Effective Altruism and the Unavoidability of Ethical Trade-Offs

The so-called “effective altruism” (EA) movement has recently received a significant attention in the press. Many articles have been critical of EA for various reasons that significantly overlap over the general theme that too much quantification and calculus implies the risk of losing the “big picture” of the issues related to charity and poverty. The last example is an article published on the website “The Conversation”. The author’s main argument is that as a reason-based approach to charity and poverty, EA proponents ignore the fact that ethics and morality cannot be reduced to some “cold” utilitarian calculus:

“[EA proponents] have PhDs in the disciplines requiring the highest level of analytical intelligence, but are they clever enough to understand the limits of reason? Do they have an inner alarm bell that goes off when the chain of logical deductions produces a result that in most people causes revulsion?”

According to the author, a society full of “effectively altruist” people would be a society where any ethical issues would be dealt with through cold-minded computations actually eliminating any role for emotions and gut instincts.

“To be an effective altruist one must override the urge to give when one’s heart is opened up and instead engage in a process of data gathering and computation to decide whether the planned donation could be better spent elsewhere.

If effective altruists adopt this kind of utilitarian calculus as the basis for daily life (for it would be irrational to confine it to acts of charity) then good luck to them. The problem is that they believe everyone should behave in the same hyper-rational way; in other words, they believe society should be remade in their own image.”

The author then makes a link with free-market economists like Gary Becker, suspecting “that, for most people, following the rules of effective altruism would be like being married to Gary Becker, a highly efficient arrangement between contracting parties, but one deprived of all human warmth and compassion.”

There are surely many aspects of EA that can be argued against but I think that this kind of critique is pretty weak. Moreover, it is grounded on a deep misunderstanding of the contribution that social sciences (and especially economics) can make to dealing with ethical issues. As a starting point, I think that any discussion on the virtues and dangers of EA should start on a basic premise that I propose to call the “Hard Fact of Ethical Reasoning”:

Hard Fact of Ethical Reasoning (HFER) – Any ethical issue involves a decision problem with trade-offs to be made.

Giving to a charity to alleviate the sufferings due to poverty is a decision problem with a strong ethical component. What the HFER claims is that when considering how to alleviate those sufferings, you have to make a choice regarding how to use scarce resources in such a way your objective is reached. This a classical means-ends relationship the study of which has been at the core of modern economics for the last hundred years. If one accepts the HFER (and it is hard to see how one could deny it), then I would argue that EA has the general merit of leading us to reflect on and to make explicit the values and the axiological/deontic criteria that underlie our ethical judgments regarding what is considered to be good or right. As I interpret it, a key message of EA is that these ethical judgments should/cannot exclusively depend on our gut feelings and emotions but should also be the subject of rational scrutiny. Now, some of us may be indeed uncomfortable with the substantive claims made by EA proponents, such as Peter Singer’s remark that  “if you do the sums” then “you can provide one guide dog for one blind American or you could cure between 400 and 2,000 people of blindness [in developing countries]”. Here, I think the point is to distinguish between two kinds of EA that I would call formal EA and substantive EA respectively.

Formal EA provides a general framework to think of ethical issues related to charity and poverty. It can be characterized by the following two principles:

Formal EA P1: Giving to different charities leads to different states of affairs that can be compared and ranked according to their goodness following some axiological principles, possibly given deontic constraints.

Formal EA P2: The overall goodness of states of affairs is a (increasing) function of their goodness for the individuals concerned.

Principles P1 and P2 are very general ones. P2 corresponds to what is sometime called the Pareto principle and seems, in this context, to be hardly disputable. It basically states that if you have the choice between giving to two charities and that everyone is equally well-off in the two resulting states of affairs except for at least one person that is better in one of them, then the latter state of affairs is the best. P1 states that it is possible to compare and rank states of affairs, which of course still allow for indifference. Note that we allow the possibility for the ranking to be constrained by any deontological principle that is considered as relevant. Under these two principles, formal EA essentially consists in a methodological roadmap: compute individual goodness in the different possible states of affairs that may result from charity donation, aggregate individual goodness according to some principles (captured by an Arrowian social welfare function in social choice theory) and finally rank the states of affairs according to their resulting overall goodness. This version of EA is thus essentially formal because it is silent regarding i) the content of individual goodness and ii) which social welfare function should be used. However, we may plausibly think of two additional principles that that make substantive claims regarding these two features:

Formal EA P3: Individual goodness is cardinally measurable and comparable.

