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The Unimportance of the Choice-Value
Thesis in Economics
BJ()RN FRANK*
Abstract
The choice-value thesis claims that people always choose what is best for them, given
their information on the set of alternatives. This paper attempts to show that this as-
sumption is less important than is suggested by the high esteem in which it is held.
Modern economics neither relies on it, as shown by inspecting a sample of
752
papers,
nor does the rejection of the choice-value thesis imply paternalism, as is sometimes
suggested. It is shown that paternalism can be argued against v,~thout referring to the
choice-value thesis. (JEL B~I, D~9)
Introduction
Economists often derive their theorems by assuming that agents are rational. The critical
discussion of this approach is hampered by the fact that two different kinds of rationality exist,
which are often not clearly distinguished. Formal rationality means that people's choices can
be represented by a utility function, and substantive rationality requires that choices are
optimal. This is called choice-value thesis by Broome [1991] and is stated as follows.
Definition 1: The Choice-Value Thesis
If a certain person, given a choice between two states of affairs, A and B, would
choose A, then as far as that person is concerned, A is at least as good as B. 1
In other words, the choice-value thesis is true if people maximize the right thing, whether it
is called experienced utility [Kahneman, Wakker, and Sarin, 1997], choiceless utility [Loomes
and Sugden, 1982], good [Broome, 1991], individual welfare [Ng, 1989], well-being [Griffin,
1986], or utility~ (with H denoting happiness) [Brandt, 1982].
Of course, it is questionable whether people maximize something at all [Selten, 1994],
and whether they should do so from a normative point of view, as sometimes there might
be good reasons for intransitive choices [Bar-Hillel and Margalit, 1988]. The latter means
that substantive rationality can exist without formal rationality, tIowever, this paper will
focus on the reverse case and assume formal rationality to be given, but not necessarily
substantive rationality. Here one need not think of someone repeatedly banging his head
against a wall based on complete and transitive preference orderings. Rather, behavior which
is in conflict with the choice-value thesis is regularly observed, even for intelligent decision
makers (think of preference reversals, time inconsistencies, or compulsion). 2 However, the
actual importance of the choice-value thesis for economic research is less clear. Is there really
*German Institute for Economic Research (DIW Berlin)--Germany. The author is indebted
to an anonymous referee, Laszlo Goerke, Yew-Kwang Ng, Barbara Seel, Gordon Tullock, and other
participants at the Forty-ninth International Atlantic Economic Conference in Munich for comments.
97
98 IAER: MAY 2002, VOL. 8, NO. 2
a good reason for feeling uncomfortable, to put it mildly, about psychologists' and fellow
economists' research on preference reversals, time inconsistencies, compulsion and the like,
given that most of these works question the choice-value thesis rather than formal rationality?
In a straightforward way, by simply examining a sample of economic papers, the next section
tries to give an estimate of the importance of the choice-value thesis for economists' actual
research. Another concern of economists, besides the validity of their own research results,
might be paternalism. Paternalism is sometimes thought to be implied when the choice-value
thesis is denied. Whether this is really the case is discussed in the third section, and the final
section concludes the paper.
The Choice-Value Thesis and Economic Research
Do economists stick to the choice-value thesis because it underlies modern economic re-
search? While methodological discussions are often shaped by the authors' subjective percep-
tion of how economic research is done, the approach in this section is more objective: simply
observing and quantifying what economists actually do. This proved to be a fruitful approach
in research on some other methodological questions [Lind, 1992; Lind, 1993, p. 500; Morgan,
1988]. In the same way, some insight may be gained into the importance of the choice-value
thesis. Unfortunately, counting alone is not sufficient in this case, as economists are hardly
ever explicit about the choice-value thesis. One notable exception is Ng [1987]: "I abstract
away any possible differences between welfare and utility. "3 However, for the other papers in
the sample, a criterion must be constructed which indicates whether the respective piece of
economic research would be invalidated if the choice-value thesis no longer held. To do so,
one needs to have an idea of what people maximize in this case. Here, a simple proposal by
Besley is adopted.
Definition 2: Irrelevance of the Choice-Value Thesis
Let the utility function which an individual maximizes depend on at least two arguments,
Xi:
U ~ U(Xl,X2: ...,Xn)
However, assume that one would advise the individual to maximize a different utility function:
u = u(Olx~, 02z2, ..., O~x~) ,
with all 8i > 0. Thus, the choice-value thesis holds, and maximizing utility amounts to
maximizing welfare, only for a certain vector of "weights" [81 82 - - - 8hi, with 81 ~ 1
for at least one i. Then the choice-value thesis is irrelevant for an economic model if its
results (theorems, propositions etc.) remain intact if 8i ---- 1Vi. In other words, the choice-
value thesis is irrelevant if a model's results remain intact although the individual maximizes
u = U(Xl, x2, ..., x~)
without maximizing his or her welfare. 4
For 81 > 1, xi is a merit good, for 0i < 1, it is a demerit good according to Besley [1988, p.
