Thursday, September 25, 2014

The preference whisperer

I had a chat today with a freshly minted PhD from an elite US economic school about rationality and utility maximisation. As you do.

There was simply no phenomena he could not explain with his beloved utility theory. But if the theory explains everything imaginable, then it predicts nothing. I resolved that the theory as it stands, in the revealed preference form, was not falsifiable, though he didn’t seem to understand why that would matter.

I’ve since dubbed him the preference whisperer - someone who can observe any apparently illogical combination of behaviour and reverse out a utility function that is consistent with that behaviour. Insurance, check, Gambling, check. Addiction, check, Suicide, check. 

Of course I could develop a theory of space monkeys controlling the universe that fits will all observable phenomena. I could add a sense of mathematical rigour to it by demonstrating that our space monkey is optimising confusion in human society to amuse himself through the infinity of time his poor immortal soul is cursed with. 

You would laugh it off of course. But for some reason you are not laughing off utility theory just yet. Over the decades an air of credibility has sprung up around the idea. Economists who believe it to represent reality sometimes wear suits, have fancy degrees, and jobs in the respected halls of academia.

Yet the theory remains as unfalsifiable as my theory of space monkeys pulling the strings of the universe. And it makes the same predictions. In my view, a theory without falsifiability or predictability is no theory at all.

2 comments:

  1. "I resolved that it the theory as it stands, in the revealed preference form, was not falsifiable, though he didn’t seem to understand why that would matter."

    If someone is in a "science" as economics sometimes fancies itself, and doesn't understand the idea of being able to falsify a theory, than they really have the most rudimentary ability to evaluate the correctness of a theory.

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  2. Then check out economic sociology, anthropology, and political economy (although some of the latter is now firmly embedded in flying money, er, rational choice.

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