Formal EA P4: Number counts: for any state of affairs with n persons whose individual goodness is increased by u by charity giving, there is in principle a better state of affairs with m > n persons whose individual goodness is increased by v < u by charity giving.

I will not comment on P3 as it is basically required to conduct any sensible ethical discussion. P4 is essential and I will return on it below. Before, compare formal EA with substantive EA. By substantive EA, I mean any combination of P1-P4 that adds at least one substantive assumption regarding a) the nature of individual goodness and/or b) the constraints the social welfare function must satisfy. Clearly, substantive EA is underdetermined by formal EA. There are many ways to pass from the latter to the former. For instance, one possibility is to use standard cost-benefit analysis to define and measure individual goodness. A utilitarian version of substantive EA which more or less captures Singer’s claims is obtained by assuming that the social welfare function must satisfy a strong independence principle such that overall goodness is additively separable. The possibilities are indeed almost infinite. This is the main virtue of formal EA as a theoretical and practical tool: it forces us to reflect on and to make explicit the principles that sustain our ethical judgments, acknowledging the fact that such judgments are required due to the HFER. Note moreover that in spite of its name, on this reading EA needs not be exclusively concerned with efficiency: fairness may be also taken into account by adding the appropriate principles when passing from formal to substantive EA. What remains true is that a proponent of EA will always claim that one should give to the charity that leads to the best state of affairs in terms of the relevant ordering. There is thus still a notion of “efficiency” but more loosely defined.

My discussion parallels an important discussion in moral philosophy between formal aggregation and substantive aggregation which has been thoroughly discussed in a recent book of Iwao Hirose. Hirose provides a convincing defense of formal aggregation as a general framework in moral philosophy. It is also similar to the distinction made by Marc Fleurbaey between formal welfarism and substantive welfarism. A key feature of formal aggregation is the substantive assumption that numbers count (principle P4 above). Consider the following example due to Thomas Scanlon and extensively discussed by Irose:

“Suppose that Jones has suffered an accident in the transmitter room of a television station. Electrical equipment has fallen on his arm, and we cannot rescue him without turning off the transmitter for fifteen minutes. A World Cup match is in progress, watched by many people, and it will not be over for an hour. Jones’s injury will not get any worse if we wait, but his hand has been mashed and he is receiving extremely painful electrical shocks. Should we rescue him now or wait until the match is over?”

According to formal aggregation, there exists some number n* of persons watching the match such that for any n > n* it is better to wait the end of the match to rescue Jones. Scanlon and many others have argued against this conclusion and claimed that we cannot aggregate individual goodness this way. Hirose thoroughly discusses the various objection against formal aggregation but in the end concludes that none of them are fully convincing. The point here is that if someone wants to argue against EA as I have characterized it, then one must make a more general point against formal aggregation. This is a possibility of course, but that has nothing to do with rejecting the role of reason and of “cold calculus” in the realm of ethics.

Economics, Rational Choice Theory and Utility Maximization

Economist Geoff Hodgson has a short article at Evonomics on the issue of the theoretical and methodological status of the rationality principle in economics. Hodgson sketches an argument that he has more fully developed in his book From Pleasure Machines to Moral Communities. In a nutshell, Hodgson argues that the rationality principle, according to which individuals act such as to maximize their utility, is (i) not a tautology but (ii) is unfalsifiable. Let me take these two points in order.

