Economists assume that we don't need to make decisions, because since we are possessed of perfect knowledge, knowing what to do is innate to us. But that's nonsense. So, how do we decide what to do?
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This is the transcript:
How do we make decisions in the real world? It's an important question because economic theory says, in essence, that we don't really need to make decisions at all, because according to the assumptions of both neoclassical and neoliberal economics, we have perfect knowledge. In other words, we know everything now, and in the future, and as a consequence, why would we need to make a decision, because the world is optimal?
Now, obviously, this is complete nonsense. There's no beating around the bush here. The whole of economic theory is based upon this stupid assumption, and most of the papers that are published in most of the serious economic journals in the world do in some way relate back to this absurd claim.
So this isn't a minor issue. It's a fundamental problem within the vast range of economic theory that is produced every year by our universities, but which informs the decision-making of people like the UK Treasury and the Bank of England. They assume that we have this perfect knowledge and that there is no difference between risk and uncertainty, but in the real world there is.
The real world is uncertain. In other words, we do not know what is going to happen. We cannot appraise all the possibilities. We can't attribute probabilities to their outcomes. We simply live in a fog. There's nothing wrong with that. That doesn't imply that we are somehow inferior beings. It just means that reality isn't the same as the economic models that are used by economists to make predictions, which are wholly unrelated to reality.
So, how do we, in the real world, make decisions even though we haven't got all the information that we need to make perfect decisions?
There's a paradox here. We have to act without knowing what is best to do, but not acting is at the same time an utterly unacceptable option. We do actually need to get on with life.
So the consequence is that any decision that we make involves both risk - that is stuff that we can predict can go wrong - and things that we don't even know might go wrong, but which nonetheless could do so.
So we must accept that not knowing is part of our decision-making process, but what, in that case, can we do?
We clearly can't rely on data alone. Nor can we rely on economic models or forecasts, because those things are built on the basis of this apparent certainty, which economists claim exists. So instead, in the real world, we rely on three things when it comes to the making of decisions. They are values, heuristics and maxims.
Values are, in many ways, the most important of these three because they reflect our basic ethical assumptions about life. They reflect the fact that we will be law-abiding. We will comply with the regulation that is imposed on us by law. We will respect other people's property. We will actually act in what we consider to be an ethical fashion. We won't discriminate, and so on.
These are our values, the things that define us as who we are, and in most cases, that define us as law-abiding human beings. They provide the framework in which our decision-making will take place.
We won't, in the case of most people, stand in front of a supermarket shelf and think, I'll have that and take it, slip it into our pocket, and never have any intention of paying for it. Some people do, but most of us don't, and that's because our values won't let us, and values therefore matter enormously. They help us decide what we're going to do.
But heuristics are in the same group. They are something that also help us decide. A heuristic is something that simply provides us with a rule of thumb that lets us deal with the complexity of any decision-making process. Now, sometimes heuristics can be reduced to very basic rules.
For example, drive on the left in the UK; drive on the right in the USA and most of Europe. That's a heuristic. There is no right or wrong about driving on the left or right, but there is a convention that says that this is what we do, and we know it, and therefore we comply with it, and therefore we overcome the problems that would otherwise arise if we didn't follow the necessary rule of thumb. This isn't a moral issue that we're talking about here. I know it is laid down in law, but the reality is that we use that rule of thumb to interpret our behaviour to such an extent that we don't even realise that it is, in fact, dictating what we do.
And this is true of a great deal in life. We've learned patterns of behaviour that let us decide in ways that shortcut the entire process of doing a great deal of the things that are necessary in life.
I leave a room; I turn the light off. It's, as far as I'm concerned, a heuristic. My sons have never learned it. They drive me around the bend. Every single time they leave a room, the light is left on. We have different rules of life that we've learned, and behaviour is different as a consequence, but all of us have to learn what is useful and what is not.
Heuristics provide us with simple guides for what might be complex decisions. For example, one of the most difficult things to learn when you become a driver is how to manage a roundabout. These are intensely complex decision-making events. So heuristics are really important.
But there's one other thing that we use as well, and that is maxims. And maxims are the way in which we interpret our values to actually come up with actions. A value is something that is, in a sense, not specific to an outcome. We believe this to be true, but a maxim translates that into a way of acting.
So, be compassionate.
Do no harm.
Love your neighbour as yourself.
All of those are maxims. They're guides for interpretation of behaviour in specific situations, and we use them in conditions of uncertainty to let us decide what we actually want to do. They embrace equality, and justice, and sustainability, and care, and as a consequence, they help us navigate uncertainty.
Now, none of these three methods of thinking provides us with outcomes that will necessarily be perfect. Mistakes will happen, but doing nothing is worse. If there are situations where we must decide, and we don't, paralysis is normally the alternative. You could sit at the roundabout forever if you hadn't learned the heuristic about how to make your way around it. You would create a traffic jam. The world would get very annoyed with you.
