The Empirical Evidence Against Utility Maximization
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.
Funny Comic which illustrates an important theme of the paper.
REFERENCES for the Paper
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."
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