On real (demonstrated) preferences and stated preferences

Hello world!

Today, no knives and hopefully a short post with little hard concepts. As you may or may not know, France is having (again) a situation with its farmers. They complain that, because of supermarkets and large retailers in general, they don’t make enough money and call for taxes and so on. The general public seems to be defending farmers against the “cruel, dehumanizing methods” of “big business”, and calling for more “friendly-local-small-mom-and-pop-shops” instead.

The problem is that all we can see in the real economic world points towards the fact that most people prefer (at least for rather generic products, like food) to buy for cheap in supermarkets or malls. Sure enough, they’d generally prefer going to shops within walking distance of their homes, get a super friendly service by someone they know, and buy the exact product they wanted from a huge choice, at the lowest possible price, 24/7. I too wish I could fly like superman! So they don’t really lie when saying they want local shops instead of big malls.

However, when confronted to the actual price (cost) of their choices, they actually pick a mix between “ideal and reality” that is largely more weighted by the budget constraint than by their utopian idealistic beliefs. The phenomenon has been, in more theoretical ways and with a focus on decisions under uncertainty, been studied and illustrated by Kahneman and Lovallo in their article “Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking” (1993).

This leads to a fundamental point that most behavioural economists (and most politicians) seem to be ignoring. As the late Murray N. Rothbard pointed out, our preferences are demonstrated by our actions, not the other way round. And they change, vary, adapt all the time. And have no value whatsoever until they correspond to actions (as economics is all about human (inter-)action, not philosophy). So you have no way to really reveal what you like or not other than by acting. Whenever we answer a survey, a poll, when we play a lottery, all we show is what we thing is best in terms of answers, not in terms of choices, since our action in these cases are answers and not votes or investments.In some cases the two may coincide more or less, but as soon as this becomes socially/ethically/politically loaded, the perceived benefit in “fitting with the group”, “not transgressing the rules”, “sounding like a great guy” and so associated with the choice we don’t prefer on may overcome the (to us purely) benefits of the choice we prefer. So we say “heum… the Government is great and Obama a superb president”, and then go to the local caucus and vote Rand Paul…

So, and here I diverge from Rothbard, the key point in understanding the preferences of people, the roots of human action, is to try to extract results from observed data of actions. Econometrics, mathematical exploration of facts, but ideally in a Bayesian and non-parametric (or as little parametric as possible) being the only practical way of arriving at something useful. Indeed, pure theory on the way people behave, the “extreme a-priorism” of the Austrian School seem dangerous unless we are perfectly omniscient and people are always rational (and/or coherent) and their decisions aggregate nicely. Note that this Austrian a-priorism may be a great guide on what or where to try and find data with your models!

So people cry for small shops and farmers but got to big malls and buy the cheapest food they can for their required quality. Based on that, please, oh please, do NOT create taxes to help small businesses (and farmers) and penalise the big retail industry. That will:

  • Not help the farmers (see the New-Zealand example of the 80’s the less help, the better in the end)
  • Not help the consumers (their purchasing power gets reduced, and they’re forced to got to small shops, which they don’t really want)
  • Help increase yet again the already overextended power of the Government on all things, thus reducing the freedom of all.

Well. I guess that’ll conclude it! Freedom!


4 Comments Add yours

  1. EA says:

    Hi Franz!
    By any chance, are you an actuary?


  2. Franz says:

    Hi EA,
    Nope, not an actuary, even if I do work with some, from time to time and do research that sometimes border actuarial sciences.


    1. EA says:

      Thank you for this blog.

      Why do you say it is better to apply bayesian statistics to the data to avoid the extrem “a-priorism” of the Austrian school ? I thought the baysian approach relied on “a-priorism” ?

      I’m waiting for an article about guitars or amplifier…


      1. Franz says:

        I’ll sure do one on guitars and/or amps soon!

        Bayesian approach has some a-priorism to it since unless you go to infinity, the prior has influence (a lot of it at the early stages). So you need to formulate a rough hypothesis on the behaviour of economic agents, that much is true. But very soon you get to update and incorporate data into you a priori description of the phenomenon. So you’re not forcing the theoretical construct onto reality, you let reality twist what construct you might have had in the first place. Less risky in the face of messy, not totally coherent, sometimes disconnected, decisions of humans.
        So the “a-priorism” is certainly needed (we can understand the Popperian description of science as an a-priorism) but the extreme version of it that the Austrian School advocates may not be best unless we’re supremely clever, coherent and that the whole dependence structure between agents decisions is well behaved.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s