374]. However, definition 2 refers to behavior rather than goods. Closely related is the concept
of quasi-rationality, a term denoting behavior which is in accordance with axioms needed to
construct a utility function, but violates some other more or less axiomatic requirement
for rationality [Luce and yon Winterfeldt, 1994; Russell and Thaler, 1985]. However, the
motivation behind the behavior described in definition 2 might, be less specific. 5 Whereas
Russell and Thaler [1985] investigate whether different equilibria may arise if some agents are
quasi-rational instead of fully rational, it is checked whether .the results of economic research
TABLE 1
The Choice-Value Thesis in Economic Research
AER
Eca
JbN
JPE
OEP
ZWS
Original Papers Using Nontrivial
Not Using Utility Maximization
Total Number of Nontrivial Utility But Choice-Value
Original Papers Maximization Thesis Irrelevant
1977
75 61 9
1987 78 57 !5
1997
52
36 11
Using Nontrivial Utility Maximization and Relevance of
the Choice-Value Thesis Depending on Interpretation of,..
Consumer Pareto Optimality
Surplus, etc. W~lfare (Betterness Relation)
1 0 4
1 2 3
1 3 1
1977 28 27 1 0 0
1987 36 33 2 1 0
1997 40 29 10 0 1
1977 28 26 2 0 0
1987 42 37 5 0 0
1997 34 30 3 0 0
1977 59 47 8 0 1
1987 61 40 18 1 2
1997 46 27 12 0 3
0
0
0
0
0
1
3
0
4
1977 24 23 1 0 0 0
1987 44 34 6 0 2 2
1997 37 26 9 0 2 0
1977 14 14 0 0 0 0
1987 21 16 5 0 0 0
1997 23 16 6 0 1 0
>
O
O
Total 742 579 123 5 17 18
100 IAER: MAY 2002, VOL. 8, NO. 2
remain intact if agents are quasi-rational in the widest sense, i.e., if the choice-value thesis
has to be dropped. To do so, the criterion stated in definition 2 is now applied to 742 papers
from six economic journals (Table 1). The sample consists of all original 1977, 1987, and
1997 papers in the
American Economic Review
(AER) without the Papers and Proceedings,
Economica ( Eca ) , Jahrbiicher fiir Nationali~konomie und Statistik ( Jb N ) ,
the
Journal of Po-
litical Economy
(JPE), the
Oxford Economic Papers ( OEP)
and
Zeitschrift fiir Wirtschafts-
und Sozialwissenschaften (ZWS).
The six journals together can be presumed to give a fair
impression of mainstream economic research.
JbN
and
ZWS
are bilingual, refereed journals
with most authors being from German speaking countries. Original means that comments,
replies, book reviews and review articles, editorials, and the like are excluded. ~
The sample includes papers which are exclusively concerned with prediction or explana-
tion, but not with welfare. With a censored sample, it would be possible to focus entirely on
the question how much of welfare economics depends on the choice-value thesis. However,
this study simply had a different purpose, namely, to give a rough estimate of the importance
of the choice-value thesis for economics as a whole. It was wished to find out whether the
typical or representative economist, when he assumes rational agents as a part of his or her
modeling strategy, implies the truth of the choice-value thesis.
Column 2 of Table 1 gives the total number of papers in which no utility function with
at least two arguments under the control of the individual, referred to as nontrivial, is maxi-
mized. In 31 of these 579 papers, utility depends on one argument only, such as
u(y),
which
sometimes occurs in simple principal-agent models. For any linear transformation of the
argument, the maximization of u amounts to the same: suboptimal behavior cannot be mod-
eled, and the relevance or irrelevance of the choice-value thesis is not defined. Of course, this
is also true for those 548 papers in the sample in which no utility function is used at all. If
the model starts right away with a demand function, it does not depend on the validity of
the choice-value thesis, as is known from Becker [1962], that usual demand functions need
not imply rational behavior.
Concerning the share of models in which nontrivial utility functions are in fac~ used, a
nice by-product to be derived from Table 1 is shown in Table 2. Almost without exception,
this share rises from 1977 to 1987 and from 1987 to 1997. 7 The two leading journals in the
sample appear to have been trend-setting in this respect.
