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> A better question might be "Is Homo Economicus a Strawman?" > To which the answer is: yes, it is. Classical economics does not actually assert that individua

> A better question might be "Is Homo Economicus a Strawman?" > To which the answer is: yes, it is. Classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner. (Actually, classical economics does, in the sense that markets follow a price-demand curve rather than a wiggle as seen experimentally.) Worst yet, though: it's sheer lunacy. In the words of Steve Keen: > Consider, for example, your regular visit to a supermarket. The typical supermarket has between 10,000 and 50,000 items, but let’s segment them into just 100 different groups. How many different shopping trolleys could you fill if you limited your decision to simply whether to buy or not buy one item from each group? You would be able to fill two to the power of one hundred shopping trolleys with different combinations of these goods: that’s 1,267,650,600,228,229,401,496,703,205,376 trolleys in total, or in words over 1,000 million trillion trillion shopping trolleys. If you could work out the utility you gained from each trolley at a rate of 10 trillion trolleys per second, it would take you 100 billion years to locate the optimal one. Obviously you don’t do that when you go shopping. http://rationalwiki.org/wiki/Homo_economicus http://rationalwiki.org/wiki/Homo_economicus

enoch_r 12y ago
You're responding to the claim that "classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner" with an argument that it is impossible for individual humans to behave in a purely rational and fully-informed manner. The only part of your comment that addresses the actual point of disagreement is "(Actually, classical economics does.)" As an aside, Keen's argument is silly. "Rationality" does not require that one must perform a search through every possible permutation of items. One might as well claim that it's impossible to draw a straight line from A to B because there are infinitely many lines from A to B we must search through to find the one we're looking for.
- TheOtherHobbes 12y ago
  >"Rationality" does not require that one must perform a search through every possible permutation of items. And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. So which is it? Is "market efficiency" rational or not? As for the original claim - of course it's true. Any sane study of the financial industry should make it obvious that the last people you want to manage anything are those who are motivated primarily by profit - precisely because they inevitably lack empathy and awareness of the social costs of their "rational" decisions.
  - enoch_r 12y ago
    Imagine I argue that, to sort an array of n integers, I must ask myself "is this permutation the sorted array?" for every n! permutations of the integers. Thus it is obvious that humans cannot correctly sort a list of 100 numbers, because even if I could correctly determine whether a given array of 100 numbers is sorted in a single second, it would take 9.3 × 10^157 seconds to sort such an array. This is clearly silly, because I ignore all the other algorithms for sorting such an array--I assume that the only available option is something comically inefficient. In just the same way, when Steve Keen argues that it's impossible that my purchases are rational because choosing rationally requires me to iterate through every possible bundle and select the best one, he is making big assumptions about the type of problem I face, the tools available, and the meaning of rationality. > And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. As others in this thread have explained, question of whether markets usefully approximate this kind of optimization is distinct from the question of whether individual people perform this optimization successfully. Deviations from efficient markets absolutely occur--the question is what my priors should be. The fact that, for example, it's extremely difficult to reliably identify and profit from financial market inefficiencies suggests that, in fact, markets really do behave astonishingly well, given all that we know about human irrationality.
  - AnimalMuppet 12y ago
    > >"Rationality" does not require that one must perform a search through every possible permutation of items. > And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. I don't see the problem. To me, it seems perfectly reasonable to say that people (and the market) can usefully approximate the optimization in question, and therefore do not have to search through every possible permutation. That is, I see no contradiction between your quote from the GP, and the efficient market hypothesis (at least, the EMH as a useful approximation).
chimeracoder 12y ago
This is like claiming that physicists are "wrong" because they spend time thinking about a frictionless vacuum[0]. > (Actually, classical economics does, in the sense that markets follow a price-demand curve rather than a wiggle as seen experimentally.) That's the difference between the limitations of an idealized model and the limitations of experimental process. That doesn't mean that either one is "wrong", any more than it would in the physical sciences. > Obviously you don’t do that when you go shopping. Correct - classical economics describes the behavior of rational actors with perfect and symmetric information. In this case, there are significant, non-zero costs to obtaining perfect information. That doesn't mean that the principles behind classical economics are false, were those assumptions to hold. And it doesn't mean that the model is useless even absent those assumptions. Just as physicists can reason about frictionless vacuums and use that to inform their understandings of the real world (with friction and air), economists can reason about perfectly rational actors with perfect and symmetric information, and use that to inform their understandings of the real world (with possibly irrational actors and asymmetric and/or imperfect information). [0] https://xkcd.com/669/ https://xkcd.com/669/
- nickff 12y ago
  >"classical economics describes the behavior of rational actors with perfect and symmetric information." Where does it describe the problems this way? Smith's "An Inquiry into the Nature and Causes of the Wealth of Nations" is not a theoretical exercise in a moral and emotional vacuum, but an explanation of how development and prosperity come to be in the real world.[1] There are some examples laid out by classical economists which make the assumptions that you describe, but those assumptions were not key tenets of the classical school. Men like Ricardo and Bastiat spent their time addressing the real world, with all its corn laws, broken windows, and import tariffs; instead of the physicist's "friction-less vacuum". [1] http://en.wikipedia.org/wiki/The_Wealth_of_Nations http://en.wikipedia.org/wiki/The_Wealth_of_Nations
eli_gottlieb 12y ago
Technically, since you're buying one item from each group or not, you only actually need 100 bits of information to complete the search problem, unless you assume conditional structure of utility between the 100 groups. Mentally asking and answering a mere 100 yes/no questions is not at all hard, especially since you can use cached answers of the form, "I am a man, so I don't need women's hygiene products today."

