On the methodological assumption of stable preferences in economics

After a long absence from this blog, I am sharing some short papers and essays that I have been writing for various courses at UPENN, Fall 2018.

From the Philosophy of Economics course, I begin with sharing a brief response paper on the topic of “The methodological assumption of stable preferences in economics”. Enjoy!

 

On the methodological assumption of stable preferences in economics

In a seminal economic study1)Becker, Gary S., The economic approach to human behavior, Chicago: University of Chicago Press, 1978., Gary Becker famously defended a core methodological assumption of his economic approach, namely the stability of preferences. The first chapter of the book aims at debunking inappropriate introductions of “irrational behavior, unnecessary folly, ad hoc shifts in value”2)Becker (1978), pp.11-12. into economic analysis, for its full explanatory power critically depends on a consistent set of hypotheses. Among these, stable preferences are introduced as a means to strengthen economic predictions: improvements upon their accurateness cannot be achieved, unless the economist refrains from explaining wrong predictions away through ad hoc changes of preferences and behavior.

As Becker himself admits, though, “economists generally have had little to contribute […] to the understanding of how preferences are formed”3)Becker (1978), p.5.: verifying the validity of that core assumption is therefore a task that could be handed down to psychology. The development of psychology into its behavioral branch has shown, among other things, that “alternative descriptions of a decision problem often give rise to different preferences”4)Tversky, Amos, and Daniel Kahneman. “Rational Choice and the Framing of Decisions.” The Journal of Business, vol. 59, no. 4, 1986, pp.251-278. http://www.jstor.org/stable/2352759., thereby invalidating on empirical grounds what classic economic theory had originally assumed at its core: that given an unchanged set of information, preferences should remain stable. A broader methodological question though now arises: has psychology any role in redefining the basic structure of economic theory? Robbins thought that that is not the case, as economic postulates would depend from psychological novelties no more than “multiplication tables” do.5)Robbins, Lionel. “The nature and significance of economic science”, in Hausman, David M. The philosophy of economics: an anthology, Cambridge: Cambridge University Press, 2008, p.82. To a contemporary reader, this thesis is hard to defend, but it appears contradictory even by what Robbins itself affirms a bit later: “if we are to do our job as economists, if we are to provide a sufficient explanation of matters which every definition of our subject-matter necessarily covers, we must include psychological elements.”6)Robbins (2008), p.85. A charitable reading could stress that Robbins’ thesis is defended on the grounds that a theory of value can be established in a non-hedonistic fashion – that is, non-psychologically; hence his claim should not be affected by any theory of preferences. That claim, though, dictates that the economic relevance of the theory of value not only depends on individuals who “can arrange their preferences in an order, and in fact do so”7)Robbins (2008), p.79., but also on their rationality8)Robbins (2008), p.95. – where “rationality” is usually understood as the ability to grade preferences consistently, so that unless new information is provided, they shall not be changed. What behavioral psychology points at is that a mere change of description affects the grading, even though no relevantly new economic information has been provided.

New accounts of economics have tried to integrate at their core the structural change of preferences, as a way to increase – not weaken, contrary to what Becker thought – its predictive powers. For a satisfying economic theory should not withdraw from any discrepancy shown by new empirical findings, by burying its head into allegedly “indisputable facts of experience”9)Robbins (2008), p.79. – but rather embrace what other social sciences have to offer as a more accurate description of human behavior, and strive to include them in a larger framework. To this last methodological guideline, I think, Becker would have agreed.

 

 

References   [ + ]

1. Becker, Gary S., The economic approach to human behavior, Chicago: University of Chicago Press, 1978.
2. Becker (1978), pp.11-12.
3. Becker (1978), p.5.
4. Tversky, Amos, and Daniel Kahneman. “Rational Choice and the Framing of Decisions.” The Journal of Business, vol. 59, no. 4, 1986, pp.251-278. http://www.jstor.org/stable/2352759.
5. Robbins, Lionel. “The nature and significance of economic science”, in Hausman, David M. The philosophy of economics: an anthology, Cambridge: Cambridge University Press, 2008, p.82.
6. Robbins (2008), p.85.
7, 9. Robbins (2008), p.79.
8. Robbins (2008), p.95.