An Empirical Interrogation of Perfect Information: Toward a Sociological Economics (Part 1)

This essay will be published in five parts over the next two weeks.

In this paper I empirically interrogate the perfect information formulation of Arrow-Debreu models in economics (Arrow & Debreu 1954; Debreu 1956, 1959, 1962). The spirit of this enterprise is to bring some of the keen theoretical, methodological, and practical tools of sociology to economics in order thereby to strengthen the quality of and dialogue between each discipline. Sociology’s relentless practical engagement with real world data, and the methodological and theoretical insights that accompany this practice can help empirically ground and evaluate the analytically rigorous ideas generated by economics. In brining sociology to economics this paper shows that (perhaps) one of economics’ most cherished ideas is in fact an unrealistic assumption: concrete empirical testing finds that perfect information does not really exist for real-world actors. The implications of these findings may not provide an immediate disciplinary revolution for economics, bet they do suggest that a radical reworking may eventually be required. Again, this paper will argue that sociology can aid in this reconstruction.

This work follows in five parts. First, it provides a brief characterization of perfect information within Arrow Debreu models. Second, it will provide a positivist understanding of how perfection information does not exist, relying on real-world data rather than mathematical models. Third, a more theoretical exposition is provided on the basis of a sociological-phenomenological understanding of understanding. Fourth, the deconstruction complete, the paper continues by asking, “where does economics go from here?” A sociological reconstruction of economics is proposed as a solution to the perfect information problem. Finally, a set of programmatic recommendations are made for the discipline of economics so that it might avoid the kind of 50-year lost enterprise that the Arrow-Debreu models have resulted in. This work is necessarily short, as it aims at a general on-line audience. A more thorough and sophisticated treatment is available upon request. This sophisticated treatment may be of greater interest to sociologists, so that they can better see how the strengths of our discipline can be used to engage with economics. Economists will find this shorter treatment sufficient.

Perfect Information

Wikipedia defines perfect information as, “a term used in economics and game theory to describe a state of complete knowledge about the actions of other players that is instantaneously updated as new information arises… assuming that all agents are rational and have perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. Perfect information would practically mean that all consumers know all things, about all products, at all times, and therefore always make the best decision regarding purchase.”

Neo-classical economics works on perfect information. And a regular cottage industry of economists has emerged, deploying this model to explain everything from work, to families, to suicide, to sexuality, and even to inequality. The technical skills deployed within the school are above reproach. Some might even argue that sociology might learn a thing or two from the ways in which economists have trained their legions to “successfully” engage with real-world problems. They have developed analytically rigorous model after model to help us understand the world Yet economists might also learn a thing or two from sociologists: how to engage with real-world realities. In particular, sociology asks that economics asks the unasked question: does perfect information actually exist in the world? Wonderful models are well and good; but do the models actually represent the reality of lived experience of everyday actors ?

To be posted shortly, the next four parts (1) Does Perfect Information Exist?, (2) Bringing sociology to economics: A phenomenological understanding of Understanding, (3) Bringing Sociology to Economics: Where do we go from here?, (4) The next half-century: saving ourselves from a fruitless enterprise

5 Responses to “An Empirical Interrogation of Perfect Information: Toward a Sociological Economics (Part 1)”

  1. Thank you thank you! I have been waiting for this blog! Every time I hear an economist take on a sociological question without addressing any kind of theory or acknowledging that there is a whole other discipline that has addressed these issues….I want to scream! Of course, as a disclaimer, I am a happily interdisciplinary person in the health/medical/social/behavioral sciences.

    Can’t wait to see what else you tackle!

  2. Can you please add citations to this article, such as (TreborBassett et al., 2005)? kthxbi

  3. fallacyofcomposition Says:

    Economics doesn’t assume perfect information. For sure models get constructed, but then they get rejected following empirical observation. That’s science isn’t it?

  4. yetanothersheep Says:

    The last chapter of Debreus “Theory of Value” is about incomplete information, it is a primary motivation for market incompleteness in Quinzii and Magills book on incomplete markets and assymetric information has been treaten since Radner wrote about it.

    And know GE theorist thinks that the Arrow-Debreu model with complete markets is good as a descriptive theory. Including Ken Arrow.

  5. scarcity Says:

    I agree that the baseline Arrow-Debreu framework relies on perfect information, but the statement that “Neo-classical economics works on perfect information” is simply false. It was immediately obvious that perfect information was a bad assumption, and, for literally decades, neoclassical economics have used methods that don’t rely on perfect information. For instance, see any of the work by recent Nobel laureates Hurwicz, Maskin, Myerson. Alternatively, see Jovanovic’s (1979) paper on job matching and turnover.

    Yes, lots of economics models assume perfect information, but to assert that it is a fundamental property of neoclassical economics is wrong.

    Further, I, and most economists, actually agree with all your probing questions, but the perfect information assumption is not the reason those are good questions.

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