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From Wald to Savage: homo economicus becomes a Bayesian statistician

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  • Giocoli, Nicola

Abstract

Bayesian rationality is the paradigm of rational behavior in neoclassical economics. A rational agent in an economic model is one who maximizes her subjective expected utility and consistently revises her beliefs according to Bayes’s rule. The paper raises the question of how, when and why this characterization of rationality came to be endorsed by mainstream economists. Though no definitive answer is provided, it is argued that the question is far from trivial and of great historiographic importance. The story begins with Abraham Wald’s behaviorist approach to statistics and culminates with Leonard J. Savage’s elaboration of subjective expected utility theory in his 1954 classic The Foundations of Statistics. It is the latter’s acknowledged fiasco to achieve its planned goal, the reinterpretation of traditional inferential techniques along subjectivist and behaviorist lines, which raises the puzzle of how a failed project in statistics could turn into such a tremendous hit in economics. A couple of tentative answers are also offered, involving the role of the consistency requirement in neoclassical analysis and the impact of the postwar transformation of US business schools.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34117.

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Date of creation: 14 Oct 2011
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Handle: RePEc:pra:mprapa:34117

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Keywords: Savage; Wald; rational behavior; Bayesian decision theory; subjective probability; minimax rule; statistical decision functions; neoclassical economics;

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  1. Giocoli, Nicola, 2006. "Do Prudent Agents Play Lotteries? Von Neumann's Contribution to the Theory of Rational Behavior," Journal of the History of Economic Thought, Cambridge University Press, Cambridge University Press, vol. 28(01), pages 95-109, March.
  2. Gilboa, Itzhak & Postlewaite, Andrew & Schmeidler, David, 2009. "Is It Always Rational To Satisfy Savage'S Axioms?," Economics and Philosophy, Cambridge University Press, Cambridge University Press, vol. 25(03), pages 285-296, November.
  3. Ivan Moscati, 2007. "History of consumer demand theory 1871�-�1971: A Neo-Kantian rational reconstruction," The European Journal of the History of Economic Thought, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(1), pages 119-156.
  4. Leonard,Robert, 2010. "Von Neumann, Morgenstern, and the Creation of Game Theory," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521562669.
  5. Edi Karni & Philippe Mongin, 2000. "On the Determination of Subjective Probability by Choices," Management Science, INFORMS, INFORMS, vol. 46(2), pages 233-248, February.
  6. Giocoli, Nicola, 2008. "Three alternative (?) stories on the late 20th-century rise of game theory," MPRA Paper, University Library of Munich, Germany 33808, University Library of Munich, Germany.
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Cited by:
  1. Dorian Jullien & Nicolas Vallois, 2012. "A Probabilistic Ghost in the Experimental Machine," GREDEG Working Papers, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis 2012-05, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.

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