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Rational addiction

Ole Rogeberg sends in this:

and writes:

No idea if this is amusing to non-economists, but I tried my hand at the xtranormal-trend. It’s an attempt to spoof the many standard “incantations” I’ve encountered over the years from economists who don’t want to agree that rational addiction theory lacks justification for some of the claims it makes. More specifically, the claims that the theory can be used to conduct welfare analysis of alternative policies.

See here (scroll to Rational Addiction) and here for background.

26 Comments

  1. Andy says:

    Hilarious, even for a die-hard rational addiction fan.

    (And of course I find the counterarguments in the video unconvincing. Calling the idea "insane" many times over isn't really an argument. Nor is saying "you're wrong, you're wrong, you're wrong".)

  2. Dave Backus @ NYU says:

    I agree with Andy, name-calling isn't an argument. Not my area, but Becker is a thoughtful guy whose work can be described as either imaginative or goofy, depending on your perspective, but it's rarely boring. I'd love to have more like him in the academic world.

  3. Bruce McCullough says:

    Double hilarious from an economist. I am reminded of H.H. Liebhafsky's spoof article that he published in Journal of Political Economy in 1972(same place that published the rational addiction article in 1986) "The Rational Consumer's Demand for Psychiatric Help: A Preference Function Generating a Perfectly Price-inelastic Demand Function". Sort of like what Sokal did. Except H.H. never got to expose the prank publicly.

    When Liebhafsky would get a letter criticizing his article, he would send back a form letter saying, "Reread the title. Why would a 'rational' consumer need psychiatric care?"

  4. Andrew Gelman says:

    Dave:

    To repeat what I wrote when this came up before:

    Scott Cunningham wrote:

    BTW, the rational addiction literature is a reference to Gary Becker and Kevin Murphy's research program that applies price theory to seemingly "non-market phenomenon", such as addiction. Rational choice would seem to break down as a useful methodology when applied to something like addiction. Becker and Murphy have a seminal paper on this from 1988. It's been an influential paper in the area of health economics, as numerous papers have followed it by estimating various price elasticities of demand, as well as to test the more general theory regarding the theory.

    My reply to this: Yeah, I figured as much. It's probably a great theory. But, ya know what? If Becker and Murphy want to get credit for being bold, transgressive, counterintuitive, etc etc., the flip side is that they have to expect outsiders like me to think their theory is pretty silly. As I noted in my previous entry, there's certainly rationality within the context of addiction (e.g., wanting to get a good price on cigarettes), but "rational addiction" seems to miss the point. Hey, I'm sure I'm missing the key issue here, but, again, it's my privilege as a "civilian" to take what seems a more commonsensical position here and leave the counterintuitive pyrotechnics to the professional economists.

  5. Andrew Gelman says:

    Bruce:

    The answer to H.H.'s question, "Why would a 'rational' consumer need psychiatric care?", is obvious. A rational person would need the help of a psychiatrist to understand all those irrational people out there!

  6. Ole Rogeberg says:

    I agree that name-calling is not an argument – and I agree that Becker is a hard-working, creative and smart guy. While I would argue that there is at least a little more than pure name-calling in this video, the point of it was mainly to repeat and poke fun at the many defensive "phrases" that in my experience pop up automatically when I discuss this with other economists.
    A more academic and full argument against the use of rational addiction theory to make empirical claims about people's welfare is something I've attempted elsewhere. For instance in the "taking absurd theories seriously" article from Philosophy of Science available at Andrew's intro links above – or in a paper written with fellow economist Hans Olav Melberg forthcoming in Journal of Economic Methodology.
    Cheers, and thanks for the nice comments! :-)

  7. Anonymous says:

    I found this to be absolutely hilarious. And I felt better about having made this argument before – though not nearly as convincingly. I have always justified the rational addict or mother who leaves her kids in the apartment while she goes out for a pipe on the time discounting model. Short horizons and low levels of discounting for risk. The same argument works as an argument for why soldiers fought in the Civil War, perhaps any war. Rationality is not reasonableness or the 'reasonable man'. It is a weighing,no? A ratio. I am going to watch it again … I may be addicted. SW

