Dani Rodrik on behavioural challenges (VIII)

26 December, 2015 at 18:16 | Posted in Economics | 4 Comments

ChameleonHow 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 Dani Rodrik does in Economics Rules amounts to the same strange thing when it comes to theory development and model modification.

In mainstream neoclassical 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, neoclassical economists all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.

What Dani Rodrik and most other 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!

As Matthew Rabin and Richard Thaler have it in Risk Aversion:

It is time for economists to recognize that expected utility is an ex-hypothesis, so that we can concentrate our energies on the important task of developing better descriptive models of choice under uncertainty.

In a similar vein, Daniel Kahneman maintains — e. g. in Thinking, Fast and Slow — that expected utility theory is seriously flawed since it doesn’t 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, Kahneman and other behavioural economists have forcefully again and again shown that preferences aren’t 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 economi theory, and to just conclude, as Rodrik does, that these

insights from social psychology were subsequently applied to many areas of decision making, such as saving behavior, choice of medical insurance, and fertilizer use by poor farmers

sounds, to say the least, somewhat lame, when the works of people like Rabin, Thaler and Kahneman, in reality, show that expected utility theory is nothing but transmogrifying truth.

To Rodrik, mainstream 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 has to be some limits to the flexibility of a theory!

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

The big problem with Rodrik’s 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 accomodates 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.

 

4 Comments »

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  1. If you cannot be wrong,you cannot be right.

    One would think this was obvious.

  2. In my view, this is the best one in the series. BTW, check out Noah’s gif of you.

  3. “It is time for economists to recognize that expected utility is an ex-hypothesis, so that we can concentrate our energies on the important task of developing better descriptive models of choice under uncertainty.”

    I would not even say this. I would say the profession needs put models away all together for a while (and this belief that the answers can be found with abstraction) and start working more like historians and other investigators – which would include analysis of both qualitative and quantitative evidence. Only when this is done properly can we begin to have sound theories.

  4. I’ve challenged the true believers in utility to explain what value they gain over me saying that people make choices because they are controlled for amusement by space monkeys.

    My view here
    http://www.fresheconomicthinking.com/2014/09/the-preference-whispers.html


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