Subjectieve Benaderingen in de Beslissingstheorie 0000: History of utility in economics up to 1968; 1968: A Dutch Ph.D. student comes in …; 1980: Another Dutch Ph.D. student, who learned from the former; 1997: and used that for Kahneman's experiments on time preference; 2004: Changes in economic paradigm taking place!? Peter P. Wakker Make yellow comments invisible. ALT-View-O Make yellow comments invisible. ALT-View-O Give away name as it comes, don’t try to make it a hidden plot of the story. In this lecture I want to explain now Bernard influenced me intellectually at a young age, planting seeds that have influenced my work in recent years. Today is a day for his students, a little bit I dofit in there. Line of the story: 1. Pre-’ ’68, van Praag 3. his influence on me 4. his general influence on current field Line of the story: 1. Pre-’ ’68, van Praag 3. his influence on me 4. his general influence on current field

History of Utility; the beginning in economics. Bentham (1789) and others (Bernoulli (1738): Utility is concrete, “intuitive.” Samuelson (‘47;citation from Van Praag‘68 p.8): "To Edgeworth … utility … was as real as his morning jam." 2 To them utility was just something concrete, and they did not think much about how to give meaning to it. Intuitive: in lack of a better term. Explain term utility for general public.

Beginning of 20 th century: Logical positivism 3  al direct judgment abandoned Baumol 1958, Fisher 1892, Pareto 1906, Slutsky 1915 U ordinal  in economics: the ordinal revolution, Pareto (1906), Hicks & Allen (1934). Utility: Measure how? Utility  consumer choices. Ordinal view: No economist, or anyone else, will say that data on introspection and feelings are useless. It is definitional: Revealed choice  economics; Introspection  psychology etc. Ordinal view: No economist, or anyone else, will say that data on introspection and feelings are useless. It is definitional: Revealed choice  economics; Introspection  psychology etc. Logical positivism: Emphasized that concepts should be measurable and hypotheses falsifiable. Influenced many empirical fields. ordinal: technical meaning I will not discuss here. Main point is that it wants to derive everything from observable choice.

4 This was up to Economists extreme, sometimes hostile towards other views. Fisher, Irving (1925), "Mathematical Investigations in the Theory of Values and Prices." End of Section 14 of Ccr. 1: "Utility" is the heritage of Bentham and his theory of pleasures and pains. For us his word is the more acceptable, the less it is entangled with his theory.

…. There was a young Dutch Ph.D. student … This is where Bernard comes in … Bernard at age 29. A man who knows what he wants, and will follow his own judgments. Depending on moment, maybe joke about suspense of public not knowing who this guy is.

6 Acknowledges existence of others (1968, p. 8): “Certainly, I have to admit that there have been attempted extensions into those directions, based on the ordinal assumptions (Debreu p. 26, 98; Arrow); nevertheless I am not too much impressed by those attempts.” Tegen de stroom in … Developed his own Leyden approach to utility measurement: This text is typical of Bernard. He is strong on his ideas, and is willing to fight for them. emphasize the delicious word “attempted”

Use introspective, “forbidden” questions, e.g.: 7 Taking into account your own situation with respect to family and job you would call you net-income per year excellent if it were over... good if it were between... amply sufficient if it were between... sufficient if it were between... barely sufficient if it were between... insufficient if it were between... very insufficient if it were between... bad if it were between... very bad if it were under... Van Praag (1971) argues that equi- distant utility assignments is reasonable for such verbal expressions.

Simply did what mainstream economics forbids! Tegen de stroom in … Sympathizers : Tinbergen, Kapteyn, and others. Impressive investigations, huge data sets, policy recommendations, etc. etc. 8

1980 I was Ph.D. student at maths Dept. in Leiden. Knowledge of economics: 0.0. Took a course in mathematical economics from a professor called Bernard van Praag... 9 I want to tell now how Bernard influenced me much at a young age.

My first exposure to economics... Started sneeking into their library at Leiden... My Ph.D. dissertation would be in ordinalistic tradition; even extremely so. 10

I devoured Weddepohl’s Ph.D. dissertation, “borrowed” from Leiden econ-library …, completely in ordinalistic tradition. This library-sneeker, here he is: 11 April 17, 1984, Dutch Day of Econometrics, "Cardinal Coor- dinate Independence for Sub- jective Expected Utility," Free University of Amsterdam, Amsterdam, The Netherlands. (Chairman: Klaus Weddepohl.) I was pondering over Van Praag’s ideas all day … Their library did not lend out books, introducing a contradiction into this lecture that I do not wish to resolve.

Mainstream economists did not recognize Leyden approach at first. Continued working (struggling?) more with ordinalist framework. 12

Economic Anomalies (?) Extremity of required decision-foundation. Becker & Murphy (1988), "A Theory of Rational Addiction." Experiments: “Real incentives,” otherwise paper rejected! Old views of Bentham etc. are taboo. Measurement by direct communication is taboo. 13

Empirical Complications for Ordinalism Paradoxes, preference reversals, prospect theory, etc. After a century with this paradigm: the problems are way more than anticipated. Several anomalies in intertemporal choices (Prelec & Loewenstein); a new one by Kahneman: 14

Cold-water experiment Short episode: 60'' hand in cold water (14 0 C = F) Long episode: 60'' hand in cold water (14 0 C = F) 30'' slowly warmed up (till 15 0 C = 59 0 F) Later: Which should be repeated? Majority choice: long episode. ???????????????? 15

Colonoscopy experiment 341 patients:normal colonoscopy 341 patients:without further reason one extra minute, still unpleasant, but less so than before. Second group judged as less unpleasant; was more willing to undergo a new colonoscopy in the future. 16 These things of revealed preferences are so bizarre, that you have to turn to other information to get people’s values. You have to turn away from ordinalism if these are your data.

New theories … etc. are needed. Not go back to Bentham. Not give up ordinalistic achievements. But reinforce and extend them. I was open to these things, started working on them, joint with Abdellaoui, Kahneman, Sarin, etc., because the seeds had been planted in me in my youth by Bernard. 17

van Praag, Bernard M.S. (1968), “Individual Welfare Functions and Consumer Behavior.” North-Holland, Amsterdam, Kahneman (1994), "New Challenges to the Rationality Assumption," Journal of Instit. & Theor. Ec s 150,18  36. Kahneman, Daniel, Peter P. Wakker, & Rakesh K. Sarin (1997), "Back to Bentham? Explorations of Experienced Utility," Quarterly Journal of Economics 112, 375–405. Abdellaoui, Mohammed, Carolina Barrios, & Peter P. Wakker (2002), "Reconciling Introspective Utility With Revealed Preference: Experimental Arguments Based On Prospect Theory," CREED, Dept. of Economics, Amsterdam, The Netherlands. Kapteyn, Arie (1994), "The Measurement of Household Cost Functions: Revealed Preference versus Subjective Measures," Journal of Population Economics 7, 333–350. Gilboa & Schmeidler (2001), "A Cognitive Model of Individual Well- Being," Social Choice and Welfare 18, 269–288. Fox, Craig R. & Amos Tversky (1998), "A Belief-Based Account of Decision under Uncertainty," Management Science 44, 879  895. Interest in choiceless inputs in economics: 18 Now the subjective approach, initiated by Bernard in 1968, is getting widely spread, with followers all over, and whole conferences dedicated to it.