Economics

Utility Maximization Is an Unfalsifiable and Inadequate Explanation of Human Behavior

Because utility maximization covers everything, it no longer tells us anything

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By Geoffrey Hodgson

Despite the rise of behavioral economics, many economists still believe that utility maximization is a good explanation of human behavior. Although evidence from experimental economics and elsewhere has rolled back the assumption that human agents are entirely self-interested, and shown that altruism and cooperation are important, a prominent response has been to modify individual preference functions so that they are “other-regarding”. But even with these modified preference functions, individuals are still maximizing their own utility.

Defenders of utility maximization rightly reject critical claims that specific behavioral outcomes undermine this assumption. They do not. But this is a sign of weakness rather than strength. The problem is that utility maximization is unfalsifiable as an explanation of behavior. As I show more fully in my 2013 book entitled From Pleasure Machines to Moral Communities, utility maximization can fit any real-world evidence, including behavior that appears to suggest preference inconsistency.

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But note that utility maximization is not a tautology. Tautologies are true by assumption or definition. Utility maximization is not a tautology because it is potentially false. But empirically it is unfalsifiable.

Where does that leave us? Utility maximization can be useful as a heuristic modelling device. But strictly it does not explain any behavior. It does not identify specific causes. It cannot explain any particular behavior because it is consistent with any observable behavior. Its apparent universal power signals weakness, not strength.

Economists have published triumphal articles in academic journals showing that individuals from other species, from rats to fish, are also faithful maximizers of their own utility. But the behavior of anything, from a motor car to a robot, can be made consistent with some utility function.

Again, these demonstrations betray weakness. The claim that utility maximization can explain the behavior of anything from bacteria to bees demonstrates crucially that there is nothing specifically human about such functions of utility or preference. Because utility maximization covers everything, it no longer tells us anything specific about the causes of human behavior.

Darwinian evolutionary approaches are different. As Charles Darwin elucidated in his Descent of Man, we need to consider the processes of natural selection, adaptation and development that lead to specific human traits. For example, propensities for altruism or cooperation among humans have to be explained by reference to the possible survival benefits or disbenefits for both the individual and for the group.

Such conjectures are potentially falsifiable, and they must be critically appraised in the light of the evidence. If they pass muster, then we have viable explanations. It is no longer a matter of stretching one theory to fit all evidence: it is a matter of falsifiable theoretical conjectures being put to the test.

For example, there is a controversy over the respective roles of genetic and cultural transmission in the evolution of human cooperation. Genetic data and evidence of group inter-mixing suggest that the genetic foundations of altruism and cooperation evolved principally among close kin, and then cultural transmission became more important. (See my Pleasure Machines book on this.)

2016 April 3


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  • Pingback: Economics, Rational Choice Theory and Utility Maximization | Bargaining Game()

  • Gustavo Prista

    people that insist in non-bounded rationality models or utility maximization are the ones keeping economics away from the real world as well as other subjects which are already using new technology, information and discoveries about the human mind and how we really work in the social level.

    this only makes economics more of an abstract subject – while it becomes less and less powerful to explain everyday social phenomena.

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  • Derryl Hermanutz

    A related idea in ethical theory is “psychological egoism”. I am incapable of acting on any other than “my” motives, whether they be selfish or altruistic or anywhere in between. Like utility maximization, it is true of everything so it explains nothing. By defining all psychological motives as “my” motives, it effectively defines any deliberate “behavior” as inescapably selfish, serving “my interests”. So my altruistic behavior is “selfish”, because it serves “my” interest in “being altrusitic”. I don’t think an idea that is broad enough to incorporate altruism “within” a definition of selfishness is particularly useful.

    I suspect the idea of utility maximization incorporates some implicit assumptions about “universal” human interests. Interests are determined by an individual’s or a culture’s beliefs, values and purposes. Any sociologist or philosopher can testify to the utter lack of consensus among individuals’ and groups’ beliefs, values and purposes. People disagree — hold and defend opposing beliefs — about basic questions of empirically visible reality. Values are notoriously tribalized. What is the “purpose” of human life? Each individual and group has their own idiosyncratic beliefs and values that condition thier conception of their “purpose”.

    Cultural anthropologists can provide ample evidence that there is no such thing as universal human interests; past or present. Humans have pursued and continue to pursue a full range of mutually exclusive purposes, based on mutually contradictory sets of beliefs and values.

