Choice in economics

The other day, I woke up thinking I fancied toast for breakfast rather than my usual muesli. I got up, got dressed, put the kettle on…and got myself a bowl of muesli. Force of habit overcame my conscious choice.

I mention this because of a post by Jason Smith, in which he questions economists’ assumption that people make deliberate choices. “I do not think humans are "really thinking" about many of their economic choices” he writes. My breakfast was an example of that.

Now, I don’t want to get into high-falutin’ grand theory here. Instead, I’ll just suggest four things that might support Jason’s scepticism.

One is that a lot of our economic behaviour is like my breakfast – a matter of habit. Most of us are shat, showered, shaved and in the office before we’ve thought about it. We can waste half our lives this way. Our everyday labour supply “decisions” are to this extent unconscious. We’re more like unthinking automata than deliberate choosers.

So too is much of our consumer behaviour. Millions of us stick with the same banks, utilities and insurance companies out of habit, at least until a threshold of dissatisfaction is breached.

Savings behaviour also fits this pattern. Much of this takes the form of a monthly direct debit into a pension or Isa. And rightly so. It’s easier to get into satisficing habits than it is to make optimal ad hoc decisions. As Alfred North Whitehead said, “civilization advances by extending the number of important operations which we can perform without thinking about them.”

Secondly, the feasible set might be so small that there’s not much to choose from. Granted, even the poor can choose between Lidl and the pound shop – and perhaps have to make more deliberate choices between them than we richer people with our weekly Ocado habit. But they don’t really have a choice about how much to save. And many of us don’t have much choice of job (because of high job-specific human capital, not just loose labour markets). Nor do we have much choice of how much to work: it’s 40 hours a week or zero for many.

I suspect it’s no accident that the idea of economics as the study of individual choice only fully emerged in the late 19^th century – because before then, economic behaviour was mostly a matter of habit and tradition rather than choice. Peasants got up, worked the land and went to bed not because they chose to do so but because that’s just what they did for generations. Yes, things have changed since then. But by how much?

Thirdly, Maynard Keynes asserted that firms can have little knowledge of the future – a claim corroborated by Rosewell and Ormerod. This suggests we should think of entrepreneurship and investment projects not so much as conscious choices – and certainly not optimizing ones – but as a form of evolution in which the market selects (imperfectly) for randomish mutations. Maybe it’s only the hindsight bias that causes us to impute skill to successful businessmen.

Blind natural selection doesn’t just operate upon corporate strategies. Hayek argued that market economies and property rights also emerged via this process:

Rules generally tend to be selected, via competition, on the basis of their human survival value. (The Fatal Conceit, p20)

You wouldn’t describe an ant colony as being the product of the conscious, deliberate, maximizing choice of individual ants. Why, then, try to describe complex emergent human societies in this way? 

Fourthly, our economic behaviour and beliefs are shaped by the past – even the distant past. For example, American attitudes today (inequality (pdf), right-wing racist (pdf) whites and black “underclass culture”) is in part the product of 19^th century slavery – as is African under-development. To take another example, areas of western Europe that were conquered by Napoleon enjoyed faster economic growth decades later, in part because of the institutional changes he imposed. Or to take another example, the fact that the same surnames dominate elites over centuries in different societies points to a persistence in inequality that’s hard to reconcile with the idea that choice and agency determine our fates.

To all this we must add that our high incomes in the west are due not to our own actions but to centuries of growth. I’m one of the 1% of richest people who ever lived. Perhaps nine-tenths of this is due to having been born in the right place and time. To attribute this to my choice and agency would be a self-serving lie.

You might reply to all this that there mere fact that incentives matter suffices to establish agency. I’m not sure. Sunflowers turn to face the sun. They behave as if they are responding to incentives. But they have no agency.

I don’t think that in saying all this I’m saying there’s no role for choice; for that view, try Daniel Wegner’s The Illusion of Conscious Will. Nor am I saying that microfoundations never matter. Instead, when we ask “why did he do that?” we must look beyond “max U” stories about mythical individuals abstracted from society and look at the role of habit, cultural persistence and constraints. As someone once said, “men make their own history, but they do not make it as they please.”

Comments

[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).