‘Homo Economicus’ as an intuitive statistician (1): Model-free learning

Abstract

The subjective expected utility theory is a method for solving an already well-defined decision problem. But prediction of behaviour in dynamic situations requires a theory that explains how the agent models his choice situation and defines his decision problem. The subjective expected utility theory, even if true, is inadequate as a theory of economic behaviour. New classical economics have proposed the rational expectations (RE) hypothesis as a way of specifying the agent’s view of the economy. The hypothesis identifies the agent’s subjective expectations with the mathematical expectations implied by the true economic model, suggesting that he maximizes his expected utility with respect to the true model. So, the new classical paradigm defines economics as the enterprise to derive economic phenomena from two hypotheses: (1) people are expected utility maximizers; and (2) they maximize their expected utility with respect to the true economic model.