?Rational Choice Theory? by Phin Upham (Part 16)

Posted February 26th, 2012.

Rational Choice Theory, Economics, Phin Upham

Author?Phin Upham?reviews Rational Choice Theory, its critics, and its applications. Part 16 of this article.?Visit Phin?s website for more information.

Critics of RCT 2.b

But we must be careful to lump even this first class of dissenters into one group.? Some of these, Bell being a clear example, as mentioned above, want to internalize aspects of the human decision making process into rationality theory so that our models can be more realistic and more useful in predicting reality.? This view is neatly stated in footnote 6 of Alchian?s seminal essay ?Uncertainty and Economic Theory? when he says ?Analytical models in all sciences postulate models abstracting from some realities in the belief that derived predictions will still be relevant.? Simplifications are necessary, but continued attempts should be made to introduce more realistic assumptions into a workable model with an increase in generality and detail.?[1]?

There is another sort of criticism that in many ways looks very similar to this sort, and which I group in the same class, but which also differs t a large extent.? It claims that rational choice theory as it stands cannot be coherently understood or applied to the world.? Rather one must slightly weakening at least some of its more obviously false postulates in order for it to correspond to reality.? This tweaking is, again, done in the service of realism.? Some RCT?s, for example, demand that the agent have perfect information ? some objectors to these theories suggest that this is too unrealistic an assumption to allow to stand and still yield accurate results.? Other critics suggest that agents do not have perfectly ordered and complete preferences (Levi, 1980).?

Chu and Chu (1990), for example, were able to show that agents preferences were not complete or transitive by selling K bets to experimenters, for the price they claimed they were worth, exchange K bets for J bets, and then having the experimenters buy back the J bets for the lower prices subjects claimed they were worth.? This money pumping cycle, of course, left the subjects poorer after each round.? If the agents preferences were transitive, then if they preferred A to B and B to C, they would also prefer A to C.? In the Chu and Chu example, though the agents showed intransitive preferences, they quickly adjusted their preferences when the experimenters began to take advantage of their preference ordering.? Bell, Raiffa, and Tversky (Decision Making) suggest that though virtually no subjects behave coherently enough to satisfy the implied behavior which the assumptions of the model generate, the model might be empirically useful because if individuals deviate too far from the behavior posited by the model then others would be able to exploit such behavior through arbitrage since the behavior is not maximizing.[2]? In the long run, therefore, people would remain in an equilibrium state close to the behavior predicted by the model.? Thus ?the normative character of the model is used as an argument to reinforce its descriptive value.?? (DM 15).? This is exactly what we saw with the Chu and Chu example.

[1] Cut section form this part ?What can we take from Alchian?s statement?? He beins with a broad statement asserting a necessary characteristic of all sciences: that they abstract from reality.? In the next sentence he rephrases ?abstract? as ?simplify.?? So, like Cartwright and Friedman he is claiming that 1) all models in Economics (and for Cartwright and Alchien, all models in any science) will not correspond perfectly to reality.? 2) That this lack or correspondence will be due to an abstraction. 3)? That this abstraction can be called a simplification.? But he continues to claim that 4) realistic assumptions ought to be added to this model in order to increase generality and detail.?To unpack point 4) will reveal the nature of an apparently uncontroversial point.? To begin, if the model were merely simplified as Alchien seemed to claim in 3), and if simplified is to have its common definition of cutting out complexity, then it would not make sense to add in this complexity again without some other guidelines (it is ass.? If just does not make sense to purposely ignore aspects (i.e. simplify) that one believes?

Source: http://www.aamprogram.org/reference-and-education/rational-choice-theory-by-phin-upham-part-16/

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