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I do, and no, not precisely, but I would prefer to have more wealth than less at any time step - that is a preference that is invariant. However, what may chang
by mrow84 6y ago
I do, and no, not precisely, but I would prefer to have more wealth than less at any time step - that is a preference that is invariant. However, what may change is the structure of the problem in front of me - the nature of the bets, or my time horizon (as I age). Realistic spending vastly complicates the situation for any analysis, but some basic spending pattern does not, and is effectively just an exogenous event that doesn't affect the analysis.
In EUT some of the response to changes in situation is modelled as a change of preferences, and encoded in the utility function - for example, older people may have different preferences to younger people, and those who have a lot of "good fortune" (perhaps through a good network) may have different preferences to those with few good opportunities.
This is fine, and it produces good results, but a more satisfying theory would be able to derive the behaviours from the problem itself. One claim is that this is not possible - that preferences are a fundamental primitive, but it isn't obvious to me that this is necessarily true.
To be clear, I would distinguish between irrational behaviours caused by lack of information, poor estimation or analysis, etc. and differences in rational behaviour caused by problem structure - here I am only considering the latter.
- kgwgk 6y ago> a more satisfying theory would be able to derive the behaviours from the problem itself See my other comment about prescriptive vs. descriptive. You can postulate some utility and derive the theoretical behaviour. You can observe some behaviour and try to infer the utility that would be consistent with it (assuming that the behaviour is rational, for some definition of rationality). EE can only do the former. Facing the same problem, people is not allowed to have different preferences. EE prescribes what rational behaviour is. EUT and EE are not incompatible. When solving an optimization problem EUT can use the same arguments that EE does to find the utility function to use. I don't think these results are new, but even if they were they wouldn't invalidate EUT. The point is that in the "prescriptive" setting the EUT framework can be used with whatever utility function makes sense for the problem. The basic theory doesn't tell you either what's the utility of inundating a valley to build a dam, or the utility of a floods if you don't. When you use EUT to find a solution to a problem you have to think about the problem.