Sunday, April 15, 2007

Mass Preferences

Most economics is based on the assumption that human individuals seek to maximize their own benefit and thus make consumer and behavioral choices based on their own pre-established preferences and interests. To choose such that the resulting outcome maximizes one's self-interest or preference satisfaction is to act rationally. When looking at public policy as opposed to individual market decisions, these assumptions have bled into the very tools that are used in policy analysis in rather basic ways. Thus, policy choices are often considered simply in terms of aggregating individual preferences, or are analyzed in terms of rational choice (where rationality, again, is defined in terms of individual preference satisfaction, now aggregated). Economists often think, therefore, that we can say quite a bit about what individuals want and can say quite about about price mechanisms in the market (as what individuals are willing to pay for something) based on (presumed) self-maximizing behavior.

This basic bundle of assumptions is highly suspect for some philosophers, sociologists, anthropologists, and so on. Critics have long argued that the portrayal of individuals as self-maximizers is an impoverished view of the individual, not even empirically correct (and much of economics views itself as an empirical science) because it selects one feature of human being at the expense of an array of others. Why? The answer is often given that the atomistic notion of the individual "works" in economic models. The problem, of course, is that such models are premised on such assumptions about individual behavior - the models then confirm the assumptions. Note the circularity.

Furthermore, the bundle presumes that interests and preferences are somehow given a priori. Critics argue that one doesn't know what one's interests are until one is in society, as an ontological and epistemological matter. I can't know that I want that Mercedes Benz or Oreo cookie or trip to Jamaica or piece of wilderness preserved unless I am embedded within a social milieu in which such things are already valued, often for non-market reasons. Satisfying my interests is going to be a function of socially-determining what those interests actually are. Those interests can be complex, yielding very little in the way of being able to make predictions by observing my individual purchasing behavior, my willingness to pay for a good, and my psychological state. But orthodox economists say that this is precisely what we can say about me as an individual, and that such behavior in the aggregate is a reflection of what a society wants and thus what is reasonable to want in general since we're supposedly choosing more or less rationally in order to self-maximize. This puts the cart before the horse in that whatever it is that I want cannot be entirely explained by observing my individual behavior (I can make quite reasonable choices for lots of reasons beyond maximizing my own preferences), and my choices are made from an array of previously socially-valued options. Those prior options may be entirely irrational from the vantage point of, say, the intrinsic value of an object (wilderness, music, a trip, etc.) or, say, the long-term survival of human beings.

Here is an interesting article in The New York Times Magazine that discusses preferences in choices of music. The question is what makes a pop song a hit.

Conventional marketing wisdom holds that predicting success in cultural markets is mostly a matter of anticipating the preferences of the millions of individual people who participate in them. From this common-sense observation, it follows that if the experts could only figure out what it was about, say, the music, songwriting and packaging of Norah Jones that appealed to so many fans, they ought to be able to replicate it at will. And indeed that’s pretty much what they try to do. That they fail so frequently implies either that they aren’t studying their own successes carefully enough or that they are not paying sufficiently close attention to the changing preferences of their audience.

The common-sense view, however, makes a big assumption: that when people make decisions about what they like, they do so independently of one another. But people almost never make decisions independently — in part because the world abounds with so many choices that we have little hope of ever finding what we want on our own; in part because we are never really sure what we want anyway; and in part because what we often want is not so much to experience the “best” of everything as it is to experience the same things as other people and thereby also experience the benefits of sharing...

...our mutual dependence has unexpected consequences, one of which is that if people do not make decisions independently — if even in part they like things because other people like them — then predicting hits is not only difficult but actually impossible, no matter how much you know about individual tastes.

The reason is that when people tend to like what other people like, differences in popularity are subject to what is called “cumulative advantage,” or the “rich get richer” effect. This means that if one object happens to be slightly more popular than another at just the right point, it will tend to become more popular still. As a result, even tiny, random fluctuations can blow up, generating potentially enormous long-run differences among even indistinguishable competitors — a phenomenon that is similar in some ways to the famous “butterfly effect” from chaos theory.

So, the author and his colleagues devised an experiment in which they looked for influence of others' voting patterns about the worth of pop songs. What they found was this:
In our artificial market, therefore, social influence played as large a role in determining the market share of successful songs as differences in quality. It’s a simple result to state, but it has a surprisingly deep consequence. Because the long-run success of a song depends so sensitively on the decisions of a few early-arriving individuals, whose choices are subsequently amplified and eventually locked in by the cumulative-advantage process, and because the particular individuals who play this important role are chosen randomly and may make different decisions from one moment to the next, the resulting unpredictably is inherent to the nature of the market. It cannot be eliminated either by accumulating more information — about people or songs — or by developing fancier prediction algorithms, any more than you can repeatedly roll sixes no matter how carefully you try to throw the die...

What our results suggest, however, is that because what people like depends on what they think other people like, what the market “wants” at any point in time can depend very sensitively on its own history: there is no sense in which it simply “reveals” what people wanted all along. In such a world, in fact, the question “Why did X succeed?” may not have any better answer than the one given by the publisher of Lynne Truss’s surprise best seller, “Eats, Shoots & Leaves,” who, when asked to explain its success, replied that “it sold well because lots of people bought it.”...

If markets not only reveal our preferences but also modify them, then the relation between what we want now and what we wanted before — or what we will want in the future — becomes deeply ambiguous.
Right. In other words, preferences are socially and historically contingent and contextual and these contexts are highly unstable as a matter of prediction. In order to make predictions one has to bracket out various assumptions that may very well be quite strong, both theoretically and empirically. One has to bracket out uncertainty. One creates models that take as presuppositions characteristics of human behavior that yield modeled outcomes that do suggest predictability.

But the further and perhaps most important point is that what we want not only has to do with the historical contingency of markets, but also with the referent of self-maximization and "interests" and with the very structural conditions through which socialized "self-maximization" operates.

Let me draw a larger normative question that really requires more justification (for even raising the question) than I can provide here for now. If the point is that individual choice is a fundamental good in its own right, and if that individual choice is actually premised upon historically contingent and unpredictable social conditions and structures, then shouldn't true choice be a political question - rather than a market issue - over the deep structures of society, including the market itself?

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