TABLE 2
The Share of Papers Using (Nontrivial) Utility Maximization
1977 (%) 1987 (~) 1997 (~)
AER
19
27
31
Eca
4 8 27
JbN
7 12 12
JPE
2O 34 39
OEP
4 23 30
ZWS
0 24 30
For papers whose authors derive their results or hypotheses starting from utility maxi-
mization, the role played by the choice-value thesis had to be assessed under two technical
assumptions. First, it is reasonable to assume that whenever it is shown that rational behav-
ior leads to inefficiencies (market failure), these are not accidentally corrected by irrational
behavior. Second, some models require that all consumers have the same utility function.
It was then assumed that this holds even if utility and welfare are not identical, that is, all
consumers make the same mistakes.
FRANK: CHOICE-VALUE THESIS 101
The third column of Table 1 shows the number of papers which do not produce any
results depending on the validity of the choice-value thesis, For example, in Mankiw's [1987]
model, the representative consumer maximizes an intertemporal utility function depending
on a nondurable and a durable good. If the choice-value thesis does not hold because the
consumer underestimates the benefits from the durable good, Mankiw's result that increased
government purchases can lead to a reduction in real interest rates still holds.
The status of the choice-value thesis is a little less clear if utility maximization is used to
derive a consumer surplus as a result (fourth column of Table 1). This does not necessarily
imply the choice-value thesis unless consumer surplus is defined as the difference between what
a consumer should rationally (to maximize well-being) be willing to pay, and price. However,
the consumer surplus is probably not perceived as such a perfect measure by most economists,
but as a rather pragmatic criterion, as its weaknesses are well-known [Ng, 1980]. These are
even more obvious if areas under market demand curves are considered and not areas under
individual demand curves. This is the more common practice in economic research, but not
very meaningful unless "the capacity of enjoyment [is] uniformly diffused in society, implying
identical utility functions ... and permitting 'interpersonal comparisons' of utility." [Mishan,
1977, p. 9] Thus, the relationship between consumer surplus and happiness is more or less
loose for a number of reasons; violations of the choice-value thesis only add another one to
the list. Similar arguments apply where welfare is defined as the sum of utilities (fifth column
of Table 1).
However, arguing with the Pareto criterion, or with the betterness relation, implies no
interpersonal comparisons of utility. When it is said that in situation A, a person is better
off than in situation B, there are two possible interpretations. The first is that being better
off means that this person prefers A to B, and secondly, the person is better off if and only
if he or she is happier in A than in B.
For economists who take the choice-value thesis as given, these two interpretations are
equivalent, and there is no need to be explicit about what they mean by "better off." Thus,
when an economist shows in his or her research that a person's utility is higher in situation
A than in situation B, and therefore better off in A, it is typically not known whether he or
she wishes to make the point that the person is happier in A. It is almost always impossible
to show that an economist implicitly assumes the choice-value thesis.
However, whatever the researcher's intention may have been, Pareto optimal allocations
surely have a higher normative appeal under Interpretation 2 than under Interpretation 1. So
does research which demonstrates the empirical invalidity of the choice-value-thesis constitute
a threat to the orthodox economist? Not really, for two reasons. First, there is still intellectual
satisfaction to be gained from showing that a certain situation is Pareto optimal, even if the
correct interpretation is that nobody could be made happier without making someone else
less happy if all were rational.
Second, as shown in the last column of Table 1, the number of papers in which the results
depend on the validity of the choice-value thesis, at least for a certain interpretation of the
Pareto criterion (or of the betterness relation), is not very large. For an economist from
the sample, the probability of writing such a paper is about 0.024 (18 out of 742 papers).
Furthermore, these papers typically also present innovative positive theory, being of interest
even without the welfare economic part. Thus, the numbers in the last column actually
exaggerate the importance of the choice-value thesis for economic research.
However, it is nevertheless true that the choice-value thesis plays a greater role for wel-
fare economics than for economics as a whole. Thus, though inspecting modern economic
research as it presents itself in mainstream economic journals does not provide us with con-
vincing reasons to treat the choice-value thesis as sacrosanct, maybe some economists fear
102 IAER: MAY 2002, VOL. 8, :NO. 2
that normative economics yields dubious policy recommendations due to the possible drop-
ping of the choice-wlue thesis. Whether this is a reasonable concern is considered in the next
section.