First, Hodgson argues that the rationality principle is not a tautology because utility maximization “is potentially false”. That is, there may be cases where people’s choices fail to maximize their utility. We may suppose that the non-maximizing behavior may be intentional or not: there are cases where we intend to maximize our utility but we fail, for instance because of weakness of will (a phenomenon known as Akrasia in ancient Greece); there are other cases where reason provides us with good reason to make choices that do not maximize our utility. This latter possibility is at the core of Amartya Sen’s criticism of rational choice theory developed in the 1970’s. Second, Hodgon points out that in spite of the fact that the U-max assumption may be false, we can never know when or at least we can never establish that is false in any specific case. This is due to the fact that it is at least always possible to change the description of some decision problem such as to make the observed behavior compatible with any consistency assumption and thus utility maximization. This is indeed true in all versions of rational choice theory, either under the form of revealed preference theory or of expected utility theory. The basic strategy consists in changing the description of the outcome space of the decision problem such as to make the choice behavior consistent. Unless a behavior is completely random, there should always be in principle a way to rationalize it according to some consistency criterion. U-max only requires transitivity of the underlying preference ordering (plus some reflexivity and continuity conditions). According to Hodgson, these two points make rational choice theory useless as a theory of human behavior. In particular, he rightly note that rational choice theory applies equally well to machines, insects and animals and that as a consequence it cannot tell us anything specific about humans.

I partially agree with Hodgson but his argument requires some qualifications. More specifically, I would argue that (i) actually rational choice theory is a tautology and that (ii) the fact that is unfalsifiable is not necessarily problematic depending on its purpose. Consider the former point first. The only reason Hodgson can validly claim that utility maximization is not a tautology is because he takes utility to be something to be independently measurable. This is of course the way the utility concept was understood by Bentham and by the first marginalists. There is also a bunch of behavioral economists defending a “back to Bentham” paradigmatic move who speak in terms of “experienced utility”, where the latter refers to something akin to happiness or pleasure. Finally, we may also admit that some economists of the Chicago school may have entertained an interpretation of utility as something independently measurable. But all of this is unorthodox. Since the days of Pareto and Samuelson, economic theory (and especially consumer theory) has given up the interpretation of utility as an independently measurable quantity. The ordinalist revolution and Samuelson’s pioneering contribution to revealed preference theory have shown how consumer theory can be formulated without any reference to the utility concept. More exactly, they have established that utility maximization is nothing but a mathematically convenient statement equivalent to the assumption that people make consistent choices and/or have well-ordered preferences. The same is true for expected utility theory, especially Savage’s version which is explicitly behaviorist. Absolutely nothing is assumed regarding what happens “in the head” of the person making some choice. U-max is not an assumption; it is only a descriptive statement of what one is doing. It is a tautology as long as there is always a possibility to rationalize one’s choices in terms of some consistency condition.

Consider now the second point. The fact that the U-max principle is actually a tautology only strengthens Hodgson’s claim that it is unfalsifiable. You cannot falsify a tautology as it is true by definition. Does it make it useless from a scientific perspective? The short answer is clearly “no”. Science is full of useful tautologies, also in economics. Consider only one example coming from biology, one on which Hodgson extensively relies in his work: the Price equation. The Price equation is a highly general mathematical statement of a process of differential replication, i.e. natural selection. The mathematical beauty of the Price equation is that whatever the specificities of the actual process of selection (whether organisms are haploid, haplodiploid, diploid, whether it is cultural or genetic, …), it captures them in a straightforward formula according to which, to simplify matters, the growth rate of some trait in a population can be expressed as the covariance between the trait frequency and the fitness of its bearer. Under the classical meaning of fitness (a measure of reproductive success), Price equation is of course both unfalsifiable and a tautology. But no biologists or behavioral scientists would reject it for this reason. The usefulness of the Price equation comes from its value as a problem-solving device. It gives the scientist a methodological strategy to solve empirical or theoretical problems. As an instance of the latter case, consider for instance how Price equation is useful to derive Hamilton’s rule and to make explicit the assumptions on which the latter rely regarding the property of selection and inclusive fitness.

I would argue that the same is true for rational choice theory in economics. From a Weberian point of view, rational choice theory provides us with a methodological strategy to uncover people’s motivations and reasons for action. Similarly, Don Ross argues it is part of the “intentional stance strategy” through which we are able to understand and predict agents’ behavior. Hodgson is right that rational choice theory is rather weak as an explanatory theory of individual behavior, simply because the theory suffers from an obvious problem of under-determination. But individual behavior is not the right level at which the theory should be applied. It is way more useful for instance to understand how the change in the institutional framework, by modifying people’s incentives and beliefs, may affect their behavior. This strategy is at the core of the applied branch of microeconomics, known as mechanism design. A branch which has enjoyed some empirical successes recently. Of course, there are other reasons to reject the imperialistic claims of the proponents of rational choice theory. I explore some of them in this (version of a) forthcoming paper in the Journal of Economic Methodology.

