Workbook for Volume 1 - Part IV – Section #23: Foundational Papers from the 20th Century, Post-World War II (5 of 15) – Simon, Bellman & Herrnstein
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For returning readers and subscribers: This post introduces a Revised Version for Volume 1 - Part IV – Section #23: Foundational Papers from the 20th Century, Post-World War II (5 of 15) – Simon, Bellman & Herrnstein
Summary:
Volume 1 - Part IV – Section #23: Foundational Papers from the 20th Century, Post-World War II (5 of 15) – Simon, Bellman & Herrnstein – During the second half of the 20th Century, the normative theories based on “Expected Value” accumulated a large catalog of empirical “Puzzles, Paradoxes & Anomalies”. Researchers did not heed Herbert Simon’s warnings, and doubled-down with the tradition of the moral/psychological conceptualization of D. Bernoulli (1738). Thus, the mathematized “Reputational Hierarchies” grew taller with additions such as Richard Bellman’s optimal control solutions, even though he showed that such solutions suffer from the “Curse of Dimensionality”. In this vein of turning the simple into the complex in order to maintain old theories in the face of contradictory observations, “Hyperbolic Discounted Utility” grew from a finding in animal psychology.On the other hand, Ergodicity Economics (EE) takes the path less travelled to solve “Puzzles, Paradoxes & Anomalies” such as these “Preference Reversals”. In a 2020 paper by Alexander Adamou, Yonatan Berman, Diomides Mavroyinanis, & Ole Peters, “Microfoundations of Discounting”, EE associates hyperbolic discounting with the additive “Growth Dynamic” to provide an endogenous model explanation based on “Time Average” growth rates instead of an appeal to psychological explanations that are external to the model. This means that we can recognize, and avoid using models that mismatch multiplicative “Growth Dynamics” with “Additive Utility Functions”. This enables the development of internally consistent recommendations that do not require an appeal to “McGuffins” such as a external “Preferencing Criterion”, but instead rely on measures of the observable structure of the “Growth Dynamics” of the client’s decision “Task Environment”.
Developing…
”CTRI by Francois Gadenne” writes a business book in three volumes, published serially on Substack for public peer-review. The book connects the dots of life-enhancing practices for the next generation, free of controlling algorithms, based on the lifetime experience of a retirement age entrepreneur, & continuously updated with insights from reading Wealth, Health, & Statistics research papers on behalf of large companies as the co-founder of CTRI.