Paternalism
Restricting a person's freedom of choice against his or her will, but aiming exclusively at
increasing the person's own welfare, is called paternalism [Dworkin, 1972]. If the choice-value
thesis was always true, there would clearly be no justification for paternalism. Rejection of
the choice-value thesis is a necessary condition for paternalism. Now some economists seem to
fear that rejecting the choice-value thesis might also be a sufficient condition for paternalism:
"[R]ationality provides reasons for allowing indR'iduals to choose for themselves. In other
words, the assumption that agents are rational is a significant ingredient in providing an
ethical underpinning for the notion of citizen sovereignty [Brennan, 1990, p. 58]. s
This argument has two noteworthy implications. First, to be rational here means to be-
have according to the choice-value thesis, rather than merely maximizing utility, and second,
economic theory is supposed to have a direct impact on practical public policy. Presume for
the moment that the latter was actually true. Then it could nevertheless still be asked why
empirical research (on the validity of the choice-value thesis) should take potential political
implications into consideration. In other words, are there good reasons to be against pater-
nalism? If these good reasons exist, and if they can convincingly be presented, irrationality is
not a sufficient condition for paternalism, and it is no longer necessary to safeguard individ-
ual freedom by ordering the choice-value thesis to be true. Three reasons for protecting even
irrational individuals from paternalistic intervention will be discussed, which are the intrinsic
value of freedom, political failures, and the difficulty of improving individual welfare with
general rules. Arguments in favor of paternalism [Burrows, 1993] are not discussed here, as
this section only aims at showing that the choice-value thesis is not needed to argue against
paternalism.
The Intrinsic Value of Freedom
One problem of paternalism is that restricting the freedom of choice is something which
cannot be done eeteris paribus; not only consumption matters, but also who made the con-
sumption decision and how. For example, how happy children were with a toy given to them
as a reward for participating in Hammock and Brehm's [1966] experiment depended on how
the toy was allocated. Some children were simply given a toy, whereas others could choose
it from two alternatives. As the experimenters found out before how each child ranks the
toys, they could make sure that they all received a toy of the same rank in their preference
ordering. Nevertheless, those who chose the toy from two alternatives were happier with their
reward. One is tempted to conclude that freedom of choice enters the utility function directly,
but it is surely more cautious to say that the individuals attach a value to freedom, because
of the distinction between utility and welfare emphasized above, and because Gravel [1994]
has demonstrated that a complete and transitive preference ordering over "choice situations"
might not exist. 9
There is a flowering stream of research which tries to operationalize "freedom of choice"
as the number of alternatives in the choice set. 1° It should be noted, however, that it does
matter whether the difference between two choice sets is caused by public policy or by natural
reasons. 11 Assume D. H. Lawrence had died before the completion of Lady Chatterley's Lover.
With so many other enthralling books available, it is unlikely that the readers' welfare would
have been lower in this case. However, once the novel was written, many people certainly felt
a strong preference for being given an opportunity to read it, even if they did not actually
FRANK: CHOICE-VALUE THESIS 103
intend to do so. It is true that some people also have a preference for others not having the
opportunity" to read
Lady Chatterley's Lover
[Sen, 1970]. In other words, reading the book
creates a negative externality. However, if censorship is thereby motivated, this has nothing
to do with paternalism.
Political Failure
People may not maximize their own welfare, but there might be nobody else able to make
better decisions on their behalf. This is not a contradiction, as becomes clear when Vickers
neatly makes the point that though "we often want what will in fact harm us," nevertheless
an individual's "attitudes toward the future, including his preferences, are, if not completely
open to his reflection, at least more clear to him than they would be to another observer."
[Vickers, 1975, p. 287]
Political failures in the context of paternalism arise for the same reason as political failures
generally do: self-interested bureaucracies, information asymmetries, incompetence and the
like. However, even the benevolent dictator, free from all these problems, would have great
difficulty implementing welfare-improving paternalism, as is shown in the next section.
The Difficulty of Improving Individual Welfare with General Rules
"Classical" paternalism, the restriction of a child's liberty by the parents, needs no general
rules, as the parents can monitor each of the child's actions. Legal paternalism, however,
needs general rules. For some kinds of irrationality, there is nothing like a general rule as a
remedy. Consider the case of the benevolent dictator who passes by two chess players, one of
them about to make a blunder leading to immediate trivial loss, whereas he could win with a
beautiful combination. Now the benevolent dictator tells him so. To make the point clearer,
forget about the fact that chess is usually considered as a zero sum game, and presume instead
that the combination is so beautiful that both players' welfare increases, tIowever, what the
benevolent dictator cannot do, even in a fable llke this, is to go home and design a law which
reduces the likelihood of blunders in chess (except for absolute beginners, who benefit from
simple folk rules-of-thumb like "Knight on the rim - things look grim"). Note that this is
no political failure as described previously; the dictator here is indeed a superior maximizer.
