Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature

This paper has now been published: CITE as follows. PREVIOUS VERSIONS have different name: Empirical Evidence Against Utility Maximization. 

Karacuka, Mehmet and Asad Zaman (2012) "The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature" International Journal for Plurslism and Economics Education, Vol 3, No. 4, p366-414

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Currently under submission to IJPEE -- International Journal for Pluralism in Economics Education. 
Dear Author(s), 

We have received the review reports for your paper "The Empirical Evidence Against Utility Maximization". 

We require now that you implement in your submission the following recommendations made by the reviewers: 

Reviewer A Comments: 
================== 
Suggestions which would improve the quality of the paper but are not essential for publication: 
The article uses as reference many older studies about 64 in number (older than 2000), rather than new literature and data to support their arguments 

Changes which must be made before publication: 
in the context of "concern for fairness" ( page 3) the author is trying to prove his point by hypothetical game theory which does not constitute actual empirical data on human behavior in the context. If fact the author in paragraph 2 of page 4 stresses this point themselves, therefore negating the point of their own discussion. 
Also on page 4 the author(s) has put down an assumption of fairness which goes against the economic principle of self-interest 
On page 5, the author is stating that "all 4 of these insights are wrong". the author(s) is actually contexting teh primisis of Goeree and Holt (2001) rather than the economic theory itself. 
On page 12, "Moral values and cheating" is extensively detailed in the game theory and can be discussed in the primisis of the Ologopolistic Competation, but the utility analysis has mostly been discussed under perfect competation. the author failed to put theier assumptions of ologopolistic competation in their model. 


Reviewer B Comments: 
================== 
Suggestions which would improve the quality of the paper but are not essential for publication: 
This paper is a literature review covering various fields of mainly empirical research over various aspects of human behavior. While much of the material is already surveyed, the paper clearly offers new insights and combines literatures over wider fields than I have seen before. It has the potential of becoming a reference article, but needs then to be sharpened. 
General remarks: 
- Structure 
I observe several issues concerning structure that needs to be addressed 
o The authors partly structure the presentation by topic (Sections 1, 2, 3, 5 and 8) and partly by discipline (Sections 4, 6 and 7). Being confusing in itself, it also results in some overlap/repetition. 
o The Polanyi part does not fit in very well. It is not clearly linked to the topic of the paper. Certainly, Polanyiˇs insights are valuable, but here maybe mainly as a framing of the whole paper? But even using him that way may detract from the main focus. 
o In some sections you present initially some propositions to prove, in others not. You should preferably develop some form of systematic use of this tool 
o The conclusion is really not concluding the paper; it is rather a form of reflection on some methodological issues. While important, it does not (alone) fill the intended role of such a section. 
- Content 
I find much of the content well developed and interesting to read  note though the aspect of repetition already mentioned. I should, however, be possible to focus better. The paper seems to challenge Utility Maximization by emphasizing four issues: Computational capacity; multiplicity of preferences/motivations; decision over time (actually including partly some issues that concern computation/consistency and some that concern preferences/normative issues); and finally whether utility maximization is a good basis for human welfare. If I am right, organizing the paper along these four topics could be used to shorten the paper and make the messages more stringent. Added to that, I note 
o The authors define Utility Max differently throughout the paper. They start by referring to ˉgreedˇ. I think that is a wrong emphasis. The neoclassical literature refers to individual utility and using this form of ˉrhetoricˇsˇ actually weakens the paper 
o The paper is aimed on empirical evidence, but there are some parts where normative issues clearly surface  being especially clear in the ˉPolanyi partˇ. This weakens the argument given the focus of the paper. I think, however, focusing on welfare aspects towards the end is still fine as it links to practical implications. 
o The authors refer several places to the point that changes in the theory of human behavior have important policy implications. These should at least be briefly illustrated. While the paper is already very (too) long, the above proposals on structuring in four should help shortening it substantially and hence give room for more inputs here. 
o Several ˉempirical proofsˇ have no documentation/referred source(s). I noted this  for example  concerning the ˉstandard objectionsˇ at the middle of page 4; at the end of section 1.3; on page 10, first paragraph after point 3; bottom of page 12 (no ref. to Arrow and Solow); last part of paragraph 2, page 16; paragraph 2 page 19 and second last paragraph same page; last paragraph section 4.3; first full paragraph page 28; last paragraph page 40; last sentence of point 2, page 43 (relative income); 
o Sometimes the authors present explanations to observations as if they are empirically proven, while they are not. They should be very careful here, not least given their agenda! Let me give a few examples: 
刋 The reference to Batson and ˉtrue generosityˇ. First, does he use that concept? I know his work to be focused on altruism. Secondly, economists have opposed his conclusions by including internal motivations into the utility function  e.g., people may ˉfeel goodˇ by helping others. Hence, it is not true generosity/altruism that is observed, but individual utility maximization ˉin disguiseˇ. Certainly, by expanding the utility function including unobservable elements like this, the theory is rendered non-falsifiable  a high cost to try to rescue a theory. But because of this, Batson could not empirically disprove their proposal either. (For a discussion, see Sober and Wilson, 1998). This argument is equally ˉvalidˇ for the authorsˇ explanations for e.g., the results of the ultimatum game and the reasoning on page 2 and also later issues (e.g., the case on page 12). I do not disagree with the authors, I think the arguments used to expla in ˉright/honorable/fairˇ action by referring to ˉwarm glowˇ etc. is weak  note the case where a person risks his/her life to rescue a stranger that is in danger. But reasoning over what we think are human capacities/what it means to be human is not an empirical proof 
刋 Top page 4: the fifty-fifty split is based on ˉconsiderations of equity and fair playˇ. How do you know? 
刋 Second last paragraph of section 3.1: ˉSmart players anticipate thisˇ. How do you know that this is what happens? No evidence is given. Would it be possible to create such evidence? 
刋 Top of page 26: How do you know that this is explained by fairness considera-tions? 
These are just a few examples. Please, go systematically through the paper and erase, or rewrite/show necessary care at similar points. 
At page 21, you raise the issue of observables/unobservable motivations. The authors may want to discuss this issue more at length as it turns out to be so crucial to their reasoning. What role may reported motivations play? Some experiments include such information. 
o The authors often refer to ˉconflictsˇ in the paper. On most instances, it is not at all clear that what is discussed should be termed a conflict. It is at least not explicitly formulated as such 

