ISTM that this arises largely from insureds believing that they are getting more insurance than they are, in fact, in the fine print, getting. Many insureds with claims are unpleasantly surprised by the extent of their coverage. The ones without claims never discover their mistake.

This mistake is not an accident, it is deliberately induced by the insurance salesman. It’s not technically fraud because the fine print is there.

(Of course, I’m referring to actual insurance; IIRC there are behavioral economics experiments in which they don’t try to deceive the subject and still find irrational preferences, but I think those are overshadowed by insurance sales tactics in practice.)

What I tried to say:

1. John, we ‘may not be able to’ but you should for sure at least try.

and,

2. Is there some mathematical model in modern economics treating this aggregation of what are divergences from rationality in the same direction, for all agents? In point: the general preference to pay more for insurance than is “rational”, based on the extent and the probability of the disaster.

What I don’t understand, not being John, is why John had a good general treatment of risk and still chooses apples/oranges to work in bounded rationality.

What I meant to say, in this notably unsuccessful snippet was that (contrary to some suggestions) incorporating agents who are heterogeneous in the sense that they have different tastes regarding things like apples and oranges is unlikely to make much difference to the results of a DSGE model.

What’s more likely to be relevant is the kind of ex post heterogeneity that emerges from incomplete markets, overlapping generations and the kind of risk preferences mentioned by JoB. My incautious reference to “emergent properties” was only meant to say that we may not be able to derive analytical solutions to the associated general equilibrium problems, and may instead have to rely on aggregate relationships consistent with observation and with an intuitive understanding of the likely effects of bounded rationality etc.

The core of bounded rationality has to do with risk and certainty – humans love small gambles and hate big risks. There’s no way that this behaviour will average out – quite the contrary. Given the option we’ll all buy some shares hoping to be the first – & we’ll all buy some insurance against loosing out on all of the shares we buy.

What I don’t understand, being a non-economist, is why economists haven’t provided theories that are as simple as the apple/oranges one including this.

What I don’t understand, not being John, is why John had a good general treatment of risk and still chooses apples/oranges to work in bounded rationality.

At the very least one should expect the impact to come at the level of derivatives of an apple/orange stuff, should one not? What’s going to be the price one’s willing to pay in order to be sure one can have an apple in a year from now? At what price do I get some remote chance of winning so many oranges now that I won’t have to worry about them, at all, never again?

Which would explain why economists have had it wrong for such long times; they were sufficiently right during all these times not to really need a correct dynamic equation.

I have no clue whether this makes any sense at all to an economist. Then again most of the economists don’t make a lot of sense to each other, or so it appears ;-)

PS: I always wondered: price theory cannot ever have meant that each individual has a willingness to pay in such and such a proportion? It would be odd that any 2 people are at any time agreeing in the relative preferences they have for anything. No?

Yes

This is nuts. Delegating decision making wrt technical matters is in no way an “abdication of the use of reason.” No modern person would be able to live a modern life without delegating thousands and thousands of decisions every day.

And what does this question have to do with Ludditism anyway?

http://www.bepress.com/ev/vol2/iss4/art2/

That such models may not appear to have brought about a revolution may have more to do with the sociology of economics than the content of the models.

To start with some economists put quite a lot of work into showing that there are circumstances where extra model features don’t make any difference—Barro 74 gets interpreted like that for example, even if the paper is less sweeping.

Other investigators take an incremental approach and the reasons for doing so are quite compelling—it helps to pin down the effect under investigation and helps maintain connection with the establishment.

However I think there is a more fundamental issue. The issue with multi agent models is not simply tractability but the expansion of the range of potentially debatable assumptions that are available simply because the models are bigger. That changes the nature of the results you can expect to get and makes research more about what assumptions you make than about what you can conclude from them.

To answer the two questions, I think there are plenty of cases where multi agent models do not yield the same results as single agent models and the equity premium puzzle is a fine area. For a reason to think that they should be relevant I would point to their potential, and the complete inability of single agent models, to address distributional issues.

Alan Kirman’s “Whom or What Does the Representative Individual Represent?” (Journal of Economic Perspectives, V. 6, N. 2, 1992: 117-136) is a classic take on the implications of the Sonnenschein-Mantel-Debreu theorem for representative agents.

One implication I take from Kirman is that no reason exists to pay any attention to Robert Lucas’ estimates of the benefits of successful stabilization policy.

While I’m handing out writing assignments, consider Graham White’s “Capital, Distribution, and Macroeconomics: ‘Core’ Beliefs and Theoretical Foundations” (Cambridge Journal of Economics, V. 28, 2004: 527-547). Macroeconomists had a consensus model only in the sense that they ignored some economists.

The problem with “microfoundations” isn’t merely that consumers don’t maximize utility and firms don’t maximize profits. Even if the microeconomic assumptions about individual behavior were valid descriptions of individual behavior, the mainstream macroeconomic models would still be invalid. The conclusions don’t follow from the assumptions in a world with more than one consumer and more than one commodity. But, for decades, mainstream macroeconomists have not cared enough to get their math correct.

I don’t want to be too harsh, but someone writing a fragment like that in a class paper would deserve to fail the class.

Due to the Sonnenschein-Mantel-Debreu result, we know that with heterogeneous agents any path of prices (subject only to very weak constraints) can be possible prices.

This means that you can give examples of just about any “pathological” behavior of prices that you want, and that unless you have access to the heterogeneous utility functions you can have virtually no testable implications for your theory.

Furthermore, if you start thinking about the dynamics of attaining equilibrium—which virtually no economist does, showing the intellectual turpitude of the field—then it matters a great deal whether you have heterogeneous agents or not. It is harder to have nice equilibrium convergence results with heterogeneous agents.

That John Quggin is a professional economists and can still ignore heterogeneity summarily shows how far economics has drifted from serious intellectual inquiry.