enoch_r 12y ago

You're responding to the claim that "classical economics does not actually assert that individual humans behave in a purely rational and fully-informed manner" with an argument that it is impossible for individual humans to behave in a purely rational and fully-informed manner. The only part of your comment that addresses the actual point of disagreement is "(Actually, classical economics does.)" As an aside, Keen's argument is silly. "Rationality" does not require that one must perform a search through every possible permutation of items. One might as well claim that it's impossible to draw a straight line from A to B because there are infinitely many lines from A to B we must search through to find the one we're looking for.

TheOtherHobbes 12y ago
>"Rationality" does not require that one must perform a search through every possible permutation of items. And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. So which is it? Is "market efficiency" rational or not? As for the original claim - of course it's true. Any sane study of the financial industry should make it obvious that the last people you want to manage anything are those who are motivated primarily by profit - precisely because they inevitably lack empathy and awareness of the social costs of their "rational" decisions.
- enoch_r 12y ago
  Imagine I argue that, to sort an array of n integers, I must ask myself "is this permutation the sorted array?" for every n! permutations of the integers. Thus it is obvious that humans cannot correctly sort a list of 100 numbers, because even if I could correctly determine whether a given array of 100 numbers is sorted in a single second, it would take 9.3 × 10^157 seconds to sort such an array. This is clearly silly, because I ignore all the other algorithms for sorting such an array--I assume that the only available option is something comically inefficient. In just the same way, when Steve Keen argues that it's impossible that my purchases are rational because choosing rationally requires me to iterate through every possible bundle and select the best one, he is making big assumptions about the type of problem I face, the tools available, and the meaning of rationality. > And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. As others in this thread have explained, question of whether markets usefully approximate this kind of optimization is distinct from the question of whether individual people perform this optimization successfully. Deviations from efficient markets absolutely occur--the question is what my priors should be. The fact that, for example, it's extremely difficult to reliably identify and profit from financial market inefficiencies suggests that, in fact, markets really do behave astonishingly well, given all that we know about human irrationality.
- AnimalMuppet 12y ago
  > >"Rationality" does not require that one must perform a search through every possible permutation of items. > And yet you - or someone, inevitably - is also going to claim that markets are somehow magically "efficient" precisely because they're capable of usefully approximating exactly this kind of optimisation. I don't see the problem. To me, it seems perfectly reasonable to say that people (and the market) can usefully approximate the optimization in question, and therefore do not have to search through every possible permutation. That is, I see no contradiction between your quote from the GP, and the efficient market hypothesis (at least, the EMH as a useful approximation).

chimeracoder 12y ago

This is like claiming that physicists are "wrong" because they spend time thinking about a frictionless vacuum[0]. > (Actually, classical economics does, in the sense that markets follow a price-demand curve rather than a wiggle as seen experimentally.) That's the difference between the limitations of an idealized model and the limitations of experimental process. That doesn't mean that either one is "wrong", any more than it would in the physical sciences. > Obviously you don’t do that when you go shopping. Correct - classical economics describes the behavior of rational actors with perfect and symmetric information. In this case, there are significant, non-zero costs to obtaining perfect information. That doesn't mean that the principles behind classical economics are false, were those assumptions to hold. And it doesn't mean that the model is useless even absent those assumptions. Just as physicists can reason about frictionless vacuums and use that to inform their understandings of the real world (with friction and air), economists can reason about perfectly rational actors with perfect and symmetric information, and use that to inform their understandings of the real world (with possibly irrational actors and asymmetric and/or imperfect information). [0] https://xkcd.com/669/ https://xkcd.com/669/

nickff 12y ago
>"classical economics describes the behavior of rational actors with perfect and symmetric information." Where does it describe the problems this way? Smith's "An Inquiry into the Nature and Causes of the Wealth of Nations" is not a theoretical exercise in a moral and emotional vacuum, but an explanation of how development and prosperity come to be in the real world.[1] There are some examples laid out by classical economists which make the assumptions that you describe, but those assumptions were not key tenets of the classical school. Men like Ricardo and Bastiat spent their time addressing the real world, with all its corn laws, broken windows, and import tariffs; instead of the physicist's "friction-less vacuum". [1] http://en.wikipedia.org/wiki/The_Wealth_of_Nations http://en.wikipedia.org/wiki/The_Wealth_of_Nations

eli_gottlieb 12y ago

Technically, since you're buying one item from each group or not, you only actually need 100 bits of information to complete the search problem, unless you assume conditional structure of utility between the 100 groups. Mentally asking and answering a mere 100 yes/no questions is not at all hard, especially since you can use cached answers of the form, "I am a man, so I don't need women's hygiene products today."