The Dismal Mind - Economics as a Pretension to Science - Part III

Written by Sam Vaknin

4. Homo Economicus

The economic actor is assumed to be constantly engaged inrepparttar rational pursuit of self interest. This is not a realistic model - merely a (useful) approximation. People don't repeat their mistakes systematically (=rationality in economics) and they seek to optimize their preferences (altruism can be such a preference, as well).

Still, many people are non-rational or only nearly rational in certain situations. Andrepparttar 132669 definition of "self-interest" asrepparttar 132670 pursuit ofrepparttar 132671 fulfilment of preferences is a tautology.

V. Consumer Choices

How are consumer choices influenced by advertising and by pricing? No one seems to have a clear answer. Advertising is bothrepparttar 132672 dissemination of information and a signal sent to consumers that a certain product is useful and qualitative (otherwise, why would a manufacturer invest in advertising it)? But experiments show that consumer choices are influenced by more than these elements (for instance, by actual visual exposure to advertising).

VI. Experimental Economics

People do not behave in accordance withrepparttar 132673 predictions of basic economic theories (such asrepparttar 132674 standard theory of utility andrepparttar 132675 theory of general equilibrium). They change their preferences mysteriously and irrationally ("preference reversals"). Moreover, their preferences (as evidenced by their choices and decisions in experimental settings) are incompatible with each other. Either economics is not testable (no experiment to rigorously and validly test it can be designed) - or something is very flawed withrepparttar 132676 intellectual pillars and models of economics.

Notes on the Economics of Game Theory - Part III

Written by Sam Vaknin

The limitations of this approach are immediately evident. It is definitely not geared to cope well with more complex, multi-player, semi-cooperative (semi-competitive), imperfect information situations.

Von Neumann proved that there is a solution for every ZSG with 2 players, though it might requirerepparttar implementation of mixed strategies (strategies with probabilities attached to every move and outcome). Together withrepparttar 132666 economist Morgenstern, he developed an approach to coalitions (cooperative efforts of one or more players a coalition of one player is possible). Every coalition has a value a minimal amount thatrepparttar 132667 coalition can secure using solely its own efforts and resources. The function describing this value is super-additive (the value of a coalition which is comprised of two sub-coalitions equals, at least,repparttar 132668 sum ofrepparttar 132669 values ofrepparttar 132670 two sub-coalitions). Coalitions can be epiphenomenal: their value can be higher thanrepparttar 132671 combined values of their constituents. The amounts paid torepparttar 132672 players equalrepparttar 132673 value ofrepparttar 132674 coalition and each player stands to get an amount no smaller than any amount that he would have made on his own. A set of payments torepparttar 132675 players, describingrepparttar 132676 division ofrepparttar 132677 coalition's value amongst them, isrepparttar 132678 "imputation", a single outcome of a strategy. A strategy is, therefore, dominant, if: (1) each player is getting more underrepparttar 132679 strategy than under any other strategy and (2)repparttar 132680 players inrepparttar 132681 coalition receive a total payment that does not exceedrepparttar 132682 value ofrepparttar 132683 coalition. Rational players are likely to preferrepparttar 132684 dominant strategy and to enforce it. Thus,repparttar 132685 solution to an n-players game is a set of imputations. No single imputation inrepparttar 132686 solution must be dominant (=better). They should all lead to equally desirable results. Onrepparttar 132687 other hand, allrepparttar 132688 imputations outsiderepparttar 132689 solution should be dominated. Some games are without solution (Lucas, 1967).

Auman and Maschler tried to establish what isrepparttar 132690 right payoff torepparttar 132691 members of a coalition. They went about it by enlarging uponrepparttar 132692 concept of bargaining (threats, bluffs, offers and counter-offers). Every imputation was examined, separately, whether it belongs inrepparttar 132693 solution (=yieldsrepparttar 132694 highest ranked outcome) or not, regardless ofrepparttar 132695 other imputations inrepparttar 132696 solution. But in their theory, every member hadrepparttar 132697 right to "object" torepparttar 132698 inclusion of other members inrepparttar 132699 coalition by suggesting a different, exclusionary, coalition in whichrepparttar 132700 members stand to gain a larger payoff. The player about to be excluded can "counter-argue" by demonstratingrepparttar 132701 existence of yet another coalition in whichrepparttar 132702 members will get at least as much as inrepparttar 132703 first coalition and inrepparttar 132704 coalition proposed by his adversary,repparttar 132705 "objector". Each coalition has, at least, one solution.

