The Vitamin F Rationale

Studies that have tested economic agents' personal theories about distributive justice yield confusing results.

Notions of equity, fairness, status, and "other departures from self-interest" (Matthew Rabin's phrase) play an integral role in how choices in games and various scenarios. It is clear that 'dominant strategies' and 'best-response solutions' to game theoretic problems which involve making "the rational choice" are rarely solved in the way economists would solve them. Even when there are supposed to be clear utility-maximizing solutions to these problems, the utility-maximizing or Pareto-improving solution is not chosen and sometimes not even noticed. Yet these heuristics that economists use, like optimizing outcomes and maximizing profit or utility, are fundamental to the notion of rational public policy decisions and public choice theory.

In the Vitamin F study done by Yaari and Bar-Hillel, for example, the players are told that that one player gets substantially more utility from the Vitamin F in grapefruits another player who gets the same utility from the Vitamin F in avocados as he does from grapefruits. They're asked to divide up the twelve grapefruits and avocados accordingly. Yaari and Bar-Hillel's work demonstrates that decision-makers disproportionately choose outcomes which do not maximize the social utility in this framework but instead distribute foodstuffs equitably or evenly among the players. This should make no sense from a neoclassical perspective. It should be counterintuitive and even "irrational".

These studies tell us something about "behavioral distributive justice", if we can label it that. They show, in non-trivial ways, that decision-making is essentially not neoclassical. It is not Marshallian, or at least not naively so. The standard Marshallian marginal utility model, with all its imperfections (the axes being upside down etc.), does not specify what is "rational" to value, only that it is rational to value utility-maximizing equilibria. What has been pumped into this notion of rationality is today a very simplified, orderly, systematizing, neoclassical set of values. Yet those values contradict most of the data that has sought to describe the values of economic decision-makers, whom, to increase the authority of the generality here, come from different cultural backgrounds and socioeconomic statuses. Their values are typically more closely linked to frameworks that involve social concerns and fairness.

Ancillary conclusions about what institutions and economic policies are necessary will likely not be drawn from these studies, but it ought to be open to criticism whether these ancillary conclusions should be drawn. If rationality is in fact something more like "fairness", why use microeconomic models that do not capture this? Perhaps no ancillary conclusions can be drawn in the first place. Decision-makers are, after all, put in the position of a benevolent dictator. All other variables like rent-seeking opportunities are ruled out. There are serious limitations and few policy insights that can be gleaned from this data.

Yet the most basic conclusion that Vitamin F should suggest is that utility-maximizing paradigms simply do not accurately describe what most economic actors think is "rational", and in that regard microeconomics is still unabashedly autistic. One way economists have interpreted the data is to say that the participants in these studies are simply not well-versed in the study of economics enough to make these decisions, making economists into some kind of vanguard group.

However, this seems highly undemocratic and paternalistic, something American economists are not supposed to do. The profession is constantly striving toward being a "positive" science instead of a "normative" calculus. Yet since these models do not include the "positive" results of scientific study, it makes economic modeling and methodology into a series of normative claims. All the models of economic theory and the solutions economists provide, then, would be nothing more than theories about what economic agents "should" do if they wanted act in a certain way, the way economists are telling them they should act. It reduces everything that was once thought to be "positive" and unbiased into a series of moral imperatives coming from a distinct methodologically individualist and utilitarian perspective, but hardly scientific.

Religionist Methodology in Economics

"Over the years, economists have proffered many reasons for downplaying the relevance of behavioral research challenging our habitual assumptions," writes Matthew Rabin in his essay Psychology and Economics. Written in 1998, it's goal was to summarily dismiss some of the studies in cognitive psychology, behavioral theory and neuroeconomics that were relevant to microeconomic theory.

It was long overdue. The claims of behavioral scientists and cognitive psychologists have posed significant problems for traditional microeconomic models of human behavior that assume rationality and rational agency. Rabin said in his paper that it is common to discuss the "broader methodological significance" of such findings but says he should refrain from doing so since the charges against the models usually stem from "unfamiliarity with the details of the research." This is quite an odd claim to make, since economists themselves were and still are quite unfamiliar with the details of such research, not to mention the methodological significance.

Ironically, it is therefore the aim of the profession to familiarize themselves with the new research, says Rabin. Today we are seeing lots of cross-disciplinary work between chemistry, physics, behavioral science and economics. In so doing Rabin believes the arguments against the profession will "dissipate". Confronting the criticisms with both "healthy skepticism" and "genuine curiosity" should help to "empirically test their validity" and "carefully draw out their economic implications." And with that, economics departments dedicated to the study of neuropsychology began to emerge.

Perhaps it would be unorthodox to suggest this link, but I must. This sort of defense is exactly what American Pentecostals have done with the biological evidence for natural selection and genetic mutation through recombination. For decades, evolutionary biologists have had to put up with religionist lobbyists beating the book over their heads and arm-twisting them into political acquiescence. Likewise, economics has been "autistic" in its vision of a purely rational agent who makes decisions according to the immutable microeconomic Text, despite mounds of evidence to the contrary.

Arguments against economic assumptions are supposed to "dissipate" once economics has camouflaged itself amongst lots of other sciences that carry more legitimacy. That's probably true, but only for the same reasons that creationism looks more credible now that creationist scientists have been camouflaging themselves as real scientists and trying to integrate creationism into lots of places besides church.

The Pentecostal methodology is a relatively easy three-step process to which the microeconomic theorists have quite readily picked up on, demonstrating that it is still possible to denounce science and still maintain important seats of government power. First, claim that the scientific criticism does not really understand science, then, claim that science cannot disprove the religion, and ultimately, claim that your religion is a science.

Paralogisms of Cognitive Microeconomics

I've been having a lot of fun recently with Kant's Critique. It was meant to apply to every aspect of human reason. In this strategy below, I'm arguing that microeconomics is no exception.


Cognitive biases and limitations are a function of individual consumer demand. In order for microeconomic models to play an adequate role in consumer choice theory, these limitations of human reason must be avoided. But they cannot. Interpersonal utility comparisons, and thus social choice theory, are impossible.

A “paralogism” is a logical argument which is not formally invalid, but rather, so ridden with unintentional, paradoxical or ambiguous reasoning—usually involving some sort of equivocation—such that it cannot be accepted in its entirety.

1^st Paralogism: All consumer preferences are based on the presupposition that the consumer says to him or herself “I demand...." The individual is the subject and goods and services are the predicates. But economists often confuse the subjectivity of demand with a permanent, interpersonal (and often objective) indifference curve.

2^nd Paralogism: Cognitive biases are internalized into indifference curves and thus become functions of the model, with the disclaimer "ceteris paribus". The isolation provided by the model does not lead to isolation of real-world cognitive biases. Cognitive biases cannot be avoided. Yet models which assume bounded rationality avoid cognitive biases.

All attempts to bound rationality, along with interpersonal utility comparisons, are normative economic models, not positive economic models. Positive economics is impossible. This is not an error of microeconomic theory; it is an error of public choice theory. The inherent judgmental and heuristic bias of comparing and abstracting choice models is inescapable for microeconomic theory.