The curse of dimensionality

And the impossibility of utility maximisation

From indifference
Concept of subjective utility dates back at least to Aristotle; made central tenet of economics and philosophy by Jeremy Bentham (not Adam Smith!) Formalised into concept of indifference curves by neoclassical economists (see Chapter 2, Debunking Economics) Many different combinations of goods capable of giving consumer same level of subjective utility Line linking points akin to isoquant on map, linking points of equivalent altitude Christened indifference curves:

From indifference
Combinations A and B give same level of satisfaction A Combination C gives higher level than A or B Combination D gives lower level than A or B Just one wee problem C B Biscuits

Bananas Indifference curves no more observable than angels dancing on heads of medieval pins

To revealed preference
Samuelson proposed solution: revealed preference Indifference curves could be inferred from behaviour of consumer, provided 4 postulates of rationality met: Completeness: consumer knows own subjective ranking of all combinations of goods Transitivity: If combination A preferred to combination B, and B to C, then A preferred to C Non-satiation: More is always preferred to less. Convexity: additional utility a consumer gets from extra units of each commodity falls Preferences and budget completely independent Applying this:

To revealed preference
All points in rectangle necessarily preferred to A (non-satiation) If A purchased when both B and C affordable, then A necessarily on higher indifference curve than B and C Move budget line around, see responses, can eventually infer indifference map from observed behaviour Appears scientific, but problems when verification attempted Biscuits A

Bananas
Biscuits

A B

Bananas

To experimental testing
In theory, consumer starts with complete preference set Imposes budget line Works out point of tangency Buys this combination (Preferences and budget completely independent) Bananas

Biscuits In experiment, easy to decide whether someone is rational or irrational according to theory:

The neoclassical expectation

X Initial budget line Consumer chooses A when A & B both affordable Rational consumer should always prefer A to B Bananas Budget Y: A no longer best, but clearly better than B

X A B

A must lie on higher indifference curve

Biscuits

But in experiments they dont do this! Sometimes, they choose B instead of A

The neoclassical explanation

Consumers irrational But in reality, economists definition of rational is irrational Many weaknesses but key one the unwitting assumption that consumers have near infinite information processing ability: the curse of dimensionality issue easily illustrated by putting numbers on axes of economists graphs:

Putting some numbers on the graph

121 combinations Some you 10 ignore 9 Others 8 you cant 7 10 pairs 6 10 additions 5 4 10 comparisons 3 2 Easy! 1 But 0 Bananas

Biscuits 0 1 2 3 4 5 6 7 8 9 10

Putting some numbers on the graph

Every additional commodity considered adds another dimension. With no more than 10 units of each: 2 commodities, 3 commodities, ~1,000 ~100 combinations combinations (actually 121)

4 commodities, 10,000 combinations

30 commodities how many combinations?

Putting some numbers on the graph

10,000,000,000,000,000,000,000,000,000,000! If budget obviously ruled out 99.9% of these; If each evaluation took 1 billionth of a second Process would complete after 32 billion years Maximum (est.) age of universe 20 billion years Individual would take 1.6 times age of known universe to make utility maximising choice of just 30 commodities Maximising utility in typical supermarket (1,000+ different items) doesnt bear contemplation let alone millions of products in modern economy Instead, intelligent partitioning of commodity space vital

Utility maximising individuals?

Sources of partitioning Culture some commodities not even contemplated (sea slugs, anyone?) Income & Needs Fulfil hierarchy of wants from basic to ethereal (Maslows concepts) Rolls Royces not part of utility set of poor Baked beans not part of utility set of rich Habit Buy mainly what you bought yesterday Change in consumption Evolutionary rather than rational process

Utility maximising individuals?

Individual tastes no longer a given but vital economic issue Explains individual partitioning of commodity space Selling new products requires movement of this space Marketing, advertising thus essential economic activities if new products are to be sold Co-evolution of products and tastes an essential aspect of economic development Consumers do not utility maximise but instead satisfice (as per Herbert Simon) Demand curve for individual consumer becomes meaningless, let alone neoclassical idea of market demand curve (see Debunking Economics, Chapter 2)