Cherry-picking economic models
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?
I 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 Dani Rodrik’s Economics Rules — just to take one illustrative example –the proliferation of economic models during the last twenty-thirty years is presented as a sign of great diversity and abundance of new ideas:
Rather than a single, specific model, economics encompasses a collection of models … Economics is in fact, a collection of diverse models …The possibilities of social life are too diverse to be squeezed into unique frameworks. But each economic model is like a partial map that illuminates a fragment of the terrain …
Different contexts … require different models … The correct answer to almost any question in economics is: It depends. Different models, each equally respectable, provide different answers.
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.
But, 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 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.
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Real-World Economics Review Blog 
Thanks for this great post, Prof. Syll. Economists also seem to ignore non-transitive preferences where A is preferred over B, B is preferred over C, but C is also preferred over A. These can easily occur if there are three or more options and three or more criteria for choice. Since this is usually the case, it may be that non-transitive preferences are the rule rather than an exception in real life. When I asked my micro professor about this (about 35 years ago) he thought for a minute and then told me, “That’s impossible”. From his point of view, I guess, there was no longer a problem.
Unless you come up with better models, economists will stick with the existing models, knowing that they are problematic. Human behaviour is hard to model anyway.
In any case, if you try to deal with an economic policy issue, you might cherry pick the models that seem appropriate to the situation.
If you adhere to the multi-model approach, you know that models have limited value, and apply better in some situations than others.
“It is difficult to get a man to understand something when his salary depends upon his not understanding it.” – Upton Sinclair.
The salaries of academic and business economists depend on them not understanding or admitting that their descriptive models are wrong. It’s just a morass of motivated reasoning and rationalizations.
Generalized Expected Utility (GEU)
I posted above about descriptive models.
I refer here to a Stanford Encyclopedia of Philosophy article called, “Normative Theories of Rational Choice: Expected Utility”. It states early on that:
“This article discusses expected utility theory as a normative theory—that is, a theory of how people should make decisions. In classical economics, expected utility theory is often used as a descriptive theory—that is, a theory of how people do make decisions—or as a predictive theory—that is, a theory that, while it may not accurately model the psychological mechanisms of decision-making, correctly predicts people’s choices. Expected utility theory makes faulty predictions about people’s decisions in many real-life choice situations (see Kahneman & Tversky 1982); however, this does not settle whether people should make decisions on the basis of expected utility considerations.”
This makes sense to me. It is eminently possible and feasible that GEU could be developed as a normative theory, a theory of how people should make decisions. Specifically, one can only envisage this happening in the macro policy space.
The examples below refer to Australia’s situation in the COVID-19 pandemic. We have largely avoided the bad waves of infection that other countries have had, though we have had some waves. We are now experiencing the start of a new Delta variant wave in Sydney which shows signs of growing exponentially and out of control. Australia’s vaccination rate is poor for a developed country. Only about 20% of adults have been fully (double) vaccinated. Our Federal government has penny-pinched, purchased inadequate supplies of vaccine so far and bungled the roll-out. We are losing the advantage we had as an isolated and easily isolate-able country because of poor border control (too many incomers permitted) and the failure of Federal government to set up proper, purpose-built quarantine stations. We have hotel quarantining which can be “leaky”. That sets the scene for the following.
I will use the example of person A, a person from a COVID-19 ravaged country, non-citizen, non-resident of Australia, who is permitted to travel to Australia on a work visa to perform work of economic benefit or dubious economic benefit. Thus A could be a fruit picker or A could be a ratbag media opinionator with strong science-denialist leanings. Both of these cases are cases we have seen recently, albeit they have not necessarily actually been COVID-19 carriers. But we have seen other cases where people getting visas have turned out to be COVID-19 carriers, infected in their country of origin or infected on the plane to Australia. Then they are quarantined for 14 days in somewhat leaky hotel quarantine and sometimes only test positive after 14 days. 14 days quarantine is inadequate for at least 1% of infected to be detected.