The Game in GT is an idealized concept. Some ofrepparttar 132706 assumptions can and should be argued against. The number of agents in any game is assumed to be finite and a finite number of steps is mostly incorporated intorepparttar 132707 assumptions. Omissions are not treated as acts (though negative ones). All agents are negligible in their relationship to others (have no discernible influence on them) yet are influenced by them (their strategies are not butrepparttar 132708 specific moves that they select are). The comparison of utilities is notrepparttar 132709 result of any ranking because no universal ranking is possible. Actually, no ranking common to two or n players is possible (rankings are bound to differ among players). Many ofrepparttar 132710 problems are linked torepparttar 132711 variant of rationality used in GT. It is comprised of a clarity of preferences on behalf ofrepparttar 132712 rational agent and relies onrepparttar 132713 people's tendency to converge and cluster aroundrepparttar 132714 right answer / move. This, however, is only a tendency. Some ofrepparttar 132715 time, players selectrepparttar 132716 wrong moves. It would have been much wiser to assume that there are no pure strategies, that all of them are mixed. Game Theory would have done well to borrow mathematical techniques from quantum mechanics. For instance: strategies could have been described as wave functions with probability distributions. The same treatment could be accorded torepparttar 132717 cardinal utility function. Obviously,repparttar 132718 highest ranking (smallest ordinal) preference should have hadrepparttar 132719 biggest probability attached to it or could be treated asrepparttar 132720 collapse event. But these are more or less known, even trivial, objections. Some of them cannot be overcome. We must idealizerepparttar 132721 world in order to be able to relate to it scientifically at all. The idealization process entailsrepparttar 132722 incorporation of gross inaccuracies intorepparttar 132723 model andrepparttar 132724 ignorance of other elements. The surprise is thatrepparttar 132725 approximation yields results, which tally closely with reality in view of its mutilation, affected byrepparttar 132726 model.

There are more serious problems, philosophical in nature.

It is generally agreed that "changing"repparttar 132727 game can and very often does moverepparttar 132728 players from a non-cooperative mode (leading to Paretto-dominated results, which are never desirable) to a cooperative one. A government can force its citizens to cooperate and to obeyrepparttar 132729 law. It can enforce this cooperation. This is often called a Hobbesian dilemma. It arises even in a population made up entirely of altruists. Different utility functions andrepparttar 132730 process of bargaining are likely to drive these good souls to threaten to become egoists unless other altruists adopt their utility function (their preferences, their bundles). Nash proved that there is an allocation of possible utility functions to these agents so thatrepparttar 132731 equilibrium strategy for each one of them will be this kind of threat. This is a clear social Hobbesian dilemma:repparttar 132732 equilibrium is absolute egoism despiterepparttar 132733 fact that allrepparttar 132734 players are altruists. This implies that we can learn very little aboutrepparttar 132735 outcomes of competitive situations from acquainting ourselves withrepparttar 132736 psychological facts pertaining torepparttar 132737 players. The agents, in this example, are not selfish or irrational and, still, they deteriorate in their behaviour, to utter egotism. A complete set of utility functions including details regarding how much they know about one another's utility functions definesrepparttar 132738 available equilibrium strategies. The altruists in our example are prisoners ofrepparttar 132739 logic ofrepparttar 132740 game. Only an "outside" power can release them from their predicament and permit them to materialize their true nature. Gauthier said that morally-constrained agents are more likely to evade Paretto-dominated outcomes in competitive games than agents who are constrained only rationally. But this is unconvincing withoutrepparttar 132741 existence of an Hobesian enforcement mechanism (a state isrepparttar 132742 most common one). Players would do better to avoid Paretto dominated outcomes by imposingrepparttar 132743 constraints of such a mechanism upon their available strategies. Paretto optimality is defined as efficiency, when there is no state of things (a different distribution of resources) in which at least one player is better off with allrepparttar 132744 other no worse off. "Better off" read: "with his preference satisfied". This definitely could lead to cooperation (to avoid a bad outcome) but it cannot be shown to lead torepparttar 132745 formation of morality, however basic. Criminals can achieve their goals in splendid cooperation and be content, but that does not make it more moral. Game theory is agent neutral, it is utilitarianism at its apex. It does not prescribe torepparttar 132746 agent what is "good" only what is "right". It isrepparttar 132747 ultimate proof that effort at reconciling utilitarianism with more deontological, agent relative, approaches are dubious, inrepparttar 132748 best of cases. Teleology, in other words, in no guarantee of morality.

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