Academic journal article International Advances in Economic Research

The Unimportance of the Choice-Value Thesis in Economics

Academic journal article International Advances in Economic Research

The Unimportance of the Choice-Value Thesis in Economics

Article excerpt

The choice-value thesis claims that people always choose what is best for them, given their information on the set of alternatives. This paper attempts to show that this assumption is less important than is suggested by the high esteem in which it is held. Modern economics neither relies on it, as shown by inspecting a sample of 742 papers, nor does the rejection of the choice-value thesis imply paternalism, as is sometimes suggested. it is shown that paternalism can be argued against without referring to the choice-value thesis. (JEL B41, D69)

Introduction

Economists often derive their theorems by assuming that agents are rational. The critical discussion of this approach is hampered by the fact that two different kinds of rationality exist, which are often not clearly distinguished. Formal rationality means that people's choices can be represented by a utility function, and substantive rationality requires that choices are optimal. This is called choice-value thesis by Broome [1991] and is stated as follows.

Definition 1: The Choice- Value Thesis

If a certain person, given a choice between two states of affairs, A and B, would choose A, then as far as that person is concerned, A is at least as good as B. (1)

In other words, the choice-value thesis is true if people maximize the right thing, whether it is called experienced utility [Kahneman, Wakker, and Sarin, 1997], choiceless utility [Loomes and Sugden, 19821, good [Broome, 1991], individual welfare [Ng, 1989], well-being (Griffin, 1986], or [utility.sub.H] (with H denoting happiness) [Brandt, 1982].

Of course, it is questionable whether people maximize something at all [Selten, 1994], and whether they should do so from a normative point of view, as sometimes there might be good reasons for intransitive choices [Bar-Hillel and Margalit, 1988]. The latter means that substantive rationality can exist without formal rationality. However, this paper will focus on the reverse case and assume formal rationality to be given, but not necessarily substantive rationality. Here one need not think of someone repeatedly banging his head against a wall based on complete and transitive preference orderings. Rather, behavior which is in conflict with the choice-value thesis is regularly observed, even for intelligent decision makers (think of preference reversals, time inconsistencies, or compulsion) (2) However, the actual importance of the choice-value thesis for economic research is less clear. Is there really a good reason for feeling uncomfortable, to put it mildly, about psychologists' and fellow economists' resear ch on preference reversals, time inconsistencies, compulsion and the like, given that most of these works question the choice-value thesis rather than formal rationality? In a straightforward way, by simply examining a sample of economic papers, the next section tries to give an estimate of the importance of the choice-value thesis for economists' actual research. Another concern of economists, besides the validity of their own research results, might be paternalism. Paternalism is sometimes thought to be implied when the choice-value thesis is denied. Whether this is really the case is discussed in the third section, and the final section concludes the paper.

The Choice--Value Thesis and Economic Research

Do economists stick to the choice-value thesis because it underlies modern economic research? While methodological discussions are often shaped by the authors' subjective perception of how economic research is done, the approach in this section is more objective: simply observing and quantifying what economists actually do. This proved to be a fruitful approach in research on some other methodological questions [Lind, 1992; Lind, 1993, p. 500; Morgan, 1988]. In the same way, some insight may be gained into the importance of the choice-value thesis. Unfortunately, counting alone is not sufficient in this case, as economists are hardly ever explicit about the choice-value thesis. …

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