Specific issues: 
- Abstract: Reference to Robbins and ˉindisputable facts of experienceˇ. Then you state: ¨Strong evidence has emerged from many different lines of research that these ¨simple and indisputable facts of experience〃 are contradicted by human behavior.〃 So where they at any point really facts? Your formulation is confusing.
- Page 3: No page reference to the citation to Mirowski. I think page references to citations are generally lacking in the paper 
- Page 6: ˉSelfish greedˇ. Is there any unselfish greed? 
- Page 6: Bottom: Reference to a paradigm shift without clarifying among whom 
- Page 8: Institutions/norms. You seem to treat norms as separate from institutions  top of page. I rather think it is quite accepted that norms are a very important form of institutions. Moreover, you talk of ˉcultural normsˇ and ˉsocial normsˇ. Any differences here? Personally I think one should only talk of ˉnormsˇ. They are per definition social or cultural constructs. 
- Page 8: The reference to chemistry in relation to methodological individualism is misplaced. MI is purely a social science issue. 
- Page 8: Zaman (2011) not in ref. list. Note: I observed this ˉby accidentˇ. I have not systematically checked this. 
- Page 9, footnote 1: As you have not presented the game as continuous, the note could be seen as redundant. 
- Page 11, point 2: The proposed explanation is unclear (but here still carefully formulated in the sense of emphasizing ˉplausibleˇ) 
- Page 12: At the top, it is referred to psychologists and internalization of norms. I lack a reference to the sociological literature here. Psychology  even social psychology  has a rather superfluous understanding of norm creation and internalization. It is like economics  mainly focused at the individual and not so much at social dynamics. 
- Page 13-14: At page 13 you ˉdeclareˇ that ˉCommunities can create and enforce social norms using education in formal and informal ways, as well as approbation, ostracism, and other mechanisms not available to markets or to governmentsˇ. At page 14 you next refer to Bowles and Gintis stating that ˉThey point out that communities are fragile, and government policies can make or break communities.ˇ The latter somewhat contradicts the former. Generally, I think there is no reason why at least not governments can also build norms. It may have some clear disadvantages, but e.g., information campaigns may exactly have that effect. 
- Page 14: ˉpersonal selfish utilityˇ? Is there an impersonal category?? 
- Page 19: Montreal Olympics were in 1976. 
- Page 20/bottom: Can a theory be ˉheld responsibleˇ? It may be ˉresponsibleˇ though. 
- Page 22/23: Value ambiguity seems to be different from incommensurability 
- Page 28: What is the source to the material in the first full paragraph? 
- Page 31/bullet point 3: No omniscient planner. But in the intro to these points you say that these papers deal with an omniscient planner situation 
- Page 35/bottom: Supply and demand cannot predict anything. You seem to refer to the theory of? 
- Page 36: The formulation of the Card and Kreuger anomaly is unintelligible to me. 
- Page 37/bottom: What is a ˉnatural social relationˇ? 
- Page 38 (you may decide to cut much of the Polanyi material, I nevertheless want to mention): 
o Point 1: ˉNatural R(?)esources are public propertyˇ. Well, many are privately owned. Do you mean public goods? If so, not all are. Very many are common-pool and some even private goods following the nomenclature of e.g., Ostrom. Both points made have a strong normative flavor. Moreover an example of formulations that are said to be conflicts but not formulated as such 
o Is it Douthwaite or you that say that the ˉbalance is negativeˇ. I guess it is the former, but by your formulation you at least embrace a statement that is highly contestable. I mean, environmental problems are tremendous and very challenging, but how to measure them on the same scale as GDP. Here you buy into commensurability assumptions in a way that I think goes against earlier arguments of your paper. 
o Last full paragraph: You refer to ˉour modelˇ=?? You also mention ˉvarying levels of ownershipˇ. Ownership is defined as categories. 
- Page 40/last paragraph: Source? 
- Page 42: Maybe consider mentioning newer sources also. This literature has ˉexplodedˇ and you should support the argument with referencing also others that Easterlin. 
- Page 45/bottom: What is best for somebody and distinguishing good from evil is not at all the same. 