The issue is this. What is the GEU of a fruit picker or a shock-jock style media opinionator? What is the potential negative GEU of a delta strain outbreak like the one in early progress in Sydney? It has to be noted that the one in Sydney was started by a flight crew member of a Fedex flight. Again, what is the GEU of the Fedex plane’s contents or all Fedex plane contents? That will certainly be larger of course.
Let us run through them.
(a) The GEU of shock-jock style opinionator = – x (such a person is a saboteur of science based policy and hence of the people, economy and nation).
(b) The GEU of all fruit pickers on visas = y
(c) The GEU of all air cargo into Australia = Z (clearly a high value this time).
Would not GEU, calculated according to the best theory and mathematics, permit an assessment that;
(1) The shock-jock style media opinionator should not get a visa.
(2) The overseas fruit-pickers should not get visas. Instead, subsidized ways should be found to give Australian unemployed, including foreign students stuck in Australia, sufficient incentives to pick fruit.
(3) Exclusive purpose-built quarantine or re-purposed quarantine for cargo flight crew should be paid for and set up. Limos with hermetic air-con sealing of driver from passengers and the wearing of masked etc. should be strictly enforced.
Surely, GEU applied to macro policy settings and regulations would tell us to do something very much like the above? While we cannot hope to act like a GEU powered decision maker as a consumer at the local supermarket, we surely could hope that the governments and authorities would take economic GEU advice for macro-economic decisions as well as taking full epidemiological advice from the start of the pandemic? To date, both hopes have been in vain in Australia.
Perhaps normative GEU theory has a place. Will I get shot down over this?
The theory of optimal choice has a place in economics. Linear programming was developed to address economic questions about efficient production. The abstract theory requires precise axioms or assumptions to yield definite results. Making the assumptions and working out the results is a useful activity. It is rare however for the assumptions to be representative of actual situations so using choice theory as a descriptive model or theory is presumptuous and often leads to error. It is strange that economists have either assumed people behave as choice theory predicts or, under the influence of behavioural finance theory, have explained actions as owing to psychological biases. In practice uncertainty is pervasive, different people have different information sets and can form different opinions even when confronted with similar information. Sensible decisions often require anticipating what other people will do. Reasonable behaviour in such situations will not generally conform to the predictions or recommendations of simple choice models, which assume the choices look the same to all agents and that therefore there is no difficulty in predicting their behaviour.
The problem for macroeconomic policy is that it is dealing with diverse people with different opinions and different interests. In deciding the optimal policy it has somehow to weight those different interests and often to decide which to favour when they clash. As Arrow’s impossibility theorem demonstrated there is no consistent, rational and apolitical way to construct a general social utility function from those of individuals, even supposing they exist.
So what started the cherry-picking, and what does it prove?
In a nutshell, what is now called Economics was once openly called Political Economics and focussed on the financing of kings and would-be industrial kings, believing money to be store of value which whether or not it could be grown would have to be shared. But Machiavellian politics worked by would-be kings telling the people what they want to hear and doing their own thing anyway. So the people are told Economics is about providing for their interests but the would-be kings of Economics pursue their Political interests anyway. They have resorted to cherry-picking so they can tell different people what they wished to hear, which proves that they all want something different and that an a-Political economics must be localised, satisfying and financed by personal credit based on earned trust, rather than on paying taxes and rents to geographical and industrial kings.
Can’t have that! Taking Ikonocllast’s Covid as an example, we have had to put up with a centralised “test and trace” system that doesn’t work rather than localised epidemiological isolation. But look at the economists whose work has been suppressed! Look at Ruskin’s “Unto This Last” being censored in 1864, G K Chesterton and Frederick Soddy being ignored in 1926 (the year of Britain’s General Strike), J M Keynes’s 1936 macro theory aimed at kings (being misrepresented rather than followed up via developments in feedback control theory), and E F Schumacher’s “Small is Beautiful”: a 1974 best-seller that is never mentioned in Economics departments.