  8. Funny for insiders. It also seems to be a sort of continuation of an insider debate. Would that change opinions, assessment by the holders of the rational addiction theory?
    I agree, the standard answers are well presented.
    Now, how could one use a same sort of discussion to hightlight the ludicrous believe AND real-world practice of continued economic growth that leads to inreasing speeds of resource depletion and destruction?
    How can one make such a debate so that it ridicules the believers in future yet-to-be-invented technologies to solve today's problems?
    How can we make the heads of government, intergovernmental organisations, and NGOs, and their functionaries blush for shame and bow their heads, when they see their nonsense exposed in clear, plain language?
    For example:
    Internalisation of externalities – if at all possible – are NOT a valid answer to the fact that growth is suicidal for humankind.
    Jobs does not validate increasing production of stuff, thereby depleting the world.
    Raising the standard of living of poor countries does not invalidate the fact that growth means more depletion.
    Green technology is not immaterial and green growth is therefore greenwashed growth.
    Okay. A normal person knows, or can at least readily understand all that. Praying and hoping will not replenish the fridge when it's empty. After the weekend party you have to go to the supermarket and buy. The leaders of this world, however, believe there is some supermarket out there where money can buy innovation and technology and miracle solutions to all environmental problems.
    They say we can't go back to the middle ages, or the stone age, in reply to the argument that we have to stop growth on a finite planet.
    Could a discussion be made in such a way that it would shame the world's leaders and their theory water carriers alike, AND possibly lead to policy change?
    In any case the discussion must be understandable to all people, not just the literate, if it has to have an effect.
    What do you say?
    Helmut Lubbers ecoglobe

  9. simone says:

    Andrew

    This theory is not falsifiable and thus not interesting. We are thus left with just logic. The logic is sound, but not grounded empirically and thus not science.

    I care not that many prominent economists say its true. A major problem we are confronted with today is that specialist assert that they alone can understand their field. This is false. While many smart individuals may not be able to conduct original research in a field, they are likely to be perfectly competent to comprehend their methods and conclusions. This is particularly true given that many fields use statistical methods and logic to make inferences. Areas where the researcher is not an expert.

  10. Gene Callahan says:

    "Calling the idea "insane" many times over isn't really an argument."

    But, of course, faced with an actually insane position, it's often all one can do. (Part of the insanity is an inability to recognize good counter-arguments.)

  11. john matylonek says:

    What is interesting is that some spiritual teachers, addiction counselors and psychiatrists would agree with the theory. They claim, in the short term, some humans would be even more insane without the drugs to self-medicate. However, they do provide possible long term optimal solutions, within their subcultures, in the long term. Thus, the theory is partly correct. Its based on individual self interest and does factor in subcultural optimization plans. Economics needs to get away from the competitive function of the economy and understand cooperative functions of economy.

  12. john matylonek says:

    Be careful of accusing lack of falsifiability in in the social sciences. Very creative and clever experiments have been designed in psychology.

  13. Great writing in this comment. Especially "counterintuitive pyrotechnics".

  14. Just hate everybody says:

    It seems this is just the tip of the iceberg. Happy economists all around are rolling out the dynamic (structural) model to explain pretty much everything. A key assumption of these models is that we are all perfectly rational and forward looking. For example, when we buy a new car, we can forecast accurately the stream of utility coming from the car in the future and are rational in doing so. While something like this can be believed for a high-ticket durable, it gets more and more slippery for other products, say detergent or whether you are buying an iphone or a another smart phone. They always also assume firms behave optimal, but I must admit I have not met many firms that behave optimal, as they are generally run by people who have a tendency to not do that. If this argument is brought up, Adam Smith’s old market forces mantra is called out, these firms will die and the market will be optimal. Wonder why this never seems to work out so well without massive government interventions.

    Much of the research in psychology shows us that we are indeed not rational being and the smallest things will change the choices we make – which economist discredit by calling these lab-effects that can be ignored as not true.

    It seems forecasting the future was hard, is hard and always will be hard. Wrapping a complex mathematical model around forecasting the future makes the forecast not much better, but it seems to be easier to defend and have uninformed people fall in line.

