Home > Uncategorized > How to cope with the behavioural challenge

How to cope with the behavioural challenge

from Lars Syll

How would you react if a renowned physicist, say, ​Richard Feynman, was telling you that sometimes force is proportional to acceleration and at other times it is proportional to acceleration squared?

kickI guess you would be unimpressed. But actually, what most mainstream economists do amounts to the same strange thing when it comes to theory development and model modification.

In mainstream economic theory,​ preferences are standardly expressed in the form of a utility function. But although the expected utility theory has been known for a long time to be both theoretically and descriptively inadequate, mainstream economists all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.

What most mainstream economists try to do in face of the obvious theoretical and behavioural inadequacies of the expected utility theory, is to marginally mend it. But that cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! Instead of mending the broken pieces it would be much better to concentrate on developing descriptively accurate models of choice under uncertainty. 

Expected utility theory is seriously flawed since it does not take into consideration the basic fact that people’s choices are influenced by changes in their wealth. Where standard microeconomic theory assumes that preferences are stable over time, behavioural economists have forcefully again and again shown that preferences are not fixed, but vary with different reference points. How can a theory that doesn’t allow for people having different reference points from which they consider their options have a (typically unquestioned) axiomatic status within economic theory?

Much of what experimental and behavioural economics come up with, is really bad news for mainstream economic theory. It unequivocally shows that expected utility theory is nothing but transmogrifying truth.

But mainstream economists do not see this​ since they have the weird idea that economics is nothing but a smorgasbord of ‘thought experimental’ models. For every purpose you may have, there is always an appropriate model to pick.

ChameleonBut, really, there have​ to be some limits to the flexibility of a theory!

If you freely can substitute any part of the core and auxiliary sets of assumptions and still consider that you deal with the same — mainstream, neoclassical or what have you — theory, well, then it’s not a theory, but a chameleon.

The big problem with the mainstream cherry-picking view of models is of course that the theories and models presented get totally immunized against all critique.  A sure way to get rid of all kinds of ‘anomalies,’ yes, but at a far too high price. So people do not behave optimizing? No problem, we have models that assume satisficing! So people do not maximize expected utility? No problem, we have models that assume … etc., etc..

A theory that accommodates for any observed phenomena whatsoever by creating a new special model for the occasion, and a fortiori having no chance of being tested severely and found wanting, is of little real value.

  1. Dominique
    September 5, 2018 at 9:56 pm

    Lars raises a very valid point:

    “Expected utility theory is seriously flawed since it does not take into consideration the basic fact that people’s choices are influenced by changes in their wealth. Where standard microeconomic theory assumes that preferences are stable over time, behavioural economists have forcefully again and again shown that preferences are not fixed, but vary with different reference points.”
    There are others. For example, Neoclassicals argue that expected value of each outcome is multiplied by a real number called utility. Whether one uses preference or utility, both concepts are in ordinal space. There is no real number called utility. In ordinal space only order is defined, whereas no multiplication, addition, division, differentiation, etc are defined.

  2. Helen Sakho
    September 6, 2018 at 2:08 am

    The Chameleon is a natural animal. It changes its colour to its environment to survive. It is either extremely intelligent or extremely cunning. Either way, you do not see it. The scorpion will kill you or be killed by you or kill itself before you kill it. The turtle acts like a contented migrant on the move, carrying its mobile home on its back until it finds a “safe” corner to rest for a bit, happy to eat whatever vegetables and flowers it finds on its way. It is lucky if it finds a shelter anywhere, away from brutal drivers and killers. What kind of excuse do these economists have? Please read in conjunction with an earlier posting a few seconds ago.

  3. Frank Salter
    September 6, 2018 at 6:57 am

    Final paragraph is:
    “A theory that accommodates for any observed phenomena whatsoever by creating a new special model for the occasion, and a fortiori having no chance of being tested severely and found wanting, is of little real value.”

    The confusion between THEORY and MODEL is extant in economics but it is not in the physical sciences. Models do NOT equate to theories.

    The “special model” is merely a curve fit to a set of concrete data. Theories are abstract concepts and provide a general description of all the data, NOT of only one set.

    Falsification is a necessary procedure for economics to become truly scientific. Without it, the nonsense will continue.

  4. Helen Sakho
    September 7, 2018 at 11:40 pm

    No testing was or is required. The ONLY testing will be how much GAS will be needed for the next round of genocide, GLOBALLY.

  5. September 12, 2018 at 11:12 am

    One suggestion seems to make sense to me. If economists want to deal with actual human behavior (actions) they should be educated as behavioral scientists. Which currently they are not. For example, the concept of “relative deprivation” was not invented by Smith, or Marx, or Laffer. It was invented by sociologist Samuel Stouffer. Stouffer and a distinguished team of social scientists working for the War Department surveyed over a half million American soldiers during World War II using interviews, over two hundred questionnaires, and other techniques to determine their attitudes on everything from racial integration to their officers’ performance. Their answers, almost always complex and often also counterintuitive, reveal individuals both defining and defined by their society and their primary (direct associations) groups. Stouffer’s work in World War II led to the Expert and Combat Infantryman Badges, revision of pay scales, the demobilization point system, and influenced what appeared in Yank, the Army Weekly, Stars & Stripes, and Frank Capra’s “Why We Fight” propaganda films. Additionally, it was Stouffer and his colleagues who during their research for The American Soldier developed the important sociological concept of “relative deprivation”, which roughly stated is the idea that one determines her/his status based on comparison with others. One of the problems that prompted the research that lead to the creation of “relative deprivation” was why were army personnel upset about promotion rates while air force personnel were not, despite the fact the rates were nearly identical. The answer: army personnel expected a faster rate while air force personnel did not. Army personnel experienced deprivation. Air Force personnel did not. On the other hand, if economists want to continue to study mathematics, they should be educated as mathematicians. Which currently they are not.

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