THE ECONOMIC THEORY OF PREFERNCE FORMATION

STATUS QUO

• in Hirschleifer’s words, “arbitrary brute facts” (1978: 240).

• Becker: “one of the most rewarding experiences” of his intellectual life

• Economists are concerned especially with the shaping of preferences for the ordinary goods, a case in which the causal connections are very intricate

CONCLUSIONS

• from the unpredictable to the undetermined, or arbitrary

• Becker: go around, circumvent: Fundamental preferences are the same (de gustibus non est diputandum) and we choose differently based on our personal and social capital

WHERE TO START? SOCIOLOGY

Sociology focused on cultural preferences

Cultural preferences are shaped by the natural environment of communities

Cultural preferences are fitness enhancing; they are not impeding

WHY ECONOMICS AND SOCIOLOGY FAILED?

• Economics: right on maximization, wrong on the maximand

• Sociology: right on determinant and maximand, but wrong on maximization

DEFINITION OF SATISFACTION

• Satisfaction is an emotional signal for the existence of the trapping of low entropy, matter and energy HAVING THE POTENTIAL to trigger action, movement , from the living organisms’ external reality

• NOTE: satisfaction is a means, not a final end

SUPPORT

• Darwin as quoted by Popper: “mental powers must help animals and men in the struggle for life” (Popper, 1988: 148)

• A characteristic property of life is that “any living organism fights the entropic degradation of its material structure” by “sucking low entropy from the environment” (1976: 55). The “trapping” of low entropy then results in an immaterial flux: the enjoyment of life. This “entropic feeling must characterize life at all levels” (Georgescu-Roegen, 1976: 56) and it cannot be anything else but what we call, with reference to the animal world, satisfaction.

• enjoyment of life=TRAPPING OF LOW ENTROPY

DEFINITION OF PREFERENCES

• In an evolutionary perspective individuals should watch and signal the level of satisfaction per unit of scarce resources spent with the trapping of low entropy

• . A component of external reality or a good x should be said to be preferred or ‘taste better’ than some other one y, when the individual gets a higher level of satisfaction for each unit of scarce resources spent with consumption of good x in comparison with y. And this is so just because for each unit of scarce resources spent with consumption of good x the individual gets a higher quantity of low entropy

THE RULE OF THE PREFERENCE SHAPING

• As a rule, preferences for any two goods are shaped inversely related to their opportunity costs: the lower the opportunity cost for one good the higher the preference for that good

• Preferences signal costs

Relatively low opportunity cost for fish results in relatively high preference for fish

Relatively high opportunity cost for fish results in relatively low preference for fish

PROOFS

• Southern people are relatively fonder of tomatoes and their derivatives while northern people are relatively fonder of pork bacon

• People in warm climates like hot food; people in cold climate like sweet food;

• Tocqueville in his Democracy in America: “The first and most intense passion that is produced by equality of condition is, I need hardly say, the love of that equality” (1945: 99)

PROOFS

Hofstede (2001: 86) confirmed in a more recent and based on research filed study the same relationship: people end up preferring equality if they have experienced equality and inequality if they have experienced inequality10. In other words people end up preferring what is relatively plenty or that which has a lower opportunity cost.

WHY WE SHOULD NOT RELY ON PREFERENCES ONLY?

• The previous examples emphasize something fundamental about preferences: they are not just opportunity costs expressed in an emotional way. They are memories of the past opportunity costs. When in any decision we make we take into account the present costs and preferences, we do so because we try in fact to reconcile present costs with the past ones, which are disguised as preferences.

THE CONSISTENCY RULE

• The individual chooses the opportunity cost patterns consistently with his preferences.

• The individual chooses that pattern which should have shaped the given preferences.

THE CONSISTENCY RULE: GRAPHICAL PRESENTATION

BECKER

• Extended utility function: u=f(x,y,x,P,S)• Subutility functions: u=f(x), u=f(y)…• Weak ideas:• 1/personal capital: fixing of what• 2/social capital: fixing of what• 3/preferences are assumed to exist• 4/no solid correlation

From wrong psychology to bad economics and back

• An economic theory away from psychology: preferences are unpredictable, undetermined

• A psychology based on a on a wrong theory: preferences are irrational: Jonathan D. Cohen – “The Vulcanization of the Human Brain: A Neural Perspective on Interactions Between Cognition and Emotion,” in Journal of Economic Perspectives, Volume 19, Number 4, Fall 2005, Pages 3-24

• A wrong economic theory goes hand in hand with a wrong psychology

This (general power) perspective on preferences

• GP perspective: preferences are formed on a rational basis: the principle of maximizing the trapped low entropy

• Because they are formed based on past opportunity costs, any human conscious choice takes also into account the present costs as they are understood or perceived by individuals. In other words, choices compromise between the past costs (depicted by preferences) and the present costs of trapping.

• It is because of this that our basic tastes and instincts run counter to what reason dictates: The present costs of acts and things do not match the past costs recorded in an emotional way; they are in dissonance.

The orthodox perspective on preferences as presented by Cohen (2005)

• With Cohen, while emotional responses are still of great value, they are not always our reliable stewards because they appear to rely on mechanisms that are “old,” “relatively unchanged,” “highly specialized for particular purposes,” “highly stereotyped” in their responses and “relatively inflexible.”

• Emotional responses entail behavior that is inconsistent or can deviate from “the rational principles.”

Why is not a coercive transaction preferred?

• Coercion with absolute magnitude• Coercion with absolute and relative

magnitude

Cohen’s cases: trading human lives

• Switch Scenario, Trolley Dilemma and the Footbridge Scenario

• In the Switch Scenario and Trolley Dilemma killing one worker in order to save the lives of other five is acceptable; in the Footbridge scenario, it is not. This inconsistency is irrational.

Cohen’s cases: split offering

• Split offering: offers of less than 20% of the sum are routinely rejected across a wide range of cultures and amounts;

• Cohen takes right standard economic theory’s prediction that any split offering, whatever small but nonzero amount, should be accepted, because “something is better than nothing.”

GP perspective: Cohen’s cases are misidentified

• Orthodox economic theory does not have tools to deal with:

• Coercive transactions: Footbridge Scenario is the case of a coercive transaction; the Switch Scenario and the Trolley Dilemma are not;

• Relative positions or justice: The split offerings are about just ratio, a problem the orthodox economic theory cannot solve by its very nature

From a GP perspective (employing coercive transactions and just ratio)

• Our emotional responses produce ordinal rankings and rank classes of situations; they cover less particular cases (coercive and voluntary, just and unjust);

• It is mechanisms of emotional processes that are less local in comparison to mechanisms of abstract reasoning.