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Classical economics thinks of people as "rational utility-maximizing actors", which doesn't approximate reality in quite a lot of ways. There's been a move towa

by pradn 6y ago

Classical economics thinks of people as "rational utility-maximizing actors", which doesn't approximate reality in quite a lot of ways. There's been a move toward more sophisticated models - like that people minimize regret more than they seek the optimal reward ("rational actors with regret minimization.") This switch to more complex underlying models is similar to computational models used in computer science. Algorithms used to only be designed for the RAM computation model, which doesn't model real-life CPUs, which have caches and where not all operations take unit time. Now, there's a wide variety of models to choose from, including cache-aware, parallel, and quantum models. You often get better predictors of the real world this way. There has been quite a lot of study in economics about cooperation. My favorite is Eleanor Ostrom's work on "the commons". She observes that with a certain set of rules, discovered across the world and across varying geographies, people do seem to be able to cooperate to maintain a natural resource like a fishery or a forest or irrigation canals for hundreds of years. Her rules are here (https://en.wikipedia.org/wiki/Elinor_Ostrom#Design_principles_for_Common_Pool_Resource_(CPR)_institution https://en.wikipedia.org/wiki/Elinor_Ostrom#Design_principle...).

webmaven 6y ago
> Classical economics thinks of people as "rational utility-maximizing actors", which doesn't approximate reality in quite a lot of ways. There's been a move toward more sophisticated models - like that people minimize regret more than they seek the optimal reward ("rational actors with regret minimization") Even when entities (corporations, for example) are trying to maximize utility, and an optimal decision is desired, there are issues with how much time and resources can be spent making decisions, so optimality has to be bounded in various ways (do you wait for more information? Do you spend more time and compute on calculating what would be optimal? etc.).
pas 6y ago
The problem with the "rational agent" model is that it's a tautology. Yes sure everyone wants more utility, great, but everyone's utility function is slightly different. As you say some are risk takers pursuing insane rewards/yields/profits with low probability, while others are super risk-averse conservative in their choices, etc. That said, economics doesn't rest on this. Macroeconomics doesn't care, nor micro/labor/health/sports/developmental econ either. Sure trying to predict how someone (and more interestingly how groups) will behave based on their psych profile is an important area of research, but the aforementioned subfields of econ already have well working assumptions about how people will behave in the aggregate, even if they can't derive it from some exact utility function.
- mlindner 6y ago
  > The problem with the "rational agent" model is that it's a tautology. Yes sure everyone wants more utility, great, but everyone's utility function is slightly different. As you say some are risk takers pursuing insane rewards/yields/profits with low probability, while others are super risk-averse conservative in their choices, etc. There's nothing in the rational agent model that assumes that everyone has the same definition of utility function. Different people want different things.
  - pas 6y ago
    Yes, of course, but that's what I mean by problem. Saying people are (bonded rational) utility function maximizers doesn't give us a predictive theory, it just means in a fancy way people do what they do for "reasons", and everyone usually have different set of reasons. Of course, it's fine as a very-very general fundamental theory, if you then want to study how people's revealed and non-revealed (old names for implicit and explicit) preferences aggregate into a utility function. (There's a whole bunch of math about pairwise comparison matrices. Lately there's some movement in that space about using perturbation to model inconsistencies in preferences, etc.)
- pradn 6y ago
  Yes, if people are rational actors, whatever they do is rational according to their private utility function. So, if anything they do is rational, then how is it "rational", which supposedly depends on some objective metric?
  - pas 6y ago
    It's rational because objectively the agent does what is best for it. Basically that's the definition of being rational. But without any qualifications, constraints, or additional context this description of decision theory is not really useful. (That was the point I tried to convey in my original comment.) What even the general theory is useful for, is to quickly reduce the question of the very general behavior/decision problem in to "show me your utility function and I'll tell you what you will do". Of course then that becomes a problem. How to model utility, how to formalize expected utility over all possible actions. What about priors (as in path-dependence, so do we want to encode that into the utility function - and constantly dynamically update the function, like a Bayesian agent would update its beliefs - or somehow manage it separately)? ... Basically I was trying to persuade people to don't say things like "economists are dumb, because people are not rational utility maximizers", because that's a false implication. Of course they are, but - just like you said - this doesn't help us better predict people's (agents') behavior, just gives us a new task to model their utility functions. And that's where regret comes in. (Which is basically risk-aversion, which is what behavioral economics studies. People are not symmetric about positive and negative expectations. They value avoiding negative-utility events more than they value encountering positive-utility events. And of course with this insight now we can build better economic models - for example we can use this to "explain" why wages are more sticky - especially downward - than we would expect, also with some handwaving we can explain why in times of crisis people are let go instead of decreasing their hourly compensation, why some people are so gullible [peer pressure, confirmation bias ~ cognitive dissonance], and so on.)
agumonkey 6y ago
> "rational actors with regret minimization." I keep seeing something like this in workplaces people don't join forces they avoid friction. Until something (crisis) or someone (capable leader) flips the thing on its head.
- callalex 6y ago
  Follow the incentives. Any individual employee is massively incentivized to keep their job. There is a slight chance that a certain leader may be incentivized to bring success to the company. That is the exception, not the norm. I learned this the hard way by caring about companies that didn’t care about me.
  - agumonkey 6y ago
    'keeping your job' implying submission to social pressure to be accepted and nothing more ? I'm not sure I got your whole argument, so if you have more details, I'd be happy to read :)

