Tuesday, November 19, 2013

Thoughts On Davis' Individuals and Identity in Economics

I have previously gone on about multiple selves, also known as Faustian agents. I had not considered how an individual manages these selves in making plans and decisions. My point was to apply Arrow's impossibility theorem at the level of the single agent, thereby demonstrating the necessity of some argument for characterizing an individual by a utility function.

Consider many individuals interacting in a market, each being composed of multiple selves. What, in the analysis, groups together sets of these multiple selves to identify individuals? This problem, and similar problems with many other decision theory analyses, is the theme of John D. Davis' 2011 book, Individuals and Identity in Economics.

By the way, an interesting issue arises with multiple selves interacting through time. One might justify hyperbolic discounting by thinking of an individual as composed of a different self at each moment in time. Why should these selves make consistent plans? Might one self start an action based on a plan for future actions, only to have a future self revise or reject that plan? This is the third or fourth time I have started reading Davis' book. Anyways, on pages 41 and 42, Davis writes:

"...[Herbert] Simon's recommendation to abandon the standard utility function framework was not influential in economics, but Lichtenstein and Slovic's demonstration of preference reversals was. Most economists initially dismissed it on a priori grounds, but David Grether and Charles Plott believed that they could go farther and demonstrate that preference reversals could not possibly exist. They identified thirteen potential errors in psychologists' preference reversal experimental methodology and accordingly set out to show that preference reversals were only an artifact of experimental design. Nonetheless, they ended up confirming their existence as well as Simon's judgement of utility functions:

'Taken at face value the data are simply inconsistent with preference theory and have broad implications about research priorities in economics. The inconsistency is deeper than mere lack of transitivity or even stochastic transitivity. It suggests that no optimization principles of any sort lie behind the simplest of human choices and that uniformities in human choice behavior which lie behind market behavior may result from principles which are of a completely different sort from those generally accepted.'(Grether and Plott 1979, 623; emphasis added)

Published in the American Economic Review, this was a momentous admission for economists. However, for many psychologists the debate was already long over, and research had moved on to which theories best explained preference construction. James Bettman published what is regarded as the first theory of preference construction in the same year Grether and Plott's paper appeared (Bettman 1979), a major review of preference construction theories appeared in 1992 (Payne and Bettman 1992), and Lichtenstein and Slovic's retrospective volume appeared in 2006 (Lichtenstein and Slovic 2006). As Slovic put it in 1995, 'It is now generally recognized among psychologists that utility maximization provides only limited insight into the processes by which decisions are made' (Slovic 1995, 365). Grether and Plott, interestingly, extended their own critique of standard rationality to Kahneman and Tverky's proposed prospect theory replacement, implicitly highlighting the difference between the two currents in Edwards' B[ehavioral] D[ecision] R[esearch] program.

'We need to emphasize that the phenomenon causes problems for preference theory in general, and not for just the expected utility theory. Prospect theory as a special type of preference theory cannot account for the results.' (Grether and Plott 1982; 575)

So, given the data and what economists have said years ago about it in the most prominent and most prestigious economics journal in America, one can expect mainstream economists today to have rejected utility theory, revealed preference theory, prospect theory, and the usual old textbook derivation of market demand curves and factor supply curves. Right?


LK said...


Off topic, but do you have any good references for Post Keynesian response to the neoclassical defence of profit maximisation amd price theory in the idea that the actual result of mark-up pricing – on the basis of average unit costs and profit mark-up – is the same as if a firm deliberately and consciously were to equate marginal cost and marginal revenue?

Do marginal costs and average costs coincide, for instance?

Robert Vienneau said...

I know of that claim from reading something about Kalecki decades ago.

I do not have a response directly addressing it, but I think some work in the 1970s develops an alternative theory. The markup is based on generating financing for investment plans. See, for example, Al Eichner's A Theory of the Determination of the Markup under Oligopoly, Geoff Harcourt & Peter Kenyon's Pricing and the Investment Decision, and Robin Marris' The Economic Theory of Managerial Capitalism. (I haven't necessarily read all of these.)

This then gets to the question of the superiority of a theory that has causal mechanisms correct versus a theory that only pretends to have a superficial model of some phenomenon.