Working paper: “Bayesianism and the Common Prior Assumption in Game Theory”

I have a new working paper on a slightly esoteric subject, at least for those unfamiliar with decision theory and game theory: “Bayesianism and the Common Prior Assumption in Game Theory: Toward a Theory of Social Interactions“. If everything goes well, I should present this paper at the 3rd Economic Philosophy Conference which will be held in June at Aix-en-Provence. It is organized by Aix-Marseille University and the GREQAM, but one of the co-organizer is my colleague (and office neighbor) from the University of Reims Champagne-Ardenne Jean-Sébastien Gharbi.

This gives me a good excuse for a slight digression: Jean-Sébastien and myself are trying hard to develop economic philosophy at Reims, and though we are currently small in number (hopefully, not for too long!), there has been some momentum shift recently. We have welcome well-known economic methodologist John Davis last year as a visiting professor and we have a significant  numbers  of recent publications in top-journals in economic philosophy and the history of economic thought (Economics and Philosophy, Journal of Economic Methodology, Revue de philosophie économique, European Journal of the History of Economic Thought, Journal of the History of Economic Thought). This is only beginning, or I hope so!

A Short Note on Newcomb’s and Meta-Newcomb’s Paradoxes

[Update: As I suspected, the original computations were false. This has been corrected with a new and more straightforward result!]

For some reasons, I have been thinking about the famous Newcomb’s paradox and I came with a “solution” which I am unable to see if it has been proposed in the vast literature on the topic. The basic idea is that a consistent Bayesian decision-maker should have a subjective belief over the nature of the “Oracle” that, in the original statement of the paradox, is deemed to predict perfectly your choice of taking either one or two boxes. In particular, one has to set a probability regarding the event that the Oracle is truly omniscient, i.e. he is able to foreseen your choice. Another, more philosophical way to state the problem is for the decision-maker to decide over a probability that Determinism is true (i.e. the Oracle is omniscient) or that the Free Will hypothesis is true (i.e. the Oracle cannot predict your choice).

Consider the following table depicting the decision problem corresponding to Newcomb’s paradox:

Matrice

Here, p denotes the probability that the Oracle will guess that you will pick One Box (and thus put 1 000 000$ in the opaque box), under the assumption that the Free Will hypothesis is true. Of course, as it is traditionally stated, the Newcomb’s paradox normally implies that p is a conditional probability (p = 1 if you choose One Box, p = 0 if you choose two boxes), but this is the case only in the event that Determinism is true. If the Free Will hypothesis is true, then p is an unconditional probability as argued by causal decision theorists.

Denote s the probability for the event “Determinism” and 1-s the resulting probability for the event “Free Will”. It is rational for the Bayesian decision-maker to choose One Box if his expected gain for taking one box g(1B) is higher than his expected gain for taking two boxes g(2B), hence if

s > 1/1000.

Interestingly, One Box is the correct choice even if one puts a very small probability on Determinism being the correct hypothesis. Note that is independent of the value of p. If one has observed a sufficient number of trials where the Oracle has made the correct guess, then one has strong reasons to choose One Box, even if he endorses causal decision theory!

Now consider the less-known “Meta-newcomb’s paradox” proposed by philosopher Nick Bostrom. Bostrom introduces the paradox in the following way:

There are two boxes in front of you and you are asked to choose between taking only box B or taking both box A and box B. Box A contains $ 1,000. Box B will contain either nothing or $ 1,000,000. What B will contain is (or will be) determined by Predictor, who has an excellent track record of predicting your choices. There are two possibilities. Either Predictor has already made his move by predicting your choice and putting a million dollars in B iff he predicted that you will take only B (like in the standard Newcomb problem); or else Predictor has not yet made his move but will wait and observe what box you choose and then put a million dollars in B iff you take only B. In cases like this, Predictor makes his move before the subject roughly half of the time. However, there is a Metapredictor, who has an excellent track record of predicting Predictor’s choices as well as your own. You know all this. Metapredictor informs you of the following truth functional: Either you choose A and B, and Predictor will make his move after you make your choice; or else you choose only B, and Predictor has already made his choice. Now, what do you choose?