    The really annoying this is that probably most economist also do not believe 100% in their little models, but one needs to publish to get tenure and get raises, so there is really no option not to work on all these nonsensical things.

  15. Mike says:

    I'm pretty sure Becker and Murphy don't need to publish to get tenure and raises anymore. They write the papers they do in order to steer the discussion of complicated decisionmaking settings in a direction that they can say something about. This, I applaud. That said, their word is not the last word on the subject but merely the beginning of the conversation.

    There was a 2001 paper by Koszegi and Gruber (in the Quarterly Journal of Economics, which is also a top economics journal) arguing that the same evidence that was found to support the Becker-Murphy framework (namely, that individuals take into account future prices when determining their consumption of addictive goods today) is also consistent with a framework in which individuals have time-inconsistent preferences (whereby their choices in the future do not coincide with their ideals for their future behavior from today's perspective). That is, Becker and Murphy only find that people are forward-looking with respect to their consumption behavior for addictive goods, not that they make decisions they will not regret. This distinction is difficult to test in the data, but the implications of time inconsistency are that may be scope for "sin taxes" and commitment devices. People choose things they will regret, and they would be better off if someone prevented them from doing so.

  16. john matylonek says:

    Hopefully Anonymous said, "Much of the research in psychology shows us that we are indeed not rational being and the smallest things will change the choices we make – which economist discredit by calling these lab-effects that can be ignored as not true."

    Yes, if economists could come up with a formal definition of greed, and include that factor in the models, they would more accurately describe the final consequences of unbridled capitalism or socialism. Is anyone up for the challenge?

  17. AS says:

    I simply cannot understand all this fuss about the lack of realism in the assumptions underlying standard economic models. Models are by definition false. A Model is not a complete description of infinitely complex reality but a super-simplified abstraction that is pared to the bone so it can hopefully explain or help us learn something more about some small economic phenomenon or interaction.

    I mean, forget theorists, even empiricists assume that they can use the laws of probability theory to do their econometric study. I mean, how do we know that real life uncertainty has a structure that can be described by a sample space with some sigma algebra and a well behaved measure on it? We don't! It's an assumption. In all likelihood a false assumption. We also don't know that any of real life economic variables follow distributions which can be described by elementary functions but those are the only ones we can manipulate so we run with it.

    In much the same vein, assumptions of models are by definition simplifications and thus false, they are often unrealistic (like assuming normal distributions for stochastic variables, assuming the decision space has a nice topological structure and assuming that agents have complete knowledge of the space and can and want to make optimal decisions, etc etc) but are made for analytical tractability. The point is, can a model predict something testable and do we learn something out of it? Sometimes we do and sometimes we don't.

  18. Mike says:

    As I mentioned in a previous comment, the evidence in support of Becker and Murphy's hypothesis is also consistent with alternative (and I feel, more reasonable) hypotheses that yield exactly the opposite policy prescriptions. The claim that the quality of an economic model need only be assessed on its ability to generate results consistent with the world is a claim about the positive merit of the model, which says little about its normative merit.

    I have no problem with the use of the Becker and Murphy model as a descriptive framework for capturing some relevant aspects of addiction (namely that potential addicts are forward-looking). I do, however, have a problem with its normative implications (namely that there should be no sin taxes, and that more choice is unambiguously welfare enhancing absent externalities), especially since other plausible (fully rational) models are consistent with the facts and yet have completely different normative implications.

    I found the video to be hilarious, but I am a bit worried that people may believe it to be representative of how *all* economists approach problems (which it is absolutely not).

  19. AS says:

    I completely agree with you.

  20. John Matylonek says:

    AS said, "I simply cannot understand all this fuss about the lack of realism in the assumptions underlying standard economic models. Models are by definition false."

