Even though utility maximisation is ubiquitous in economic textbooks to model consumer behaviour, its usefulness is rarely demonstrated by evidence.

  1. Is there any evidence that some consumers do behave that way on at least some markets?

Utility maximisation applied to a representative agent is also often used to model the demand side of a whole market. However, here also, this is hardly ever justified by evidence. On the other hand, alternative models seem to have good properties too: for instance in Complex Economics by Alan Kirman, it is said that random consumption + heterogeneity of income suffices to construct an aggregate demand that decreases as price increases. Random consumption does not seem more stupid than perfectly informed utility-maximisation... but sounds definitely simpler.

  1. Is there evidence that utility maximisation used as a model of the demand side of a market is actually better than other (simpler) models of consumer behaviour?

There is plenty of evidence. Many successful policy interventions have been designed assuming that people are utility maximizers and deriving its consequences. To the extent that the model can correctly anticipate the effects of the intervention, and then this effects can be measured in the data, the model is justified.

The list is long, but many procurement auctions are studied this way, antitrust policy, social programs to alleviate poverty, optimal ways to design contracts, education policy, monetary policy to control inflation, the effect of taxes and subsidies, etc, etc, etc.

You touch on an important point. If there is another theory like the one in Complex Economics, that produces the same predictions (for example a downward sloping demand), then the data may not be able to help us figure out what model is better. The key is to find a model that can predict better.

I would also like to push back on which model is simpler. I do not know Kirman's model, but I think that assuming that people maximize their happiness given their knowledge and their means is pretty simple too.

| improve this answer | |
  • $\begingroup$ With all due respect, I am not sure you are answering my question. You seem to be concerned with my point (1) but don't provide evidence that individuals do act as perfectly-informed utility-maximizers. (I would actually expect quite the contrary, given the what I know of for instance the work of Kahneman & Tversky.) $\endgroup$ – Arthur Oct 16 '19 at 22:33
  • $\begingroup$ I should probably be more specific about the individual level vs. market level distinction. The fact that many people use utility-maximizing representative agents does not make the model valid at the individual level. Textbooks generally present the problem at individual level, even if validity is probably more at the market level. $\endgroup$ – Arthur Oct 16 '19 at 22:38

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.