Bostrom argues that this lead to a conundrum to the causal decision theorist:

If you think you will choose two boxes then you have reason to think that your choice will causally influence what’s in the boxes, and hence that you ought to take only one box. But if you think you will take only one box then you should think that your choice will not affect the contents, and thus you would be led back to the decision to take both boxes; and so on ad infinitum.

The point is that here if you believe the “Meta-oracle”, by choosing Two Boxes you then have good reasons to think that your choice will causally influence the “guess” of the Oracle (he will not put 1000 000$ in the opaque box) and therefore, by causal decision theory, you have to choose One Box. However, if you believe the “Meta-Oracle”, by choosing One Box you have good reasons to think that your choice will not causally influence the guess of the Oracle. In this case, causal decision theory recommends you to choose Two Boxes, as in the standard Newcomb’s paradox.

The above reasoning seems to work also for the Meta-Newcomb paradox even though the computations are slightly more complicated. The following tree represents the decision problem if the Determinism hypothesis is true:

Newcomb

Here, “Before” and “After” denote the events where the Oracle predicts and observes your choice respectively. The green path and the red path in the three correspond to the truth functional stated by the Meta-oracle. The second tree depicts the decision problem if the Free Will hypothesis is true.

Newcomb 2

It is similar to the first one except for small but important differences: in the case the Oracle predicts your choice (he makes his guess before you choose) your payoff depends on the (subjective) probability p that he makes the right guess; moreover, the Oracle is now an authentic player in an imperfect information game with q the decision-maker’s belief over whether the Oracle has already made his choice or not (note that if Determinism is true, q is irrelevant exactly for the same reason than probability p in Newcomb’s paradox). Here, the green and red paths depict the decision-maker best responses.

Assume in the latter case that q = ½ as suggested in Bostrom’s statement of the problem. Denote s the probability that Determinism is true and thus that the Meta-oracle as well as the Oracle are omniscient. I will spare you the computations but (if I have not made mistakes) it can be shown that it is optimal for the Bayesian decision maker to choose One Box whenever s ≥ 0. Without fixing q, we have s > 1-(999/1000q). Therefore, even if you are a causal decision theorist and you believe strongly in Free Will, you should play as if you believe in Determinism!

Greed, Cooperation and the “Fundamental Theorem of Social Sciences”

An interesting debate has taken place on the website Evonomics over the issue of whether or not economists think greed is socially good. The debate features well-known economists Branko Milanovic, Herb Gintis and Robert Frank as well as the biologist and anthropologist Peter Turchin. Milanovic claims that there is no personal ethics and that morals is embodied into impersonal rules and laws that are built such that it is socially optimal to follow his personal interest as long as one plays along the rule. Actually, Milanovic goes farther than that: it is perfectly right to try to break the rules since if I succeed the responsibility falls on those who have failed to catch me. Such a point of view fits perfectly with the “get the rules right” ideology that dominates microeconomic engineering (market design, mechanism design) and where people’s preferences are taken as given. The point is to set the right rules and incentives mechanisms such as to reach the (second-) best equilibrium.

Not all economists agree with this and Gintis’ and Frank’s answers both qualify some of Milanovic’s claims. Turchin’s answer is also very interesting. At one point, he refers to what he calls the “fundamental theorem of social sciences” (FTSS for short):

In economics and evolution we have a well-defined concept of public goods. Production of public goods is individually costly, while benefits are shared among all. I think you see where I am going. As we all know, selfish agents will never cooperate to produce costly public goods. I think this mathematical result should have the status of “the fundamental theorem of social sciences.”

The FTSS is indeed quite important but formulated this way it is not quite right. Economists (and biologists) have known for long that the so-called “folk theorems” of game theory establish that cooperation is possible in virtually possible in any kind of strategic interactions. To be precise, the folk theorems state that as long as an interaction infinitely repeats with a sufficiently high probability and/or that players have a not too strong preference for the present, then any outcome guaranteeing the players at least their minimax gain in an equilibrium in the corresponding repeated game. This works with all kinds of games, including the prisoner’s dilemma and the related public good game: actually, selfish people will cooperate and produce the public good if they realize that this is in their long term interest to do so (see also Mancur Olson’s “stationary bandits” story for a similar point). So, the true FTSS is rather that “anything goes”: as there are an infinity of equilibria in infinitely repeated games, which one is selected depends on a long list of more or less contingent features (chance, learning/evolutionary dynamics, focal points…). So, contrary to what Turchin claims, the right institutions can in principle incentivize selfish people to cooperate and this prospect may even incentivize selfish people to set up these institutions as a first step!