    Yea, yea consider a spherical cow…but the "fuss" is that real markets and the people that largely control them have been educated by our august rationally minded economic theories. When real world consequences occur because of collectively deficient assumptions, than more just academic egos are hurt. Take notice of studies in role of irrationality in our "as if" models. Neuroscience, social psychology are honing in what really motivates us. It behooves theoretical economics, ethically, to study and factor in these developments. May I suggest developing reference point for value, say Maslow's hierarchy of needs? All else, is an imaginary socially contrived bubble…

  21. John Matylonek says:

    So, what is the ethical responsibility difference between a physics modeler and economic modeler? Only a very few fascinated and motivated minority of people, will go through the trouble of "testing" rocket trajectories while most everyone is obligated to participate in economics.

  22. Dan Acland says:

    As an economist and a recovering drug addict I can say that the theory is beautiful and compelling and lovely and wrong.

  23. Marty says:

    Well, we all have to pay for the physics modeler's time and overhead, as well as future experimental physicists' time and resources — largely through defense department allocations.

    So yes, the immediate and overall impacts of noodling around with models differ in magnitude, but society does subsidize all of it.

    What is just?
    Are academics ethically responsible for the stupid or ignorant or fraudulent application of all this noodling around with models, as well paying the bills for the direct costs of subsidizing them?
    If so, that would imply a need to censor the public's access to published scientific inquiry, which would in turn reduce the quality and range of criticism of those publications, as well as narrow the educational opportunities of everyone trying to hone their reasoning skills, including those afforded to all of us who are (unpaid) intellectual dilletantes.

  24. Chris Auld says:

    A few belated remarks on this thread, from an economist who co-wrote a quite well-cited critique of empirical versions of the rational addiction model:

    The rational addiction model is a great model. It starts with what at the time a common way to model addictions, the habit formation model, which assumes that consumption today of some addictive good depends on past consumption of that good. In these models people do not in any way take into account that consumption today affects them in the future; they just make a sequence of single-shot choices.

    The "rational" bit simply adds the wrinkle that people realize that how much they will want the good tomorrow depends on how much they consume today. The rational addiction model replaces the simplification that people are constantly surprised by changes in behavior brought about by past consumption with the simplification that people are perfectly aware of how their behavior today will play out in the future. The behavioral implications turn out to be quite rich, and the rational addiction model is clearly better than the model it replaced.

    The canonical model is deliberately stripped to bare bones. Notably, it's deterministic and forward-looking, which generates the implications the video repeatedly calls insane. Nonetheless, some key predictions are empirically supported, such as anticipated future price changes affecting current behavior. Some other aspects are empirically falsified.

    Subsequent research working off the canonical model has revealed how the model has to be changed to capture behavior more realistically, and also transformed empirical practice. The canonical paper has been cited more than 2,000 times and the follow-up empirical application by the same authors (along with Michael Grossman) has been cited more than 700 times.

    Yes, if we figuratively ask people in the rational addiction model what they're doing the answer seem silly—"I am pursuing a carefully planned dynamically optimal life cycle drug consumption plan which is the single best thing I could possibly do," etc. Yet if we figuratively ask a salmon in an optimal foraging model what it's doing, the salmon would similarly tell us it's pursuing a carefully planned dynamic, forward-looking strategy to maximize some proxy for its fitness. It would be easy to lightly edit the video to turn it into a discussion between a biologist offering that it's fruitful to model animal behavior using control theory and someone who repeatedly does nothing but call the biologist an insane idiot for bestowing salmon with the ability to solve nasty dynamic programming problems.

    I suspect a great deal of the problem is simply the jargon "rational"—the "rational" in "rational addiction" does not mean "rational" in the everyday sense of the word. If many decades ago, say, "consistent" or "goal-directed" had become the jargon instead of "rational," microeconomic models would not receive nearly as much misguided and vitriolic criticism. Biologists, wisely, do not call their models Rational Salmon models.

    Chris Auld
    Associate Professor, Economics
    Scientist, Center for Addictions Research
    University of Victoria

  25. Avray says:

    "Rationality is not reasonableness" – I think you say it all there, there's nothing to add.

  26. Avray says:

    Thank you for clearing that up about "rational" being jargon that could be replaced (possibly) by the words "consistent" or "goal-directed". It really is not information that is spelt out clearly enough to us lay people. An earlier commenter used the phrase "rational is not the same as reasonable" which also helped make things a bit clearer for me.