Looking for a psychology for the inner rational agent

Research in psychology and behavioural economics shows that individuals’ choices often depend on ‘irrelevant’ contextual factors. This presents problems for normative economics, which has traditionally used preference-satisfaction as its criterion. A common response is to claim that individuals have context-independent latent preferences which are ‘distorted’ by psychological factors, and that latent preferences should be respected. This response implicitly uses a model of human action in which each human being has an ‘inner rational agent’. I argue that this model is psychologically ungrounded. Although references to latent preferences appear in psychologically-based explanations of context-dependent choice, latent preferences serve no explanatory purpose

Can a Humean be a Contractarian?

In this paper I argue, contrary to Hartmut Kliemt, that it is possible to be both a Humean and, in James Buchanan's sense, a contractarian. Hume sees principles of justice and political allegiance not as actual or hypothetical products of explicit agreement, but as conventions that have emerged spontaneously. However, it is fundamental to Hume's analysis that conventions are mutually advantageous, and hence cognate with agreements. The core idea in Buchanan's contractarianism is that the proper role of government is to implement voluntary exchanges between individuals, not to define and maximise a unified conception of social welfare. Although real politics cannot be based entirely on unanimous agreement, the voluntary exchange approach provides a valuable structure for normative economics.Hume, Buchanan, contractarian, contractarianism, conventions

On ‘common-sense ontology’:A comment on the paper by Frank Hindriks and Francesco Guala

This note comments on Hindriks and Guala’s ‘unified theory of institutions’. One of the components that Hindriks and Guala seek to unify, and which they claim is unsatisfactory on its own, is the analysis of conventions that derives from the work of Lewis. I argue that the Lewisian approach provides simple and powerful explanations of many regularities in the social behaviour of humans and other animals. Those explanations can be seen as good social science even if, as Hindriks and Guala argue, they do not fit with common-sense ontology

The emergence of reciprocally beneficial cooperation

This paper offers a new and robust model of the emergence and persistence of cooperation. In the model, interactions are anonymous, the population is well-mixed, and the evolutionary process selects strategies according to material payoffs. The cooperation problem is modelled as a game similar to Prisoner’s Dilemma, but there is an outside option of nonparticipation and the payoff to mutual cooperation is stochastic; with positive probability, this payoff exceeds that from cheating against a cooperator. Under mild conditions, mutually beneficial cooperation occurs in equilibrium. This is possible because the non-participation option holds down the equilibrium frequency of cheating.Cooperation; voluntary participation; random payoffs.

Spurious complexity and common standards in markets for consumer goods

It has been argued that cognitively constrained consumers respond sub-optimally to complex decision problems, and that firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. We model a countervailing force. Restricting one's choices to the most easily comparable options is a psychologically well-attested heuristic. Consumers who use this heuristic favour firms that follow common conventions about tariff structures. Because a 'common standard' promotes price competition, a firm's use of it signals that it offers value for money, validating the heuristic. This allows an equilibrium in which firms use common standards and set competitive prices.common standard, spurious complexity, cognitive limitations

Common reasoning in games: a Lewisian analysis of common knowledge of rationality

The game-theoretic assumption of ‘common knowledge of rationality’ leads to paradoxes when rationality is represented in a Bayesian framework as cautious expected utility maximisation with independent beliefs (ICEU). We diagnose and resolve these paradoxes by presenting a new class of formal models of players’ reasoning, inspired by David Lewis’s account of common knowledge, in which the analogue of common knowledge is derivability in common reason. We show that such models can consistently incorporate any of a wide range of standards of decision-theoretic practical rationality. We investigate the implications arising when the standard of decision-theoretic rationality so assumed is ICEU.Common reasoning; common knowledge; common knowledge of rationality; David Lewis; Bayesian models of games

Consumers’ surplus when individuals lack integrated preferences:A development of some ideas from Dupuit

In modern economics, consumers’ surplus is understood as the sum of individuals’ compensating variations, defined by reference to well-behaved preferences. If individuals lack integrated preferences, as behavioural economics suggests they often do, consumers’ surplus cannot be defined. However, Dupuit – the earliest theorist of consumers’ surplus – did not assume integrated preferences. His concept of consumers’ surplus can be interpreted in terms of the maximum yield of discriminatory prices. In principle, this can be measured without making assumptions about preferences, but (contrary to what Dupuit apparently thought) is not in general equal to the area under the observed demand curve

Paternalism and entrepreneurship

I explore the area of economic life at the border between paternalism and entrepreneurship, with reference to dual-self Planner/ Doer models used in behavioural economics. Using a concept of a ‘continuing person’ as the composition of her Doer selves at all points in time, I argue that competitive markets provide individuals with every opportunity for feasible voluntary exchanges that they collectively want to use. The mechanism that achieves this result is entrepreneurship. Entrepreneurs do not respond to the preferences that people hold as Planners; they try to anticipate the future preferences of Doers

The behavioural economist and the social planner: To whom should behavioural welfare economics be addressed?

This working paper is a lightly edited version of two chapters of a book that I am currently writing. This book will present and defend a form of normative economics that conserves the main insights of the liberal tradition of classical and neoclassical economics but does not depend on strong and implausible assumptions about individual rationality. In this paper, I ask who the addressee of normative economics should be. Conventional welfare economics, both neoclassical and behavioural, asks what is good for society from an impartial perspective - the view from nowhere. Explicitly or implicitly, its recommendations are addressed to an imagined benevolent despot. I argue for an alternative, contractarian approach, in which recommendations are addressed to individuals who are looking for ways of coordinating their behaviour to achieve mutual benefit. The contractarian approach disallows paternalistic recommendations, since these have no valid addressee