Richard Thaler gets the 2017 ‘Nobel prize’ – Lars Syll
The Swedish Academy of Sciences has announced that it has decided to award the 2017 Sveriges Riksbank Prize in Economic Sciences – in Memory of Alfred Nobel – to Richard Thaler. A good choice for once!
To yours truly Thaler’s main contribution has been to show that one of the main building blocks of modern main- stream economics – expected utility theory – is fundamentally wrong.
If a friend offered you a gamble on the toss of a coin where you could lose €100 or win €200, would you accept it? Probably not. But if you were offered to make one hundred such bets, you would probably be willing to accept it, since most of us see that the aggregated gamble of one hundred 50–50 lose €100/gain €200 bets has an expected return of €5000 (and in making our probabilistic calculations we find out that there is only a 0.04% risk of losing any money).
Unfortunately – at least if you want to adhere to the standard neoclassical expected utility maximization theory – you are then considered irrational! A mainstream neoclassical utility maxim- izer that rejects the single gamble should also reject the aggregate offer.
Matthew Rabin’s and Richard Thaler’s modern classic Risk Aversion shows forcefully and convincingly that expec- ted utility theory does not explain actual behaviour and choices.
What is still surprising however, is that although the expected utility theory is obviously descriptively inadequate, colleagues and microeconomics textbook writers all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.
That cannot be the right attitude when facing scientific anomalies. And when models are plainly wrong, you’d better replace them! Or as Rabin and Thaler have it: ” It is time for economists to recognize that expected utility is an ex-hypothesis, so that we can concentrate energies on the important task of developing better descriptive models of choice under uncertainty. ”
What many of the works of Thaler show is that expected utility theory is an ‘ex- hypothesis.’ Or as Monty Python has it: This parrot is no more! He has ceased to be! He’s expired and gone to meet his maker! He‘s a stiff! Bereft of life, he rests in peace! If you hadn’t nailed him to the perch he’d be pushing up the daisies!
His metabolic processes are now history! He‘s off the twig! He‘s kicked the bucket, he‘s shuffled off his mortal coil, run down the curtain and joined the bleedin’ choir invisible!! THIS IS AN EX-PARROT!!
An ex-parrot that changes truth shouldn’t just be mended. It should be replaced!
Source: Real World Econ Rev, 10 Oct. 2017 https://rwer.wordpress.com/2017/10/10/richard-thaler-gets-the-2017-nobel-prize/