Does this mean that morality is unnecessary for economic efficiency or that there is no “personal ethics”? Not quite so. First, Turchin’s version of the FTSS becomes more plausible as we recognize that information is imperfect and incomplete. The folk theorems depend on the ability of players to monitor others’ actions and to punish them in case they deviate from the equilibrium. Actually, at the equilibrium we should not observe deviations (except for “trembling hand mistakes”) but this is only because one expects that he will be punished if he defects. It is relatively easy to figure out that imperfect monitoring makes the conditions for universal cooperation to be an equilibrium far more stringent. Of course, how to deal with imperfect and incomplete information is precisely the point of microeconomic engineering (see the “revelation principle”): the right institutions are those that incentivize people to reveal their true preferences. But such mechanisms can be difficult to implement in practice or even to design. The point is that while revelation mechanisms are plausible at some limited scales (say, a corporation) they are far more costly to build and implement at the level of the whole society (if that means anything).

There are reasons here to think that social preferences and morality may play a role to foster cooperation. But there are some confusions regarding the terminology. Social preferences do not imply that one is morally or ethically motivated and the reverse is probably not true altogether. Altruism is a good illustration: animals and insects behave altruistically for reasons that have nothing to do with morals. Basically, they are genetically programmed to cooperate at a cost for themselves because (this is an ultimate cause) it maximizes their inclusive fitness. As a result, these organisms possessed phenotypic characteristics (these are proximate causes) that make them behaving altruistically. Of course, animals and insects are not ethical beings in the standard sense. Systems of morals are quite different. It may be true that morality translates at the choice and preference levels: I may give to a charity not because of an instinctive impulse but because I have a firm moral belief that this is “good” or “right”. For the behaviorism-minded economist, this does not make any difference: whatever the proximate cause that leads you to give some money, the result regarding the allocations of resources is the same. But this can make a difference in terms of institutional design because “moral preferences” (if we can call them like that) may be incommensurable with standard preferences (leading to cases of incompleteness difficult to deal with) or to so-called crowding-out effects when they interact with pecuniary incentives. In any case, moral preferences may make cooperative outcomes easier to achieve, as they lower the monitoring costs.

However, morals is not only embedded at the level of preferences but also at the level of the rules themselves as pointed out by Milanovic: the choice of rules itself may be morally motivated as witnessed by the debates over “repugnant markets” (think of markets for organs). In the vocabulary of social choice theory, morality not only enters into people’s preferences but may also affect the choice of the “collective choice rule” (or social welfare function) that is used to aggregate people preferences. Thus, morality intervenes at these two levels. This point has some affinity with John Rawls’ distinction between two concepts of rules: the summary conception and the practice conception. On the former, a rule corresponds to a behavioral pattern and what justifies the rule under some moral system (say, utilitarianism) is the fact that the corresponding behavior is permissible or mandatory (in the case of utilitarianism, it maximizes the sum of utilities in the population). On the latter, the behavior is justified by the very practice it is constitutive of. Take the institution of promise-keeping: on the practice conception, what justifies the fact that I keep my promises is not that it is “good” or “right” but rather that keeping his promises is constitutive of the institution of promise-keeping. What has to be morally evaluated is not the specific behavior but the whole practice.

So is greed really good? The question is of course already morally-loaded. The answer depends on what we call “good” and on our conception of rules. If by “good” we mean some consequentialist criterion and if we hold the summary conception of rules, the answer will depend on the specifics as indicated in my discussion of the FTSS. But on the practice conception, the answer is clearly “yes, as far as it is constitutive of the practice” and the practice is considered as being good. On this view, while we may agree with Milanovic that to be greedy is good (or at least permissible) as long as it stays within the rules (what Gintis calls “Greed 1” in his answer), it is hard to see how being greedy by transgressing the rules (Gintis’ “Greed 2”) can be good whatsoever… unless we stipulate that the very rules are actually bad! The latter is a possibility of course. In any case, an economic system cannot totally “outsource” morality as what you deem to be good and thus permissible through the choice of rules is already a moral issue.