That's true with regard to a lot of economic decision-making as well. You not only have to go to work, but you have to learn the routines that work requires of you to ensure that you can deliver what is expected of you during the course of the working day.
That's what training is for. It is there to shortcut the processes that would otherwise literally create paralysis within your working day.
And the point is action with care is always better than inaction through fear.
But we have to remember, the economy is not a machine. The diktats that come out of the economic thinking of universities and elsewhere would suggest that it is mechanical, but it isn't. It's a living process, managed by humans, informed by judgment and not certainty, and we have to be able to undertake our economic decision making, recognising that embracing uncertainty is a strength, and acting with humility is wisdom. Doing the right thing is never a waste of time. That is how we build a better future and we can know what the right thing is by combining our values, our heuristics, and our maxims. Together, they give us the capacity to make good decisions.
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Crumbs, I was thinking along the lines of this earlier this morning reflecting on – of all things – the over use (and even just use) of I.T. /tech based CRM (Customer Service Modules) in our customer services methods.
The CRM ‘process’ – now increasingly inculcated with AI – is sort of standardised approach, like a comfort blanket of some sort. But what that story does not tell is the amount of people who just give up in these systems and try to talk to a real person instead – what John Seddon calls ‘failure demand’ because the CRMs and AI are based on models using (I bet) averages of some kind to anticipate demand.
These CRM systems are supposedly ‘elective, empowering’ – giving the user ‘choices’ but in actual fact place decisional pressures on them when in fact what they need is someone to help them make those decisions by having a proper discussion with a real person. Seddon’s critique is the CRMs do not deal with the complexity or variety of reality very well unlike real committed helpful human beings.
So when it comes to making effective decisions, embracing complexity and variety have to be in the mix. Life is too complicated to formularise it, not matter what any computer salesman tells you.
Much to agree with
Touches on my thoughts about the culture of the clinic waiting room , which might be some kind of experimental test bed for consumer/producer behaviour – at a world renowned eye hospital on Friday .
You arrive at your ‘appointment time’ asking ‘reception’ (behind a glass screen) whether there would be any wait and who and how many nurses/doctors I am to see. No clear answer – other than the whole time could be two hours.
There are twenty to 50 people sitting in chairs arranged in rows and some at right angles – in various states of alertness – some desperately trying to hear above the ambient clatter and chatter of voices echoing around the corridors and spaces – if the lady with a lanyard who has popped out from behind a mysterious panel – is calling their name. The lady obviously doesn’t expect to be heard immediately and proceeds forward raising her voice and uttering some name originating from one of the five continents, and eventually someone responses and staggers towards her and follows her behind the panel.
It begins to dawn that all 50 people may have been given the same 10 am appointment . and as a result some remain anxious, while others simply give up and doze – and the little cluster of lanyard ladies around the reception desk giggle and share jokes – not glancing towards the animals -to- the slaughter punters awaiting the timing of their unknown fates.
Maybe a simple numbering system or a screen showing the list of names as they approach the top of the queue? But no the one thing the poor old ‘consumers’ need is information – and the whole system is to keep them ignorant.
My local hospital has a list of the numbers of patients in order, and you are given one as you arrive. There is a screen which counts the numbers down, so you know when it’s your turn. Simple and effective. This too was an eye hospital among other functions.
Been there done that, but in Bristol Eye Hospital Emergency you do get a numbered card telling you that you are number 25 in the triage queue. But yes, noise, chairs in all directions and giggling lanyard ladies and screens. Our GP surgery has replaced the lanyard lady with an AI system, calling out your name and putting it on a video screen and telling you to “go to treatment room 101”. Help.
Last week I had to make payments from two banks, which were likely to be flagged as suspicious transactions and would lead to the accounts being frozen. Fortunately both banks still had branches in our city, so that was able to go to the branches to make the payments and try to get them past the fraud system. In each branch a delightful young person helped me. In each case it took about an hour to get the payment accepted. The advisor phoned the fraud department and we sat in a room, listening to piped music, interspersed with being asked the same questions time and time again. The only difference from communicating directly with a computer was that the questions were asked in a strong accent, which I could not have understood without the help of the advisor. It is not just that computers have taken people’s jobs, but that those who are left have been converted to human computers
I send money to a church in Beirut doing amazing work with refugees (about 1/3 of the Lebanese population are refugees – the majority from their former enemy and occupying power, Syria), and internally displaced victims of Israeli attacks on South Lebanon, and victims of the chaos that is Lebanon (food, medical clinics, education, social support, help with house repairs after the port explosion, available to all groups, races, religions).
HBOS group took exception, and it took me about a year to arrange another route (100% above board) to get the money to them and publicise that to others in the UK.
Lebanon is a classic example of a country without a functioning government, that runs a dollarised economy. Their own currency, the Lebanese pound, is worthless and non negotiable.
