V Lecture
Recursive relation between
preferences and choices
Wrap up of the previous lecture
• Methodological problem of inferring from price-choice
reversal data the phenomenon of preferences reversal.
• If the inference is incorrect, then the phenomenon at stake is
an artifact and the explanatory hypothesis (preferences as a
contingent for of information processing) is not testable.
• Triangulation method and lab-reality of preferences
reversal.
• The truth-value of the explanatory hypothesis can be tested.
Introduction.
Utility as the driving force of human behavior
• ECONOMICS: 1) Utility
is
a
numerical
representation of rational
preferences
(standard
view); 2) utility is a
hedonic measure that the
brain assigns to states or
events of the world
(behavioral foundation).
• Implication:
choices
reveal and not shape
utility (preferences).
• PSYCHOLOGY: utility is
hedonic in character but it
is ill-defined.
• Implication:
choices
shape utility through 1)
sensitivity to situational
factors; 2) memory of past
behaviors that might be
biased by situational
factors.
The standard view
•
Aim of RCT: providing a general
concept of rationality and a measure
of utility.
•
Representation theorem of expected utility
theory: analytical equivalence between
preferences consistency and utility
maximization (Bermudez 2009).
•
The concept of rationality has to
represent a class of entities, namely
individuals.
•
Definition of preferences in terms of
choices.
•
There is no gap between preferences and
choices so that rational choices always
reveal individual’s true preferences.
(Hollis and Sugden 1993)
•
There is no causal and substantive
assumption on preferences and utility.
•
•
Preferences relations are reduced to
logical ordering relations (Hollis and
Sugden 1993).
Rationality defined in terms of
consistency between preferences and
choices; utility is defined in notional
terms (numerical representation of
preferences).
Examples
• A professional billiard player chooses the direction to of the white
ball by following – most of the time - rules of thumbs. His behavior
satisfies geometrical laws that he does not know.
• Football players – in aggregate – kick on the grounds of their
experience. Their behavior is consistent with a mixed strategy in
Nash equilibrium.
• Chess players chose their moves by following – explicitly – logical
rules.
• We see how choices can satisfy theoretical predictions even if they
are not necessarily caused by a deliberate use of rationality
principles.
Interpretations of the standard view
• Normative interpretation: axioms
of rationality are normative
requirements and they describe
how the subject should behave.
• Prescriptive
interpretation:
axioms
of
rationality
are
requirements that prescribe how
the subject ought to behave.
• Positive interpretation: axioms of
rationality are positive properties
that describe the way people
behave under the assumption of
full rationality.
• In the first two cases deliberation
is required while in the latter it is
not.
• There is not a uniquely valid
interpretation of RCT and the
three interpretations do not
necessarily imply each other.
• In the positive interpretation we
notice the following asymmetry:
all reasons are causes while not all
causes are reasons.
Examples
• In a prisoner’s dilemma agents should exhibit preferences for defection. In
this case, subjects apply axioms of rationality after deliberation. However
this interpretation leaves open the possibility of having compelling reasons
(may be ethical) for not being an utility maximizing agent (normative
interpretation).
• In a prisoner’s dilemma subjects have compelling reasons to implement the
rational strategy of defection. In this interpretation axioms of rationality are
restrictions on our compelling reasons of choice (prescriptive
interpretation).
• In a prisoner’s dilemma agents behave in an utility maximizing manner. In
this case, axioms of rationality simply describe behaviors and they are
compatible with a wide range of causes (positive interpretation).
Behavioral foundation
• Characterization
hedonic terms.
• Utility is an universal feature of
human nature.
• Unilateral causal relation between
preferences
and
choices:
preferences are causes of choice
behaviors but the inverse does not
holds (preferences exogeneity).
• Utility is a real cause of behavior
(Bruni and Sugden 2007).
• Empirical hypothesis: rational
actions are a reliable basis to infer
hedonic utility and preferences.
• Axioms of rational consistency
describe a real preferences
structure.
• The behavioral foundation of
RCT is consistent with a RPT’s
interpretation of preferences.
of
utility
in
• Positive interpretation of standard
theory: deliberation is not a
necessary condition for rationality.
