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Causal versus Consequential Motives in Mental Models of Agent Social and Economic Action: Experiments, and the Neoclassical Diversion in Economics

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  • Vernon L. Smith

    () (Economic Science Institute, Chapman University)

Abstract

Since the neoclassical revolution of the 1870s, reasoning and analysis in economic theory has been dominated by utility theory, in which: Action implies Outcome implies Utility. I describe three prominent and unexpected failures of this utilitarian framework to predict the replicable outcomes of experiments. First, in supply and demand experiments for non‐durables the predicted equilibrium obtains, but under conditions violating those thought necessary: complete information, large numbers and price‐taking behavior. The failure is in not accounting for the weak conditions under which equilibrium is actually attained. Second, in asset markets it is thought that price bubbles cannot rationally occur under complete common information on fundamental value. Replicable experiments consistently yield price bubbles in violation of this prediction. Third, in two‐person trust and ultimatum games, equilibrium predicted outcomes failed decisively and massively. The observed failures stem from modelling only the outcome consequences of actions, not “the impulses from which action proceeds.” Utility theory rigidly binds the origins of action to their outcome value, thereby trumping alternative mental models of the actor.
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  • Vernon L. Smith, 2018. "Causal versus Consequential Motives in Mental Models of Agent Social and Economic Action: Experiments, and the Neoclassical Diversion in Economics," Working Papers 18-11, Chapman University, Economic Science Institute.
  • Handle: RePEc:chu:wpaper:18-11
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/249/
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    References listed on IDEAS

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    8. Corinne Bronfman & Kevin McCabe & David Porter & Stephen Rassenti & Vernon Smith, 1996. "An Experimental Examination of the Walrasian Tatonnement Mechanism," RAND Journal of Economics, The RAND Corporation, vol. 27(4), pages 681-699, Winter.
    9. Carey Caginalp & Gunduz Caginalp, 2018. "Valuation, Liquidity Price, and Stability of Cryptocurrencies," Papers 1802.09959, arXiv.org.
    10. Smith, Vernon L, 1976. "Experimental Economics: Induced Value Theory," American Economic Review, American Economic Association, vol. 66(2), pages 274-279, May.
    11. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
    12. Arthur T. Denzau & Henrik P. Minassians & Ravi K. Roy, 2016. "Learning to Cooperate: Applying Deming's New Economics and Denzau and North's New Institutional Economics to Improve Interorganizational Systems Thinking," Kyklos, Wiley Blackwell, vol. 69(3), pages 471-491, August.
    13. Smith, Vernon L. & Wilson, Bart J., 2018. "Equilibrium play in voluntary ultimatum games: Beneficence cannot be extorted," Games and Economic Behavior, Elsevier, vol. 109(C), pages 452-464.
    14. Ravi K. Roy & Arthur T. Denzau, 2020. "Shared Mental Models: Insights and Perspectives on Ideologies and Institutions," Kyklos, Wiley Blackwell, vol. 73(3), pages 323-340, August.
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    Cited by:

    1. William F. Shughart & Diana W. Thomas & Michael D. Thomas, 2020. "Institutional Change and the Importance of Understanding Shared Mental Models," Kyklos, Wiley Blackwell, vol. 73(3), pages 371-391, August.
    2. Ravi K. Roy & Arthur T. Denzau, 2020. "Shared Mental Models: Insights and Perspectives on Ideologies and Institutions," Kyklos, Wiley Blackwell, vol. 73(3), pages 323-340, August.

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    Experimental Economics; History of Economic Thought;

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