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August 06, 2017

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Dave C

Max U is an average, there's a lot of noise, but the signal is max U.

My choice between Sainsbury's and Tesco is a habit, but it was a considered decision 10 years ago, and it's a decision that gets reviewed every few years. This is my strategy to maximise utility given that making a choice is a cost.

C.H.

It depends on your perspective. If you want to explain individual choices,then habits and other things are obviously important. But if you want to account for how markets work in the aggregate, how change in information affects demand schedules and so on, not sure how individual person actually make choice is that much important. Sensitivity to change in incentives and opportunity costs at some aggregate level is all that matter.

Brendan

Doesn't this just depend on U? One coudl argue people maximise U by satisfying their habits.

Luis Enrique

Max U obviously is not a complete description of human behaviour, and there will be contexts when something else is needed, but I don't see anything here to suggest max u is the wrong foundation in most settings. Max U doesn't say where preferences come from, could easily incorporate habit formation, and so what if we don't recalculate our max U every instantly? Of course things like rational inattention and other deviations from rat-ex have big implications in i.e. macro. But you tried to build economics from another foundation, such as supposing we acquire habits by some random process and thereon follow them mindlessly, I think you'd be going more wrong. And presuming people aren't the best judges of their own welfare can take you into very dangerous territory. Even though I realise it's not wholly true I'm glad that's where economics starts from, rather than helping itself to stories about false consciousness whenever it suits.

Timlagor

How about not assuming you know how people behave and make decisions before you start and actually making that a part of the study?

Steven Clarke

Regarding thinking of economics in more evolutionary terms, here is an excellent Paul Krugman speech where he is persuasive that the methods used in both subjects is more similar than you might think:

http://web.mit.edu/krugman/www/evolute.html

Some choice quotations:

"Evolutionary theorists, even though they have a framework that fundamentally tells them that you cannot safely assume maximization-and-equilibrium, make use of maximization and equilibrium as modelling devices - as useful fictions about the world that allow them to cut through the complexities. And evolutionists have found these fictions so useful that they dominate analysis in evolution almost as completely as the same fictions dominate economic theory."

"There are indeed economists who regard maximization and equilibrium as more than useful fictions. They regard them either as literal truths - which I find a bit hard to understand given the reality of daily experience - or as principles so central to economics that one dare not bend them even a little, no matter how useful it might seem to do so."

"It would be better if economists were more self-aware - if they understood that their use of maximization-and-equilibrium, like that of evolutionary biologists, is a useful fiction rather than a principle to be defended at all costs. If we were more modest about what we think our modeling strategy is doing, we might free ourselves to accommodate more of the world in our analysis."

gastro george

Life is too short to analyse the best electricity tariff I should use, which may not be the best tomorrow.

Britonomist

It's a matter of heuristics, but heuristics that are more beneficial/welfare maximizing get selected for - so you can say ultimately little changes.

robert flood

There are decision costs.

Blissex

«Max U doesn't say where preferences come from, could easily incorporate habit formation, and so what if we don't recalculate our max U every instantly?»

But then it becomes an empty concept: then "max U" means "whatever we subjectively think is max U".
The constraints of the neoclassical microfoundations as to "max U" are far stronger than that, and without those constraints the whole scam falls apart (and falls apart even with them, as S Keen and others have amply documented).

Jacques René Giguère

A fwe months ago while on a business trip,I searched for a good restaurant near my hotel. Arriving there, it looked familiar. Yep, I had been here the year before.
I went through the menu and ordered what seemed the best choices. When the meal arrived, it too look familiar. The same dishes I had ordered the year before.
Was I maximizing U as a rational customer as I told my students or acting out of habit after a first random choice?

PeteW

Blissex is right.
If Max U means "everything I do" then it means nothing, the concept is meaningless.
Change your supermarket regularly to keep costs down? You're maximising U.
Change it every few years when your partner nags you to keep the bills down? You're maximising U.
Never change you supermarket because you just can't be bothered, even though you're usually thrifty? You're maximising U.
Bollocks.

C.H.

Max U is not a theory of human behavior. It is neither explanatory nor predictive, it is merely a way to describe choices. Mainstream economists (I exclude behavioral economists here) are not interested in accounting for individual choices, they mostly study market dynamics. Max U is a convenient way to model choices and then to explore how market works depending on the kinds of choice people make (or the kinds of preferences people have), e.g. upward slopping demand curves with Giffen goods (in a partial equilibrium set up) or income effects (in a general equilibrium set up).

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