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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.

Suggested Citation

  • Giocoli, Nicola, 2011. "From Wald to Savage: homo economicus becomes a Bayesian statistician," MPRA Paper 34117, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:34117
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    File URL: https://mpra.ub.uni-muenchen.de/34117/1/MPRA_paper_34117.pdf
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    References listed on IDEAS

    as
    1. Nicola Giocoli, 2003. "Modeling Rational Agents," Books, Edward Elgar Publishing, number 2585.
    2. Edi Karni & Philippe Mongin, 2000. "On the Determination of Subjective Probability by Choices," Management Science, INFORMS, vol. 46(2), pages 233-248, February.
    3. 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, vol. 28(01), pages 95-109, March.
    4. Gilboa, Itzhak & Postlewaite, Andrew & Schmeidler, David, 2009. "Is It Always Rational To Satisfy Savage'S Axioms?," Economics and Philosophy, Cambridge University Press, vol. 25(03), pages 285-296, November.
    5. Giocoli, Nicola, 2008. "Three alternative (?) stories on the late 20th-century rise of game theory," MPRA Paper 33808, University Library of Munich, Germany.
    6. Gilboa,Itzhak, 2009. "Theory of Decision under Uncertainty," Cambridge Books, Cambridge University Press, number 9780521517324, October.
    7. Wakker,Peter P., 2010. "Prospect Theory," Cambridge Books, Cambridge University Press, number 9780521765015, December.
    8. 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, vol. 14(1), pages 119-156.
    9. Nicola GIOCOLI, 2005. "Modeling Rational Agents The Consistency View Of Rationality And The Changing Image Of Neoclassical Economics," Cahiers d’économie politique / Papers in Political Economy, L'Harmattan, issue 49, pages 177-208.
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    Cited by:

    1. Dorian Jullien & Nicolas Vallois, 2012. "A Probabilistic Ghost in the Experimental Machine," GREDEG Working Papers 2012-05, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    2. Guilhem Lecouteux, 2017. "Bayesian Game Theorists and Non-Bayesian Players," GREDEG Working Papers 2017-30, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis, revised Jul 2018.

    More about this item

    Keywords

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

    JEL classification:

    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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