Regardless of the nature of the underlying evaluations, preference orderings are valid as long as they fit the formal conditions such as transitivity that allow them to lead to utility functions with the desired mathematical properties.
An agent can make choices based on her own self-interest or the well-being of family and friends, various communities to which she belongs, or the global population. In other words, the entire span of generally utilitarian orientations can be represented by preference orderings without any supplementation at all. Amartya Sen discussed this possibility in the context of commitment , and it can also be stated in the deontological language of principles , motivations often ethical in nature that do not respond as quickly as do preferences to marginal changes in cost.
This is not to say that principled behavior is completely invariant with respect to cost, only that it takes a significant change in cost to do so. We see people every day devote a significant part of their well-being and sometimes their entire lives to promoting a cause.
We applaud and admire them when we find their cause to be just—and are horrified when we do not—but in both cases we recognize that these people have elevated a broader ideal above mere preferences in their decision-making, and again, not in a way that allows for trade-offs at the margin. The behavior of the person who donates money to the animal shelter and does not change her gift in response to small changes in her financial situation could be interpreted and modeled in terms of preferences but this would be a misrepresentation.
The absence of marginal trade-offs would seem puzzling unless it were acknowledged that her gift is not an expression of a preference but rather a principle—and only with such an acknowledgment can her future behavior based on this principle be anticipated and predicted as much as is possible.
Not only are preferences and principles formally distinct, they are balanced by agents in different ways in different circumstances.
A principle may take precedence over preference in some decision-making contexts but not others. In some of these cases there may be a rule or determinative logic behind the priority given principle or preference, but in many cases it comes down to judgment , an intuitive faculty that by its nature cannot be reduced to rules. Judgment is necessary to rank different elements of interests in specific circumstances as well as to make decisions in cases in which those elements are evenly matched or truly incommensurate.
For example, she may know she should exercise in the morning, and may sincerely intend to the night before, but when she wakes up she may choose not to even though she still knows this to be in her interests. Even though the agent knows at all times that it would be better to act in her long-term interests, the short-term interests have a unique visceral pull on her that requires willpower to resist. Against this broader understanding of choice, behavioral economics becomes problematic due to its adherence to the core of the neoclassical model of choice, which is insufficient to explain the wide range of human choice despite behavioral improvements to it.
Rather than question the centrality of preferences, behavioral economics recommends that economists reconsider how preferences are informed and processed by agents to arrive at predicted choices different from those resulting from the neoclassical model, and are therefore unable to consider the full range of motivations in interests more broadly defined.
But the modified deliberative process that results from these critiques still focuses on preferences and ignores the broader set of motivations that comprise interests much less judgment and will. For example, satisficing behavior may serve as a rational heuristic to optimize time and effort, but it may be also be the result of a judgment call made in light of competing principles: the agent feels she needs to come to a decision quickly because she has a prior commitment to meet, for example.
This alternative understanding does not change the nature or value of the satisficing model, but it places it in a broader context that informs its use and motivation. In this example, the agent does not satisfice because she cannot make a perfect decision, or because she does not find it worthwhile in a global context, but because a principle constrained the amount of time and effort she can devote to that particular choice.
Nonetheless, this expanded ethical range of human motivations is represented solely in terms of preferences, with the resulting amenability to trade-offs, rather than the logically distinct principles and ideals, which resist trade-offs at the margin.
For example, Matthew Rabin explains the reciprocal nature of nonselfish behavior often seen in laboratory experiments. In a sense, the agent has a preference for fairness that is triggered by the fairness of others and which sits amongst preferences based on self-interest—and can be traded off at the margin in response to changes in opportunity cost. This modeling technique, wedded to the concepts of preferences and utility, rules out the possibility that agents can behave fairly because they believe it is right and even when the costs of behaving fairly rise to a point.
For example, the well-developed behavioral economics literature on procrastination provides us with many clever ways of understanding why people delay or put off arduous long-terms tasks for short-term pleasures, including time-inconsistent preferences, present-biased preferences, or preferences influenced by the greater salience of short-term payoffs. But none of these modifications to the neoclassical model speak to willpower itself; instead, they propose ad hoc alterations to preference designed specifically to generate irrational delay.
Once the agent makes a decision that maximally satisfies her preferences—however those preferences are conceptualized—it is taken for granted that the agent will act on that decision. But the entire problem of weakness of will is that a person does not act according to her own best judgment, but instead does something else.
However, because economics models, even with behavioral enhancements, do not allow for the distinction between decision and action, they cannot incorporate a true sense of will. As a result, they can explain why people have incentive to cheat on their diets or delay writing a term paper, but they cannot explain why people with those incentives resist the urge to cheat on a diet or procrastinate, and instead do the thing they know they should do regardless of incentives to the contrary.
