Monday, December 28, 2009

Andrew Gelman on over-use of Economics Utility Model to explain all of psychological behavior

A pair of boots with one bootstrap visible.Image via Wikipedia
I was thinking about this recently. Many times, we can model people's behavior as a boot-strap process: people use a personal, informal, emotional process to decide whether to engage in rational (or semi-rational) utility analysis, or not.

[personal/informal/emotional process] ⇒ {{{decision point}}} ⇒ [begin rational utility analysis]

If they "drop out" at the decision point, nothing worth calling a rational utility analysis even gets started.

Many people are so overwhelmed by grappling with the critical issues of life, that they distract themselves into a silly stupor that makes a rational utility analysis impossible.

Andrew Gelman: Taxation curves and poverty traps - Statistical Modeling, Causal Inference, and Social Science: "
I think the concept of utility is extremely useful, and I've used it in my own applied work (see my papers on the utility of voting and on radon mitigation or the chapter on decision analysis in BDA). Utility is a model, and it's great.
My problem is when people think that the utility model can/should explain everything.
For example, as I've discussed on the blog, I don't think the utility model is particularly useful for explaining uncertainty aversion, seeing as the essence of the 'uncertainty aversion' phenomenon is that preferences can depend on how they are framed and how they are set up in terms of probabilities--two things that violate the classical von Neumann axioms in which preferences should only depend on the ultimate outcomes and their total probabilities, not on where these probabilities come from.
I think it's just sad that utility functions have become a default way of explaining all sorts of psychological processes that don't fit the model so well (requiring the sort of epicyclic adjustments that can make the model more trouble than it's worth). I can respect the general endeavor to take a model and push it as far as you can--to see what tweaks can be done to make it work further than it was originally intended--but, at some point, I think it makes sense to recognize the practical limitations of any mathematical model.
So, yes, I don't think utilities (or, for that matter, preferences) 'exist' in some Platonic sense. But I still think utility theory is great. I think the normal distribution is great, too, even though it can be misused in all sorts of ways!

Galton Box (demonstrates normal distribution)Image via Wikipedia
In a follow-up comment by Gelman:
Nathan (and Dan): I think prospect theory is great. I just don't like trying to explain uncertainty aversion using a nonlinear utility function of money (which, as I and others have shown repeatedly, makes no sense at all when you try to look at it quantitatively), and I really really don't like having to explain this to people over and over again, people whose technical ability is such that they could've realized in the first place the impossibility of explaining uncertainty-aversion-at-any-scale using a curving utility function. And I also don't like the term "risk aversion" casually used in a way that blurs three different phenomena: aversion to risk, aversion to loss, and aversion to uncertainty.
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