after we’ve identified what we think the figure is.”
People’s actions may look consistently purposeful in retrospect, they may not. Even when they do, though, that is not necessarily the result of people “doing the best they can.” It’s the result of people doing what they may, not necessarily cognizant of a large scheme to maximize anything, whether short-term or long-term.
You’re imputing on to people the way you act, the way you want them to act, and assuming that they are so inclined as well. And people wonder why economics is viewed as being so hegemonic!
One only needs to listen for a moment to the marketing for defense spending to realize that the reason given for spending trillions on armaments is not a preference for guns over butter but a perception that buying guns is the only way to secure the butter. Similarly Aristotle’s dictum that “we work in order to have leisure,” confirmed in Adam Smith’s fable of the poor man’s son cursed with ambition, suggests that maximization can be roundabout and ultimately thwarted quest. One gives up what one prefers for the sake of the illusion of getting more of it, dog-in-the-manger style.
Now think of war and peace or work and leisure not as distinctive figure and ground but as ambiguous configurations (as illustrated by a Rubin’s vase) in which perception oscillates back and forth between figure and ground. What do the purchase of guns and the attachment to work reveal about the preferences of those who perceive they are thereby pursuing peace and leisure through those precisely those choices?
Dear Nick. Read your post, thanks to Mark Thoma. Amartya Sen has also observed that individuals are adaptable, and argued against utilitarianism as the sole guide to human well-being.
From introspection, I find myself driven more by risk minimisation than utility maximisation. If this is correct, I wondered what this implies for economic models. I thought that the main implication is that individuals seek to smooth consumption over time, which is consistent with many of the economic models based on utility maximisation that I am familiar with. If this is right, perhaps that is the reason why mainstream economists continue to hold on the utility maximisation.
However, one implication of Kahneman’s work is that individuals are asymmetrical in their attitude to risk. We are much more adverse to a loss in consumption than a gain in consumption. (Hence, there is a “kink” to the utility curve.) Might this be where mainstream economic models need to be reviewed?
Going back to Sen and normative economics, it seems to me that mainstream economists have yet to take on board Sen’s argument that utilitarianism is a poor guide to human well-being. Perhaps this is another area where mainstream economists should revise their thinking.
Since economics teeters perilously on the tight wire between science and religion, we now have decided to push it off by including the least scientific science, psychology.
Most economists prove nothing, and replace data with intuition. What will happen now with the addition of psychology, which is 99% intuition?
Rodger Malcolm Mitchell
Kien, you raise two valid points, but both miss my point. First, risk aversion can easily be incorporated into neoclassical preference curves. Someone like you would still be relatively easy to model, as you are guided by internally consistent preferences for risk and reward. I’m arguing that human nature is not so simple, so we should get rid of what’s better termed as “methodological instrumentalism,” wherein individuals maximize based on any given set of preferences.
As for utilitarianism, that’s a different issue, as it involved social choices about how to approach societal benefits. I would argue that methodological instrumentalism is necessary but not sufficient for utilitarianism- an important decision. I am not sure where Sen would come down on this whole debate, though.
Nick states: “You’re imputing on to people the way you act, the way you want them to act, and assuming that they are so inclined as well.”
Here is the test. Will you admit that when you make decisions about choices, whatever they may be, that you do NOT TRY to make the best decisions you can under the circumstances (which may include costly information search, uncertainty, etc.)?
If you will admit that, then the hypothesis does not apply to you, and I would infer that you are a quite unhappy person. But I do not think that you will, and everyone that I have posed the question to does not answer that they do not try.
The utility maximization hypothesis is just a formal generalization of what everyone, not currently under psychiatric care, will say about how they go about making decisions. Decisions may in retrospect may be poor ones, but we all say that it is because our information was incomplete, we did not have time to consider all the ramifications, that we were subject to cognitive errors, etc., etc. But we will always say that we tried. As the saw goes, “good judgment is the product of experience, and . . . , experience is the product of bad judgment”., that is, errors.