Behavioral economics has also been criticized for sacrificing simpilicity; Jolls, Sunstein, and Thaler , defend the complexities added by behavioral economists by arguing that the predictive power of the neoclassical model is overstated, especially in light of behavior observed by experimental psychologists that led to the development of behavioral economics and which differs from mainstream predictions in systematic ways not merely increasing a symmetric error term.
They also argue that the neoclassical model is too general, which leaves it able to explain everything but predict nothing in particular; in other words, a model that allows for all behavior rules out none.
In contrast, Jolls, Sunstein, and Thaler argue, a behaviorally-informed model places sufficient restrictions on behavior to generate definite predictions and allow for falsifiability.
I would argue that accounting for principles, judgment, and willpower not only generates richer and more accurate explanations, but also results in better predictions in cases in which people base decisions on factors other than self-interested preference-satisfaction. Economic models of choice focused on preferences have no language or concepts to handle the observance of legal norms for the sake of legal norms, and for all of its contributions to these models on the margin, neither does behavioral law and economics.
As Robert Sudgen , writes:. How, without making normative judgments, do we determine what counts as complete information, unlimited cognition, or complete willpower? Even if we can specify what it would mean to have these supernatural powers, how do we discover how some ordinary human being would act if he were somehow to acquire them? This is where behavioral economists have made their point too well: if our cognitive biases, dysfunctions, and limitations are as pervasive as they argue, then imagining what a person would prefer or choose in the absence of them takes us out of the realm of actual human beings into pure speculation.
There are a myriad of reasons an agent may have chosen the hot fudge sundae even if she were fully aware that the fruit cup was the healthier choice. But an external observer who watched our agent choose the hot fudge sundae would likely assume that this reflected a binary, all-things-considered preference, instead of the result of a complex process involving preferences, principles, ideals, all processed by judgment and implemented by will.
The question of the existence of preferences before a choice situation is encountered, and the issue of rational versus irrational preferences, both too much emphasis on preferences to the exclusion of their primary source: interests.
If we instead conceptualize choice in terms of goals, principles, and ideals, as processed through judgment and will, preferences are revealed to be simply a modeling heuristic to enable mathematical representation of one narrow aspect of the choice process and derivation of a utility function.
For example, before the smartphone was introduced by Apple in , no one could have had a preference or taste for smartphones. As indicated by its unprecedented and continued success, however, we can assume that the smartphone fulfills significant interests of millions of consumers for more basic functions such as handheld computing, telecommunications capacity, and addictive games.
These interests could be represented by preferences, but preferences are secondary to interests themselves, and reducing interests to the much simpler and narrow logical form of a binary preference is reductive, especially when it obscures the greater complexity of decision-making. Because interests are multifaceted, complex, and subjective, no one other than the agent herself can know if even she does whether a particular decision or preference is reflective of her true interests.
There would be two results of such as acknowledgment. First, economists would be able to appreciate the many other factors that go into decisions other than those most easily rendered in mathematical form, leading to a richer understanding of choice that would also lead to better predictions if less easily implemented in mathematical form.
In those models, preferences are primary, and interests—the basis for preferences—are neglected altogether or reduced to self-interest or wealth maximization.
That done, the focus remains on preferences, the quality of which is called into question by anomalous experimental results that show choices deviating from the predictions based on simple self-interested motivations.
Rather than question the preference-based model or the simple interests assumed therein , researchers and policymakers conclude that there must be something wrong with preferences that can be fixed with behavioral modification to lead people to the choices they would have made had their preferences been rational, which by definition are choices in their best interests as judged as those crafting the policies.
Because scholars and policymakers choose to see only preferences, they miss the other factors that enter into decision-making, such as principles, ideals, judgment, and will, and so they wrongly presume to understand choice, why it goes wrong, and how it make it better.
This will not always be true, of course: we all make stupid choices from time to time, but the only ones who can know that they are stupid choices are the ones making them, who have a much better idea of their interests than anyone else outside of close friends and family. This is based not only on respect for autonomy, but an acknowledgment that people know their own interests in all their complexity better than outsiders do especially policymakers and that they can make reasonably sound choices in those interests.
In response to this, he contributed to the development of behavioral economics in the hope of providing the field with a more realistic depiction of human decision-making. As a result, behavioral economics has provided us with a wealth of invaluable knowledge and understanding of the imperfections of human rationality.
However, its continued focus on preference-satisfaction as the core of its model of decision-making furthers the positivist legacy of neoclassical economics, and compromises the significant advances that could be made in behavioral law and economics.