However, with chess being such a complex game, he cannot prescribe the best action for every
choice problem which might arise in the future. Likewise, it is not possible to determine the
optimum number of alcoholic drinks per person in advance for every situation, because it
depends on too many things: not only availability of public transport, but also body weight,
social context, climate, own mood, mood of others, genetic factors, time preferences, and
the like. Thus, laws are a very inaccurate paternalistic instrument, improving on individual
decisions only if these can be assumed to be even farther away from the optimum than the
prescription by the law. (This is one of the reasons why strict paternalism with respect to
alcohol stops at the age of 18 or 21 in Western countries.)
Conclusion
If economists
feel
that the choice-value thesis is a fundamental part of economic research,
or that it is a necessary ingredient in the crusade against paternalism, they are wrong. The
previous section has shown that paternalism can be argued against without referring to the
choice-value thesis, and the second section has shown that a large part of modern economic
research works without the choice-value thesis.
As a consequence, those economists who feel that psychological research on suboptimal
behavior demands a redirection of economic research might also be wrong, as most economic
104 IAER: MAY 2002, VOL. 8, NO. 2
models only assume that individuals maximize utility, something which is hard to refute when
utility is not identified with welfare [Boland, 1981].
However, the empirical study on which these conclusions are based is subject to two
possible objections. First, it is impossible to prove that the six journals in the sample are
representative. However, a look at Table 2 shows that, despite certain differences, the journals
are homogenous in the sense that the statistics for any of these alone would support these
conclusions. Admittedly, inspection of journals outside the sample might lead to different
results, but at least there is no
ex ante
reason why this should be the case. Even if it would
be possible to identify clear differences in the editorial policy of the
American Economic
Review
and a top journal which is not included in our sample, such as the
Quarterly Journal
of Economics,
it would still have to be shown that this leads to different shares of published
papers which rely on the choice-value thesis.
A second limitation of the present study is noteworthy. Irrational behavior was modeled
as giving "wrong weights" to the arguments of the utility function (cf. definition 2). In many
models, this does not change the results, but it would matter indeed if people were to entirely
neglect determinants of their welfare. In Goerke's [1997] model, to give an example from our
sample, it does not matter if workers underestimate the non-monetary benefits from being
a union member, thus it is one of those papers appearing in column 3 of Table 1, for which
the choice-value thesis is irrelevant. However, if workers completely neglect these benefits
(something which definition 2 above does not allow for, as 0~ > 0Vi), then the model no
longer works (that is, the results on the impac~ of tax policy on the outcome of collective
bargaining can no longer be obtained).
Finally, one should hasten to add that not all psychological research on human decision
making is "destructive," aiming to show that people do not maximize anything, or maximize
the wrong thing. Much of psychological research is interesting for economists because it shows
exactly what people try to maximize, leading to interesting responses by economic theory. 12
Footnotes
iWith slight modifications taken from Broome [1978, p. 313]. Broome discusses some refinements
of this definition, but for the present purpose, the simplest version suffices. A related notion is
Burrow's [1993] "preference-choice-value proposition."
2Introductory surveys which cover evidence raising some doubts about formal, as well as substan-
tive rationality, are provided by Conlisk [1996] and Sugden [1992].
3For a model explicitly allowing for optimization errors, also from the sample, see Kooreman and
Kapteyn [1987, p. 231]
4Note that individual welfare may depend on other people's welfare. Thus, maximizing welfare
does not contradict altruism.
5A brief survey of the general reasons why people might make choices which are not optimal is
provided by Ng [1989], and more extensively by Elster [1990].
6A more detailed description of the sample is available from the author upon request.
7JbN
is the only journal in the sample which regularly publishes purely statistical papers, which
decreases the share of papers with economic models, and thus the likelihood of finding one in which
utility maximization is relevant.
SSee Boadway [1981, p. 541] for a similar argument.
9On the intrinsic value of freedom, see also Sen [1988].
1°For an example, refer to Puppe [1996].
USee Jones and Sugden [1982, p. 51] for a related argument.
12E.g., Bolton and Ockenfels' [2000] "theory of equity, reciprocity and competition."
FRANK: CHOICE-VALUE THESIS 105
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