Thanks. This was very helpful. I assume the political recognition of this always murky interwoven complexity of human action is one of the arguments for the UK state remaining without a written constitution. More popularly referred to as a pragmatic politics of ‘decent chaps’.
How does any individual or society, once they recognise that moral corruption has become the political group heuristic, set about changing this ?
That is a much harder question to answer.
But first, we have to expose the nonsense.
Orthodox theory presumes the economy is in equilibrium to render it amenable to simple mathematical analysis, and the nonsensical idea of “perfect knowledge” is a result of this assumption.
Complexity Economics assumes the economy’s normal state is disequilibrium, with agents in the economy changing the system as they operate within it:
https://www.santafe.edu/research/results/working-papers/complexity-economics-a-different-framework-for-eco/
^ This seems to make more sense 🙂
It does, but it is also rare. That is the point that I was making.
About 30yrs ago, I used to drive on an infrequent but regular basis from rural Wiltshire along the M3 to SE London, for a theology distance learning course, as I slowly moved over about 5 years, from a James Herriot life to the Vicar of Dibley (without the gender shift).
Somewhere in outer W. London, Richmond? I would encounter the A316, Great Chertsey Rd. en route to the A205? S. Circular.
At the first roundabout on the A316 after running out of motorway, I realised with a jolt, that the HEURISTICS of joining a roundabout in London were very different to those in deepest Wiltshire, particularly the quiet agricultural bits I was familiar with. On the S. Circular roundabouts, as you joined them, if there was a car-sized, fast-moving gap approaching from the right, then – foot down, shut my eyes, yank the wheel to the left and accelerate into the gap AND DO NOT STOP. I quickly learned that the expectations of London black cab drivers and LT bus drivers were different from those of Wiltshire tractor drivers hauling leaking slurry tankers along the A303 at 20mph. The London drivers expected everyone to just keep moving and swerve into the gaps.
If I stopped to wait for a Wiltshire-sized gap on the S. Circular, I would cause a traffic jam and never get onto the roundabout.
I adjusted, and also had to remember to adjust in reverse as I rejoined the A303 on the way home. My newly acquired London driving habits were not welcome in rural Wiltshire and would probably take me straight into the back of a slurry tanker.
Sadly, our leaders cant’ or won’t apply the same principles to running the country. Because as Theresa May once said, “Nothing has changed”, when clearly, everything HAS changed.
Even worse, Starmer promised change, but is changing nothing, not really, not the change that we really need.
Spot on.
Perfect example.
If we have perfect knowlege why do we need insurance?
Economics makes no such claims about having perfect information and /or not needing to make decisions. Why do you invent thus strawman nonsense – is it simply so that you can have something to write about for you acolytes and then pretend you are some sort of academic?
Surely an academic shouldn’t have to lie to try and make themselves look relevant or clever?
It makes that claim every day.
Everything I said is true.
Why are you lying?
Where does ‘it’ make this claim?
Why do you never support your claims with links to evidence like a proper academic?
You just stare preposterous things and then censor posts that don’t agree with you.
https://en.m.wikipedia.org/wiki/Perfect_information
My question is, why do you want to waste my time making claims that are false?
I’ve been called a Corbyn cultist, a Putin apologist, a Tory enabler, and today in church someone accused me of antisemitism.
A Murphy “acolyte?” Do I get a badge?
That’s a new one. Thanks so much. (Rubs hands, thinks, “this could be entertaining”.)
🙂
Maybe we should make some 🙂
Seriously? That is the best you’ve got?
“Perfect information is a concept in game theory and economics that describes a situation…”
It describes A situation, not every situation – of course there are some scenarios where there is perfect information. What economics doesn’t say is that there is perfect information in every area of life, as you were claiming.
Neither does economics say that we don’t need to make decisions in these cases. That’s just more of your nonsense.
You have clearly never studied economics or read all the papers that make the standard neoclassical assumptions, which are:
This is from Investopedia: https://www.investopedia.com/terms/n/neoclassical.asp
What Are the Main Elements of Neoclassical Economics?
The main assumptions of neoclassical economics are that consumers make rational decisions to maximize utility, that businesses aim to maximize profits, that people act independently based on having all the relevant information related to a choice or action, and that markets will self-regulate in response to supply and demand.
This bold section in the text is the assumption of perfect knowledge.
It is fundamental to neoclassical and neoliberal economics. Now, very politely, please stop wasting my time. You are talking complete nonsense.
I agree with Richard’s criticisms of the core assumption of neoclassical/neoliberal economics. Perhaps a good place for anyone who’s interested in understanding what’s wrong with neoclassical economics is with Steve Keen’s book, “Debunking Economics: The Naked Emperor Dethroned?” (Revised and Expanded Edition). And for those who may want a sympathetic but philosophical appraisal of neoclassical economics then Daniel M. Hausman’s book, “The inexact and separate science of economics” (1992) is a great resource. I’m very much looking forward to more of Richard’s critiques of neoclassical/neoliberal economics.