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

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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!

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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.

The 40/30/30 Rule

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Reminds me of the rule of Michael Kevin Powell that when you are 60% ready, go for it. The other 40% is your ability to think on your feet and resilience to the opposition and frustrations that will invariably pop up.

The Simple Dollar » The 40/30/30 Rule: "What is the 40-30-30 rule? Simply put, it’s an argument that when you prepare for anything in life, only 40% of the preparation is physical – the rest is mental. Thirty percent of preparation is technical skill and experience, and the second thirty percent is the willingness to take risks."

Slipperiness of the term "risk aversion" - thoughts of Andrew Gelman

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[ For the purposes of this post, I am defining "risk" as a "non-zero probability of a undesirable outcome. I believe this definition is consistent with everything in this post, including Andrew Gelman's original comment. ] Interesting post by Andrew Gelman: Slipperiness of the term "risk aversion" - Statistical Modeling, Causal Inference, and Social Science: "

But I'm bothered by the term 'risk aversion.' Why exactly is it appropriate to refer to strict rules on drug approvals as 'risk averse'? In a general English-language use of the words, I understand it, but it gets slippery when you try to express it more formally.

I understand what Alex is saying--people are afraid of the risk of an adverse drug reaction, with this fear being 'risk averse' rather than simple rational prudence if the cost of the risk aversion outweighs, in expectation, the risk being avoided. (After all, we don't call it 'risk averse' to avoid going down Niagara Falls in a barrel. The idea of 'aversion' is that one is evaluating a tradeoff using a rule that is more stringent than the calculation of expected values.)

Still, it's tricky to refer to this as 'risk aversion' in a general sense. In the drug-approval context, there are two risks--the risks from an adverse drug reaction, and, on the other side, the risk of something bad happening that could've been prevented by taking the drug. It's risk vs. risk. What if someone said we should approve just about every drug, so as to avoid the risk of some otherwise-preventable condition? That would be risk-averse in another way, right?

This stance might seem fanciful, but I actually think it's pretty common, if you shift the context just slightly. Having done some (academic) work on pest control, I've learned that the most effective method of reducing home roach infestation is to clean the place, put poison in the cracks in the walls, and seal the cracks. 'Bombing' the apartment doesn't really do the trick. It kills some roaches but then the others come back. And this is beyond whatever poisoning you might get from the pesticide that's sprayed all over.

Nonetheless, people just love, love that bombing. Every month in our building they put up a list asking who wants their apartment bombed, and lots of people sign up. (And, beyond these individual choices, there's an institutional choice to bomb people's apartments for free. Nobody's offering to clean and seal our apartments for free.) Every month they do it, so I'm pretty sure the roaches are coming back.

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To get back to the main point of discussion, this behavior can be viewed as risk-seeking or risk-averse. Risk-seeking because people are taking on a risk of being exposed to poison and basically getting nothing out of it. Or, risk-averse because people are willing to do something pretty extreme to avoid the risk of roach exposure. In general, the 'take a pill for it' or 'bomb it' attitude can be seen as risk-averse. Or not, depending on how you look at it.

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My Comment:

Yes, I think I understand what you are saying. Converting your wealth to *any* basket of goods has risk. Turn all your wealth into gold, fearing inflation, and you are badly situated for a Mad Max Carmageddon rapid societal collapse (if you try to trade gold for firearms, you will simply have the firearms pointed at you). Turn *all* your wealth into gasoline and Chevys and firearms, and you are badly situated for any other possible world. Any action carries risk, any bout of inaction carries risk. So I understand your point to be: instead of having the cultural norms pick which risks count and which risks don't count, and describing some actions as "risk averting", rigor demands specifying the risks for all actions and also for inaction, and specifying how you rank or discount risks relative to each other. I meant to open up my copy of Sam Savage's _Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty_ and see what he wrote about "risk aversion". The whole book is commendable - readable and rigorous.