Example
• In repeated pricing-choosing tasks subjects exhibiting
preferences reversals can be turned into “money pumps”
(Lichtenstein and Slovic 1971).
• Subjects learn from the bad consequences of their choices.
• If learning is allowed then preferences reversals disappears.
i.e. second price auctions (Cox and Grether 1996).
• If subjects exhibit the same pattern of choices between
pricing and choosing tasks, then their choices are a reliable
basis to infer their hedonic utility.
Implications
• Actions do not influence rational preferences. This means
that we always implement rational actions on the grounds of
a given preferences ordering.
• Preferences are context-independent. Rational preferences
are discovered rather than learnt (DPH).
• Preferences are path-independent. The way we come to
implement rational choices is causally irrelevant for what
concerns the structure of rational preferences: preferences
are discovered and not learnt.
Problem
• We have evidence that in repeated interactions preferences
reversals disappear (Cox and Grether 1996).
• The consistency between choosing and pricing confirms
theoretical predictions.
• Considering choices as a reliable basis to always infer
utility is a stronger assertion and it implies DPH.
• To falsify DPH we need evidence of consistent behavior
that does not allow for a reliable inference of the subjects’
true utility: we need evidence of a recursive causal
relationship between preferences and choices.
Coherent arbitrariness of
preferences (Ariely et al. 2003)
•
•
•
•
Experiment: 1) participants are asked to state if
they would pay a given price for bottles of wine
corresponding to the last two digits of their
social security number; 2) participants are asked
to bid for the bottles in an auction.
Results: people with higher social security
number bid more than people with a lower one.
These patterns of behavior do not converge
across market (anchoring effect).
Arbitrariness: the value attribution is determined
by the normatively irrelevant cue of social
security number. Coherence: people start to
choose in a consistent way bearing on their
initial (arbitrary) valuation.
Coherent arbitrariness
phenomenon.
is
a
long
run
•
In new situations choices are highly
responsive to normatively irrelevant
stimuli.
•
This foundational choice exerts a
normatively inappropriate influence on
future choices so as to characterize the
emergence of the orderly pattern.
•
The orderly pattern of choice is market
specific.
•
We can identify a recursive relation
between preferences and choices due to
preferences responsiveness to the cue
dimension of the external stimulus.
•
Our coherent choices might reflect an
arbitrary and biased set of preferences.
Original attribution of value
• The original attribution of value - the first time
that you evaluate an object – is highly variable
and malleable.
• Relative preferences provide the order of
original valuations.
• Axioms of rationality apply only to relative
preferences.
Relevance of original attribution of
value
• Such variability of the original attribution of
value might lead to the emergence of market
specific patterns even in logically equivalent
interactions. These patterns of behavior are a long
run phenomenon (i.e. coherent arbitrariness).
• The variability of the original attribution of value
is explainable through cognitive sciences.
• Therefore, cognitive science might integrate the
explanation of economically relevant phenomena.
Memory and preferences formation
• Arbitrary determination of the
value of wine bottles (Ibidem) and
coherence of subsequent bids.
• Difference between reinforcement
learning
and
learning
by
experience.
• Observation of past choices and
inference of hedonic utility.
• Reinforcement learning: finetuning predictions of hedonic
utility of different courses of
actions.
• Acting in accordance with the
inferred utility.
• People ignore the possibility that
their foundational choice might be
determined
by
normatively
irrelevant stimuli.
• Learning by experience: past
behavior is an arbitrary set point
not necessarily related to hedonic
utility: i.e. anchoring effect due to
SSN.
Problems in measuring utility
• Do actions shape hedonic utility or do they bias the
subjective estimation of utility?
• If individuals are not endowed with a well-defined
structure of preferences, then both possibilities are
allowed (PCH). If they do are endowed with a well
defined structure of preferences, then actions can only
bias utility in the short run (DPH).
• Inference problem: are choices due to biased or
“shaped” preferences?
Conclusions
• The behavioral foundation of economic theory
implies that 1) actions do not influence
preferences; 2) preferences are contextindependent; 3) Preferences are path-independent.
• Empirical analysis identifies a recursive causal
relation between preferences and choices so as to
falsify the mentioned implications.
• Metrical problem: do actions shape or bias
hedonic utility?