by pradn 6y ago

webmaven 6y ago

> Classical economics thinks of people as "rational utility-maximizing actors", which doesn't approximate reality in quite a lot of ways. There's been a move toward more sophisticated models - like that people minimize regret more than they seek the optimal reward ("rational actors with regret minimization") Even when entities (corporations, for example) are trying to maximize utility, and an optimal decision is desired, there are issues with how much time and resources can be spent making decisions, so optimality has to be bounded in various ways (do you wait for more information? Do you spend more time and compute on calculating what would be optimal? etc.).

pas 6y ago

The problem with the "rational agent" model is that it's a tautology. Yes sure everyone wants more utility, great, but everyone's utility function is slightly different. As you say some are risk takers pursuing insane rewards/yields/profits with low probability, while others are super risk-averse conservative in their choices, etc. That said, economics doesn't rest on this. Macroeconomics doesn't care, nor micro/labor/health/sports/developmental econ either. Sure trying to predict how someone (and more interestingly how groups) will behave based on their psych profile is an important area of research, but the aforementioned subfields of econ already have well working assumptions about how people will behave in the aggregate, even if they can't derive it from some exact utility function.

mlindner 6y ago
> The problem with the "rational agent" model is that it's a tautology. Yes sure everyone wants more utility, great, but everyone's utility function is slightly different. As you say some are risk takers pursuing insane rewards/yields/profits with low probability, while others are super risk-averse conservative in their choices, etc. There's nothing in the rational agent model that assumes that everyone has the same definition of utility function. Different people want different things.
- pas 6y ago
  Yes, of course, but that's what I mean by problem. Saying people are (bonded rational) utility function maximizers doesn't give us a predictive theory, it just means in a fancy way people do what they do for "reasons", and everyone usually have different set of reasons. Of course, it's fine as a very-very general fundamental theory, if you then want to study how people's revealed and non-revealed (old names for implicit and explicit) preferences aggregate into a utility function. (There's a whole bunch of math about pairwise comparison matrices. Lately there's some movement in that space about using perturbation to model inconsistencies in preferences, etc.)
pradn 6y ago
Yes, if people are rational actors, whatever they do is rational according to their private utility function. So, if anything they do is rational, then how is it "rational", which supposedly depends on some objective metric?
- pas 6y ago
  It's rational because objectively the agent does what is best for it. Basically that's the definition of being rational. But without any qualifications, constraints, or additional context this description of decision theory is not really useful. (That was the point I tried to convey in my original comment.) What even the general theory is useful for, is to quickly reduce the question of the very general behavior/decision problem in to "show me your utility function and I'll tell you what you will do". Of course then that becomes a problem. How to model utility, how to formalize expected utility over all possible actions. What about priors (as in path-dependence, so do we want to encode that into the utility function - and constantly dynamically update the function, like a Bayesian agent would update its beliefs - or somehow manage it separately)? ... Basically I was trying to persuade people to don't say things like "economists are dumb, because people are not rational utility maximizers", because that's a false implication. Of course they are, but - just like you said - this doesn't help us better predict people's (agents') behavior, just gives us a new task to model their utility functions. And that's where regret comes in. (Which is basically risk-aversion, which is what behavioral economics studies. People are not symmetric about positive and negative expectations. They value avoiding negative-utility events more than they value encountering positive-utility events. And of course with this insight now we can build better economic models - for example we can use this to "explain" why wages are more sticky - especially downward - than we would expect, also with some handwaving we can explain why in times of crisis people are let go instead of decreasing their hourly compensation, why some people are so gullible [peer pressure, confirmation bias ~ cognitive dissonance], and so on.)

agumonkey 6y ago

> "rational actors with regret minimization." I keep seeing something like this in workplaces people don't join forces they avoid friction. Until something (crisis) or someone (capable leader) flips the thing on its head.

callalex 6y ago
Follow the incentives. Any individual employee is massively incentivized to keep their job. There is a slight chance that a certain leader may be incentivized to bring success to the company. That is the exception, not the norm. I learned this the hard way by caring about companies that didn’t care about me.
- agumonkey 6y ago
  'keeping your job' implying submission to social pressure to be accepted and nothing more ? I'm not sure I got your whole argument, so if you have more details, I'd be happy to read :)