Reference: 
Sober, E. and D.S. Wilson, 1998. Onto Others. The Evolution and Psychology of Unselfish Behavior. Cambridge, Massachusetts: Harvard University Press. 

Changes which must be made before publication: 
My proposals follows from the above. I will especially emphasize 
1. Reorganizing - create a clearer structure/avoid overlap - see above. Consider taking out the part on Polanyi 
2. Shorten 
3. Strengthen the referencing - parts with empirical calims but no source(s) offered. 
4. Be more careful concerning the explanation of observed behavior 

NOTE: Please send an email to the editor to acknowledge the reception of this email notification. The editor needs to make sure that messages reach the authors and don't delay the review process. 

rejected by Journal of Economic Surveys for being disrespectful to economists.
submitted to Journal of Economic Surveys on 3 Jan 2012
rejected by Kyklos on 2 Jan 2012
Finalized and submitted to  Economics & Society on 29th Nov. 2011.
Latest Version is EEAU12.doc; which is attached at bottom. 
Should Patients Receive Full Information about all the alternative medical choices and their risks? Article says NO!

Related Articles not cited or dropped from final version: Maximization Failures

The Empirical Evidence Against Utility Maximization

 

 

ABSTRACT

 

Current Economics Textbooks and Economists justify a theory of consumer behavior based on utility maximization on a priori grounds. This methodology follows Lionel Robbins’ idea that economic theory is based on logical deduction from postulates which are “simple and indisputable facts of experience.” Strong evidence has emerged from many different lines of research that these “simple and indisputable facts of experience” are contradicted by human behavior. In this article, we summarize some of main contradictions between predictions of utility theory and actual human behavior. Efforts to resolve these contradictions continue to be made within orthodox frameworks, but it appears likely that a paradigm shift is required.

 

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Thaler, Richard H. and Eric J. Johnson (1990). "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science vol. 36(6): 643-660 reprinted in QRE

 

Thaler, Richard H. and Sunstein, Cass R. (2008). Nudge: Improving decisions about health, wealth, and happiness. New Haven:Yale University Press. 

 

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JEL Classification: D010, D100

Keywords: Behavioral Economics, Utility Theory



REFERENCES for the Paper

 

Some BOOKS:

 1.         Colin Camerer: Behavioral Game Theory  - Evidence from Ultimatum Game (Dictator Game) and Prisoners Dilemma shows widespread violations of selfish maximizations

2.         Richard Thaler: Quasi Rational Economics: Mental Accounting models show how consumers allocate income into different types and therefore do not maximize as per economic theory models.

3.         Much Material in: Blackwell Handbook of Judgement and Decision Making

4.         Tastes are not exogenous, but are strongly influenced by socialization and advertising. Predictably Irrational by D. Ariely has very useful material on this topic.

5.      Gigerenzer and Todd (2000) Simple Heuristics that Make Us Smart [download link from http://library.nu -- first register]

6.       Gary Klein (2009) Streetlight and Shadows: Searching for the Keys to Adaptive Decision Making. 

5.         Dan Ariely, G. Loewenstein, Drazen Prelec: "Coherent Arbitrariness: Stable Demand Curves without Stble Preferences." QJE Feb 2003. Preferences are formed in course of decision making -- that is choices determine preferences rather than other way around. Subsequent choices are made consistent with initial ones which creates an illusion of existence of preferences and stability -- "the results imply that demand curves estimated from market data need not reveal true consumer preferences." 

6.         Frederic Lee "The Incoherent Emperor: A Heterodox Critique of Neoclassical Microeconomic Theory". View Download (history1.pdf)


Batson, C Daniel (1992), “Experimental Tests for the Existence of Altruism,”  PSA: Proceedings of the Biennial Meeting of the Philosophy of Science Association, Vol. 1992, Volume Two: Symposia and Invited Papers (1992), pp. 69-78