Psychology is Fundamental: The Limitations of Growth-Optimal Approaches to Decision Making under Uncertainty

20 Pages Posted: 27 Jun 2022 Last revised: 17 Jan 2023

See all articles by Matthew Ford

Matthew Ford

St John's College, Oxford

John Kay

St John's College, Oxford

Date Written: August 31, 2022

Abstract

A new research programme in ‘Ergodicity Economics’ has reinvigorated interest in growth-optimal approaches to decision making under uncertainty. We show that Ergodicity Economics is best understood as traditional growth-optimisation with a new metaphysical justification. We then extend the argument in Samuelson (1971) to show that growth-optimal approaches to decision making are necessarily always incompatible with expected utility theory. Drawing on this result, we show that Ergodicity Economics’ justification, which seeks to exclude psychological factors, is unpersuasive: psychology is necessarily fundamental to any general theory of decision making under uncertainty.

Keywords: ergodicity economics, expected utility theory, decision-making under uncertainty

JEL Classification: A12, B40, B59, D81, D84

Suggested Citation

Ford, Matthew and Kay, John, Psychology is Fundamental: The Limitations of Growth-Optimal Approaches to Decision Making under Uncertainty (August 31, 2022). Available at SSRN: https://ssrn.com/abstract=4140625 or http://dx.doi.org/10.2139/ssrn.4140625

Matthew Ford (Contact Author)

St John's College, Oxford ( email )

St John's College, St Giles
Oxford, Oxfordshire OX1 3JP
United Kingdom

John Kay

St John's College, Oxford ( email )

St John's College, St Giles
Oxford, Oxfordshire OX1 3JP
United Kingdom

HOME PAGE: http://https://www.sjc.ox.ac.uk/discover/people/professor-john-kay/

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