If a descriptively accurate and predictively successful model of human choice is the goal, behavioral economists and mainstream economists alike should acknowledge, and incorporate into their models, the breadth and complexity of interests, as well as the roles of judgment and will, that can encompass the wide range of human behavior—including legal behavior—that we observe every day. I wish to thank the guest editors for their extraordinary patience and encouragement, and two anonymous referees for insightful and enlightening comments.
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These are merely technical assumptions used to ensure the relevant functions are well behaved, thereby preventing perverse outcomes. If any of these four closure conditions are not met and there are, of course, more ways of meeting them than mentioned here constant conjunctions will not emerge.
Incidentally, t hat there are four M-H and four closure conditions is merely coincidence. Moreover closure requires far more than the M-H conditions: the latter are merely those explicitly mentioned in the theory. Other assumptions lie buried within the ceteris paribus clause; are attached to sub-components of the theory, such as diminishing marginal returns; or are made by omission.
Neoclassical economists know perfectly well that they are using falsehoods hence the reference to known falsehoods but often ignore the causes and consequences of constraints on their freedom to choose the M-H conditions, or assumptions in general.
They cannot choose assumptions on the grounds of their truth-likeness because the need to maintain systemic closure often overrides these and other considerations — such as descriptive adequacy. Faced with a decision between adopting an assumption that is known to be false yet closes the system, and one that is known to be true yet violates closure, the known falsehood must be chosen or the constant conjunctions will not emerge.
A damaging consequence o f adopting known falsehoods is that their presence removes explanatory power, for at least three reasons - on explanation see Runde The causal history of a phenomena is not merely if at all one couched in terms of the event s that precede the phenomena , but in terms of the underlying causal mechanisms.
One does not, for example, adequately explain the event of a lamp becoming illuminated simply by pointing to the event of flicking of the switch that preceded it. One does not adequately explain an increase in the demand for labour by pointing to the fall in wages that allegedly preceded it. The overriding necessity of closure requires the removal theoretically of course of all causal mechanisms that might violate the closure conditions.
So, for example, the theory of labour demand omits reference to trade unions, the introduction or abolition of labour laws and responses to them, government policy, political ideology, management systems, different working practices and so on, mechanisms that have considerable causal impact on labour demand.
But here is the rub: o nce removed from the theory these causal mechanisms cannot subsequently be recalled and offered as part of the causal explanation. Relevant causal mechanisms are either included in the theory, in which case they can contribute to the causal explanation, or they are excluded, in which case they cannot.
Prediction does not constitute explanation. Explanation entails the deduction of an event after it has or is known to have occurred.
Prediction entails the deduction of an event prior to knowledge of its occurrence. One can, however, predict without explaining anything at all. One can predict the onset of measles following the emergence of Koplic spots, but the latter does not explain measles. Even supposing an econometric model successfully predicted an event and the predictive power of neoclassical economics is arguably weak , the regression might be grounded in no economic theory whatsoever, or be grounded in a theory that contains known falsehoods.
In this case, even a successful prediction would not constitute an explanation. Consider an analogy. In explaining how my rubbish bags get ripped during the night, I might hypothesise that it is the work of a fox or I might hypothesise that it is the work of a ghost. The explanation involving the fox is advanced because I believe it to be true.
Two counter-arguments are commonly deployed to legitimise the use of known falsehoods. Now whilst abstraction is legitimate, the process is complex and cannot be elaborated upon here c. Sayer I defend my claim with the following observation. Theories like that of labour demand are replete with such obvious falsehoods that to suggest they are really legitimate abstractions is merely a rhetorical ploy to avoid methodological discussion. In any case, as noted above most neoclassical economists admit to knowingly using falsehoods.
There are two objections to this. Many of the previous false assumptions remain in place and, new false ones are added to ensure closure in this more complex system. Falsehood is then piled upon falsehood — and the dream of one day removing all false assumptions evaporates.
In short, the counter-arguments do not evade the critical realist critique. To the extent that neoclassical economic theory is rooted in the deductivist method, constant conjunctions of events, artificially closed systems and known falsehoods, it explains nothing at all. Notes 1. I wish to thank Paul Lewis for his careful comments. Deductivism is also found in some heterodox Austrian, Institutionalist , Marxist and Post-Keynesian economics whereupon these perspectives also become vulnerable to the following critique.
Neoclassical theorists do, of course, recognise that substitution between labour and capital is not ubiquitous and attempt to deal with it via non-convex isoquants. References Caldwell B. Lipton P. Fleetwood S. Hodgson G. Lawson T. Pratten S. Runde J. Archer, R. Bhaskar , A. Collier, T. Lawson, A.
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