Thursday, August 23, 2007

Fickle preferences...

I still haven't yet finished that old paper by Gary Becker, but I hope to get back to it soon, and see whether or not I treated his ideas fairly in The Social Atom. In the paper, he's trying to argue that economists can make much weaker assumptions about the rationality of people, and still derive some of the key theorems of economic theory. I have my doubts, but I'm not quite ready yet to lay out why in detail.

One of the problems, I suspect, may hinge on the notion of fixed preferences. Economists tend to assume that people have fixed preferences -- say, for deciding between apples and oranges. If those preferences are indeed fixed and independent of any situation, then it's easy to understand if you see lots of people eating apples and few eating oranges; what you see in the group, in the aggregate, is merely the summation of the preferences of the individuals. There's a technique that theorists use to formalize this intuition, called the Representative Agent. If you see that 80% of the people are eating apples, then you can infer that 80% prefer apples to oranges. (Effectively, you could also treat the response of the crowd as if it was the response of a single "representative agent," who likes to mix apples and oranges in a four to one ratio; in mathematical theories, this is done for convenience.)

Trouble arises, however, if one assumes that this representative agent trick can always be carried through. And it clearly cannot if people interact (which they do!), and if what one person prefers depends on what others prefer, or on what they actually choose to do (which it often does!). In an extreme case, for example, most people might (on their own) prefer apples to oranges, but also have a strong preference to eat what they see most other people eating. If one person starts out by eating an orange, and a second follows suit, so may all the rest, leading to an outcome that doesn't reflect the "innate" preferences of the group, but the way the dynamics of influence can easily twist peoples' preferences away from their independent values.

Economists have long tried to get by with this representative agent trick, as it greatly simplifies the task of going from some knowledge of what individuals want to how a group will behave. Unfortunately, it is a very serious mistake, as it effectively cuts the interactions of people out of the loop. And interactions count.

As one intriguing example, some Chilean and Columbian economists, working at the Santa Fe Institute, have recently been studying the way people manage limited resources. In experiments, they had people "extract resources" from a mythical reservoir (think grasslands, minerals, fresh water, etc). Each person could choose how much to take. The more they take, the more they get, in general, except there's also a cost -- if everyone takes a lot, the resources gets depleted and then everyone suffers. The study is fairly involved, and I won't get into the details, but one fascinating outcome is that the fact that peoples' preferences can be influenced by what others do can have a great effect.

Many individuals feel guilty if they take too much (more than an accepted social norm). In some of the experiments, they found that this guilt (particularly when backed up by the small threat of a fine for taking too much), led to a stable situation in which the people extracted resources in a healthy, sustainable way. However, many people only feel guilt in overextracting as long as others aren't overextracting too; if many others do begin to take out too much, many individuals lose their guilty feelings and will join in. As a result, even under the same conditions, the group's behavior can end up in two different states, pushed into one or another by some initial accident -- not unlike the example of the apples and oranges.

I think this emphasizes the major theme of The Social Atom pretty well; people cann't be understood in isolation, and then summed together, to get social reality. It emerges inherently from the collective patterns born of their interactions. Not really an earth-shaking thought, but one that many scientists have tried to suppress for many years.


WanderingJew said...

What you have stated here is the core of the argument that sociologists have with economists.

Len said...

We like to think of ourselves as individuals, but our instinct is for the herd. We just call our herds different things: tribes, races, nationalities, political parties, families, and so forth. We don't like to think of ourselves as herd animals, but we most undoubtedly are.

Kate said...

It is surprising that economists held on to the assumption of the rational individual for so long, but I guess every discipline has to work within their assumptions.

What interests me is the tipping point--in the tragedy of the commons scenario, a group maintains their resource through equality and cooperation. A few violate the norms, however, consuming more than their share. At some point, others begin to copy the cheaters, and the end of the game is the loss of the commons for all. One wonders what situational influences cause the switch from the shared resource situation to the every person for themselves situation.

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