    So “whose” utility is being maximized? Mine? Mine, where I include “my family” as part of “me”? Where I include “humanity” as part of “me”? The individual’s? The tribe’s? Society’s?

    Without defining the unit whose utility is being maximized; and without a reliably consistent ‘quantum unit’ whose utility is being maximized; utlity maximizer theory is reduced to assuming the unit actor is a homo economicus. A self-serving individual human, whose interest extends only as far as me, myself and I; who behaves with no concern for the effects on family, community, society, the environment, life, or any broader conception of “me and mine”.

    Homo economicus, psychological egoists, and utility maximizers, are narcissistic anti-social “psychopaths”. Some humans are psychopaths. But most are not. So trying to define “everybody” as a utility maximizer ends up defining us all as self-serving psychopaths who use everybody and everything to maximize “my” utility. Which is simply not true of real people in the real world.

  • Utilities Optimization? with all the behavioural understanding in the past 20 years combined with all the big data thinking isn’t it time to change our out dated language? Maximization make as large or as great as possible…..to…… Optimization the action of making the best or most effective in Omni circumstance-event-Happening of the Vital now of Omni Resource. Seems to me the Pot is calling the Kettle …..or the same colour? JDS

  • Hodgson makes good points that “evidence from experimental economics and elsewhere has rolled back the assumption that human agents are entirely self-interested” and that “Utility maximization can be [most] useful as a heuristic modelling device.”

    But it is also true that a great deal of behavior CAN be explained by the “assumption that human agents are entirely self-interested” in that same way that old Newtonian physics explains most of the observed behavior of physical objects. We know that assumption has limitations, but it is still quite useful in modelling behavior and revealing insights about why people acts as they do, despite those limitations

    • John Michael Crofford

      Aggregate statistics are very useful, too, and many things can be explained as a function of them. The problem, though, is that those numbers don’t capture all of the ways in which people don’t fit the average and so any theory based solely on the aggregates is going to fail spectacularly a large fraction of the time.

  • Rob Lewis

    Robert Frank’s book The Darwin Economy makes the central point that utility is often a relative quantity, not an absolute one, and this fact changes everything. As he puts it, “positional” benefits are “graded on a curve,” and only have meaning as they rank among those of other people. This single fact completely overturns the “invisible hand” dogma, and (as Darwin understood) can produce individual incentives that are destructive for the group as a whole. The net effect is that we invest too much in positional goods and not enough in nonpositional ones. Government policies can correct this so we all end up better off.

  • jayrayspicer

    Claiming that utility maximization is unfalsifiable strikes me as unlikely, considering that people so rarely even bother to *try* to maximize their utility, and when they do try, they so rarely come close to doing so, and considering that there’s not really any way to determine if they succeed.
    Most of the actual humans I know make almost all their economic decisions on the basis of whether the outcome is good enough, rather than maximal, or even relatively superior. Most economic decisions simply aren’t worth the effort to try to maximize. Where am I going to dinner? Well it doesn’t matter that much. And anyway, by what metric would I even maximize such a decision? Calories per dollar? I think not. Anything else would be pretty subjective or too computationally intensive.
    Even for larger economic decisions, like where to live, where to work, what car to buy, what remodeling contractor to hire, while actual humans certainly put in more effort to avoid making a bad choice, everybody invests a certain amount of work commensurate with the importance and then calls it a day or runs out of time. Even Paul Krugman admitted that he didn’t optimize his house remodel. If a Nobel Prize-winning economist couldn’t be bothered to optimize a major economic decision, what are the odds anybody else would?
    And ultimately, how would we even know whether we maximized our utility in any given instance? Not only do we generally not have access to complete knowledge about all our choices (if we are even aware of all our choices) there are infinite opportunity costs for any economic decision. So, unfalsifiable or just impossible on its face? What’s weird is that this preposterous idea ever gained such currency in the first place. Even assuming that on average “it must work out” to a reasonable approximation of rational maximization is just so much desperate hand-waving. Empirical research is required to even guess at an approximation of the shape of the curve. And given human variation and subjectivity, approximation is the best we could ever hope for. So how is this even a thing, much less a foundational axiom of prevailing economic theory?

  • Edd

    This author fell into a trap of his/her own protest. He/She couldn’t justify his/herself, and Indirectly showed us that utility maximization is believable. See, “For example, propensities for altruism or cooperation among humans have to be explained by reference to the possible survival benefits or disbenefits for both the individual and for the group.”. This is what the household utility maximization means.