Choice under uncertainty: animal spirits

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Chapter 4 in The Behavioral Economics of John Maynard Keynes, 2022, pp 79-92 from Edward Elgar Publishing

Abstract: Maximizing rational choice requires choosing the highest option ranked highest by the combined utility and probability. But how do humans decide under uncertainty when probabilities are unknown? Since all decisions are future-oriented and suffer from uncertainty, Keynes concluded that cold calculations are insufficient and that it needs emotions - animal spirits to decide finally. Gut feelings, instincts, and emotions are unacceptable for a theory that deduces economic behavior from abstract axioms. Even many self-acclaimed Keynesians feel uncomfortable with animal spirits. However, recent neurological research - arguably the hardest evidence shows that emotions are involved in every decision and that pure cognitive reasoning will never reach a decision. Neoclassical decision theory relies on maximization starting from the end: Rational individuals must have multiplied the expected utility with a subjective probability from the assumption that actual choices are utility-maximizing. An equation with three unknown variables: The variable on the left represents the unmeasured utility of the specific choice assumed to be the maximum. The two variables on the right side are the utility ascribed to the item times the subjective probability. Of course, the subjective probability is not the actual probability; it simply is a synonym for gut feeling but consistent with neoclassical assumptions.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2022
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