Modeling Preferences

Modern economic theory developed under the assumption that only two basic facts are needed concerning human preferences. The first is that agents have consistent preferences that permit modeling choice as the result of the maximization of a preference function subject to appropriate material and informational constraints. The second is that economic agents are self-interested in the sense that the sole criteria relevant to an agent in evaluating an economic transaction is the effect of the transaction on his personal holdings. The core of modern economic theory can be derived from these minimal assumptions (Mas-Colell, Whinston and Green 1995). Empirical evidence has brought both of these assumptions under attack in recent years. The psychological experiments of Daniel Kahneman, Amos Tversky, and others (Kahneman, Slovic and Tversky 1982, Kahneman and Tversky 2000) have shown that human preferences deviate in a systematic fashion from the axioms deployed in neoclassical models of individual choice. Economic experiments beginning with Güth, Schmittberger and Schwarz (1982) have shown that the selfinterest assumption does not generally hold when agents interact strategically. These experimental results must alter the way economists treat the relationship between theory and evidence. We require a behavioral economic theory, firmly based on the interplay between model-building and testing. Since economic choice appears to depend on factors traditionally studied outside economics, behavioral theorists will doubtless explore the models and empirical findings produced in other behavioral disciplines, including biology, anthropology, psychology, and sociology. The challenge is how to deepen the explanatory force ∗Herbert Gintis ([email protected],http://www-unix.oit.umass.edu/g̃intis) is on the faculty of the Santa Fe Institute and the Central European University. He would like to thank Werner Güth and Alex Possajennikov for valuable comments, and the John D. and Catherine T. MacArthur Foundation for financial support.