Working Paper: “Game Theory, Game Situations and Rational Expectations: A Dennettian View”

I have just finished a new working paper entitled “Game Theory, Game Situations and Rational Expectations: A Dennettian View” which I will present at the 16th international conference of the Charles Gide Association for the Study of Economic Thought. The paper is a bit esoteric as it discusses the formalization of rational expectations in a game-theoretic and epistemic framework on the basis of the philosophy of mind and especiallly Daniel Dennett’s intentional-stance functionalism. As usual, comments are welcome.

What Are Rational Preferences

Scott Sumner has an interesting post on Econlog about the economists’ use of what can be called the “Max U” framework, i.e. the approach consisting in describing and/or explaining people’s behavior as a utility maximization. As he points out, there are many behaviors (offering gifts at Christmas, voting, buying lottery tickets, smoking) that most economists are ready to deem “irrational” while actually they seem amenable to some kind of rationalization. Sumner then argues that the problem is not with the Max U framework but rather lies in the economists’ “lack of imagination” regarding the ways people can derive utility.

Sumner’s post singles out an issue that lies at the heart of economic theory since the “Marginalist revolution”: what is the nature of utility and of the related concept of preferences? I will not return here on the fascinating history of this issue that passes through Pareto’s ordinalist reinterpretation of the utility concept to Samuelson’s revealed preference account whose purpose was to frame the ordinalist framework in purely behaviorist terms. These debates had also much influence on normative economics as they underlie Robbins’ argument for the rejection of interpersonal comparisons of utility that ultimately led to Arrow’s impossibility theorem and the somewhat premature announcement of the “death” of welfare economics. From a more contemporary point of view, this issue is directly relevant for modern economics and in particular for the fashionable behavioral economics research program, especially as it has now taken a normative direction. Richard Thaler’s reaction to Sumner’s post on Twitter is thus no surprise:

<blockquote class=”twitter-tweet” lang=”fr”><p lang=”en” dir=”ltr”>Yes. This version of economics is unfalsifiable. If people can &quot;prefer&quot; $5 to $10 then what are preferences? <a href=”https://t.co/Cn1XQoIzsh”>https://t.co/Cn1XQoIzsh</a></p>&mdash; Richard H Thaler (@R_Thaler) <a href=”https://twitter.com/R_Thaler/status/680831304175202305″>26 Décembre 2015</a></blockquote>

Thaler’s point is clear: if we are to accept that all the examples given by Sumner are actual cases of utility maximization, then virtually all kinds of behaviors can be seen as utility maximization. Equivalently, any behavior can be explained by an appropriate set of “rational” preferences with the required properties of consistency and continuity. This point if of course far from being new: many scholars have already argued that rational choice theory (either formulated in terms of utility functions [decision theory for certain and uncertain decision problems] or of choice functions [revealed preference theory]) is unfalsifiable: it is virtually always possible to change the description of a decision problem such as to make the observed behavior consistent with some set of axioms. In the context of revealed preference theory, this point is wonderfully made by Bhattacharyya et al. on the basis on Amartya Sen’s long-standing critique of the rationality-as-consistency approach. As they point out, revealed preference theory suffers from an underdetermination problem: for any set of inconsistent choices (according to some consistency axiom), it is in practice impossible to know whether the inconsistency is due to “true” and intrinsic irrationality or is just the result of an improper specification of the decision problem. In the context of expected utility theory, John Broome’s discussion of the Allais paradox clearly shows that reconciliation is in principle possible on the basis of a redefinition of the outcome space.

Therefore, the fact that rational choice theory may be unfalsifiable is widely acknowledged. Is this a problem? Not so much if we recognize that falsification is no longer recognized as the undisputed demarcation criterion for defining science (as physicists are currently discovering). But even if we ignore this philosophy of science feature, the answer to the above question also depends on what we consider to be the relevant purpose of rational choice theory (and more generally of economics) and relatedly, what should the scientific meaning of the utility and preference concepts. In particular, a key issue is whether or not a theory of individual rationality should be part of economics. Three positions seem to be possible: The “Not at all” thesis, the “weakly positive” thesis and the “strongly positive” thesis:

A) Not at all thesis: Economics is not concerned with individual rationality and therefore does not need a theory of individual rationality. Preferences and utility are concepts used to describe choices (actually or counterfactually) made by economic agents through formal (mathematical) statements useful to deal with authentic economic issues (e.g. under what conditions an equilibrium with such and such properties exists?).