And Kien states “From introspection, I find myself driven more by risk minimisation than utility maximisation”.
That is the dual of the problem, with non-zero variances thrown in. It is the same problem — utility maximization with a negative sign, and risky choices.
HCG, you really do underestimate the degree to which people make decisions this purposefully. I did a straw poll of friends this evening- I’m the only one who operates this way. A lot of decisions boil down to, “I dunno, I just did.” These are all intelligent people, too- recent grads from good universities. I really think there is a perception bias among economists.
Damn! Another blog I’m going to have to read every day.
HCG: “Here is the test. Will you admit that when you make decisions about choices, whatever they may be, that you do NOT TRY to make the best decisions you can under the circumstances (which may include costly information search, uncertainty, etc.)?”
What kind of a “test” is that? There is clearly a social incentive to claim that one tries to make the best decisions they can — even when people know that they have simple abdicated making a decision because it was too hard to decide or because the “choice” they faced was a double bind (catch 22). Cognitive dissonance. Ever hear of it?
So you’re saying one can ground a methodological principle on coerced answers to a loaded question? If so, when are you going to stop beating your spouse?
[…] Dame’s academic forum on economics and ethics; parody- betting against the American dream; taking on Max U; redefining fiscal sustainability; rounding up Max U comments; and why environmentalists […]
It sounds as if no one actually answered your question about ‘how we go forward.’ What surprises me is that they didn’t so much attempt to answer that question as try to answer the implicit why, as in ‘why should we go forward with neoclassical max U’. Their responses indicate that they don’t think that SWB theory offers a viable alternative (yet? well I don’t think it does either as it leaves too much out, we know we can have happy people in fascist countries, for example) and that utility theory can be tautological, therefore we do indeed need a ‘how’. But not one of them adequately provided a ‘how’.
There are several ‘hows’ in my mind that might work. If we want to hold to some form of utility maximisation, then maybe it should be through evolutionary game theory and agent based modeling. Here I’m thinking of the work by people like Sam Bowles, Herb Gintis or others (some of whom were historically analytical Marxists and wanted to use the tools of neoclassical theory to different ends). Much of their work also gives credence to heterogeneous kinds of agents, agents who are embedded in cultural contexts and whose utility is affected by society and class – endogenous preferences and state-based preferences. That is one ‘how’ for going ahead with neoclassical utility theory, though maybe not in a way the panelists would want or like. See also, Jo Henrich, Ernst Fehr, Simon Gaechter, Urs Fischbacher, Klaus Schmidt, Frank Marlowe, Lee Cronk and many others [By the way, I’m not saying that their work is flawless, but that it represents one ‘how’ that sticks to some tenets of neoclassical thinking.]
[…] 3, 2010 by Nick Krafft Maxine Udall, whose eponymous blog is quite excellent, responds to my post from last Wednesday. Foreword: This is a response to Nick Kraftt at Open Economics, where he […]
Simon-
These new evolutionary models are something I need to learn a lot more about- thanks for your comment.
This is a fantastic blog you have here. I visit here every week. I have already subscribed to your rss feed to help me stay update with your publication. Are you on twitter so that I can follow you?
[…] and Law”. As anyone who has taken introductory microeconomics knows, our dear friend “Max U” for individuals has it’s firm-level counterpart, profit maximization. Remember that […]
our Mental Energy Sphere is his latest work, and could qualify as a novelette – in that it is less than 20,000 words. Yet, to fully make use of this self-help guide, readers must allow space and time to contemplate what he is saying. Readers will benefit by reading this book slowly, at times when there are no distractions. Each sentence is valuable – no word is wasted, here. Using realistic tools such as deep introspection, evaluation and deduction, Shyam coaxes individuals to find their true happiness. Though Shyam provides the tools, he makes it clear that readers will have to take the steps that will ensure their own satisfaction in life.*
Please do pay a visit to our very own web blog
<,http://www.caramoanpackage.com/caramoan-hotels/