B) Weakly positive thesis: Economics builds on a theory of individual rationality but this theory is purely formal. It equates rationality with consistency of choices and/or preferences. Therefore, it does not specify the content of rational preferences but it sets minimal formal conditions that the preference relation or the choice function should satisfy. Preferences and utility are more likely (but not necessarily) to be defined in terms of choices.

C) Strongly positive thesis: Economics builds on a theory of individual rationality and actually parts of economics consist in developing such a theory. The theory is substantive: it should state what are rational preferences, not only define consistency properties for the preference relation. Preferences and in particular utility cannot be defined exclusively in terms of choices, they should refer to inner states of mind (e.g. “experienced utility”) which are accessible in principle through psychological and neurological techniques and methods.

Intuitively, I would say that if asked most economists would entertain something like the (B) view. Interestingly however, this is probably the only view that is completely unsustainable after careful inspection! The problem is the one emphasized by Thaler and others: if rational choice theory is a theory of individual rationality, then it is empirically empty. The only way to circumvent the problem is the following: consider any decision problem Di faced by some agent i. Denote T the theory or model used by the economist to describe this decision problem (T can be either formulated in an expected utility framework or in a revealed preference framework). A theory T specifies, for any Di, what are the permissible implications in terms of behavior (i.e. what i can do given the minimal conditions and constraints defined in T). Denote I the set of such implications and S any subset of these implications. Then, a theory T corresponds to a mapping T: D –> I with D the set of all decision problems or, equivalently, T(Di) = S. Suppose that for a theory T and a decision problem Di we observe a behavior b such that b is not in S. This is not exceptional as any behavioral economist will tell you. What can we do? The first solution is the (naïve) Popperian one: discard T and adopt an alternative theory T’. This is the behavioral economists’ solution when they defend cumulative prospect theory against expected utility theory. The other solution is to stipulate that actually i is not facing decision problem Di but rather decision problem Di’, where T(Di’) = S’ and b ∈ S’. If we adopt this solution, then the only way to make T falsifiable is to limit the range of admissible redefinitions of any decision problem. If theory T is not able to account to some implication b under all the range of admissible descriptions, then it will be falsified. However, it is clear that to define such a range of admissible descriptions necessitates making substantive assumptions over what are rationalizable preferences. Hence, this leads one toward view (C)!

Views (A) and (C) are clearly incompatible. The former has been defended by contemporary proponents of variants of revealed preference theory such as Ken Binmore or Gul and Pesendorfer. Don Ross provides the most sophisticated philosophical defense of this view. View (C) is more likely to be endorsed by behavioral economists and also by some heterodox economists. Both have however a major (and problematic for some scholars) implication once the rationality concept is no longer understood positively (are people rational?) but from an evaluative and normative perspective (what is it to be rational?). Indeed, one virtue of view (B) is that it nicely ties together positive and normative economics. In particular, if it appears that people are sufficiently rational, then the consumer’s sovereignty principle will permit to make welfare judgments on the basis of people’s choices. But this is no longer true under views (A) and (C). Under the former, it is not clear why we should grant any normative significance to the fact that economic agent make consistent choices, in particular because these agents have not to be necessarily flesh-and-bones persons (they can be temporal selves). Welfare judgments can still be formally made but they are not grounded on any theory of rationality. A normative account of agency and personality is likely to be required to make any convincing normative claim. View (C) cannot obviously build on the consumer’s sovereignty principle once it is recognized that people do not always choices in their personal interests. Indeed, this is the very point of the so-called “libertarian paternalism” and more broadly of the normative turn of behavioral economics. It has to face however the difficulty that today positive economics does not offer any theory of “substantively rational preferences”. The latter is rather to be found in moral philosophy and possibly in natural sciences. In any case, economics cannot do the job alone.