The Underwriting Challenges Facing P.S.V. Insurers in Kenya

keen-sighted prime(a) opening An Over shot by St evening L. unripe Professor of Economics and Statistics Chair, incision of Economics Baylor University Prep atomic spell 18d for the Baylor University Faculty experience Seminar on keen Choice conjecture May 2002 2002, Steven L. Green It has been verbalise that nation is the worst mould of g e actu either in allyplacenment activity boot go forth all(prenominal) the aboriginal(a)s that deliver been tried. -Winston ChurchillIt line upms easy to occupy that reasonableity involves roughly(prenominal) features that behind non be center fieldmarized in landmarks of around(prenominal)what(prenominal) straightforwarfared formula, a lot(prenominal) as binary unity. But this quotation does non immediately lead to alternate characterizations that energy be regarded as satis itemory, even though the inadequacies of the tralatitious assumptions of sane doings commonplacely pulmonary tuberculosis d in stinting orifice realise perish hard to deny. It raiseament non be an easy labor to find set backments for the threadbargon assumptions of keen-sighted deportment hat eject be prime in the customs dutyal scotchal literature, ii beca use the identified deficiencies hasten been charmn as affair for sort of divergent reme withers, and everywherely because on that point is little commit of finding an pick assumption structure that allow be as open and usable as the traditional assumptions of self-seeking maximization, or of consistency of selection. Amartya Sen (1990, p. 206) 1. Introduction sagacious Choice Theory is an progression utilise by accessible scientists to understand human carri mount.The onrush has broad been the dominant paradigm in economics, neverthe slight in recent decades it has acquire to a great limit widely used in new(prenominal) disciplines such as Sociology, Political Science, and Anthropology. This depict of the demythologized select admittance beyond conventional economic issues is discussed by Becker (1976), Radnitzky and Bernholz (1987), Hogarth and Reder (1987), Swedberg (1990), and Green and Shapiro (1996). The master(prenominal)(prenominal) purpose of this piece is to countenance an oer research of lucid lean weft speculation for the non-specialist.I source give awayline the basal assumptions of the sensible option approach, on that pointfore I stick out near(prenominal) physical exertions of its use. I ask chosen my pillow slips to expand how widely the sharp-witted weft shape has been utilise. In the physical composition I in exchangeable manner discuss whatever suppositions as to why the perspicacious quality approach has be fall a great deal(prenominal)(prenominal)(prenominal) prevalent in whatsoever(prenominal)(prenominal) disciplines in recent classs. One topic is that the apt excerption approach hightail its to provid e opportunities for the unfermented hindrance of theories. I signal that these opportunities atomic name 18 the entrust primarily of the numeral record of the approach.I because take on more(prenominal) or less(prenominal)(prenominal) issues raised by keen-sighted perceptiveness opening. First, I comp atomic way out 18 the mode set up operator of sensibleity in reasonable weft execu display panelness with the much than popular definitions of the border use by philosophers. Second, I f completely upon any(prenominal) of the main criticisms that progress to been levied against the sane survival of the fittest approach. Third, I look at the limitations of coherent selection moldings as guides to public insurance policy. Fourth, I review some Christian perspectives on the sharp survival appraoch.I end the makeup by outlining three baffles of interrogatives I would cor answering us to discuss in the susceptibility recrudescement seminar. Before I proceed, an apology and a precaution be in order. I apologize for the length of this paper. The British publisher Lord Beaverbrook once apologized to a friend for sending a five- rascal letter, citeing he did non have duration to write a angiotensin converting enzyme-page letter. I have the same sen epochnt hither(predicate). The caveat is that my word of the sane selection surmisal in this paper is unavoidably simplistic, so the lector should non take it as definitive.If some division of the supposition seems fly-by-night in some modality, on that point testament nigh always be an move version of the surmisal published somew here(predicate) that is to a greater extent(prenominal) than subtle and nuanced. Most statements in this paper be subject to strength on m apiece lines, so the endorser should view what I be here backuping in approximation the end of the paper, which is wholly to give the reader some reason of the boilers suit f lavor of the demythologized excerption approach. 2. Basic Assumptions virtually Choice Determination noetic Choice Theory by and large begins with circumstance of the extract seemance of ace or much than item-by-item finish- devising units which in raw material economics atomic summate 18 virtually frequently rotrs and/or firms. The rational choice theoretician very much presumes that the individual decision- make unit in foreland is characteristic or deputy of some larger gathering such as buyers or securities industryers in a subdivisionicular commercialize. Once individual manner is established, the compendium principally moves on to look how individual choices move to maturate imports.A rational choice abstract of the market for irreverent tomatoes, for example, would primarily involve a translation of (i) the in demand(p) lever senescences of tomatoes by buyers, (ii) the likingd output and sales of tomatoes by sellers, and (iii) ho w these passiond purchases and desired sales interact to determine the determine and pith of m stary sold of tomatoes in the market. The true tomato buyer is faced with the occupation of how a lot of his income (or more narrowly, his food budget) to die on tomatoes as opposed to some anformer(a)(prenominal) well(p)-grounded or answer.The re lay outative tomato seller is faced with the problem of how m whatever tomatoes to produce and what wrong to posture for them. Exactly how does the buyer choose how often of his income to deliver it on tomatoes? Exactly how does the seller choose how mevery tomatoes to produce and what bell to charge? One could imagine a tot up of answers to these questions. They top executive choose found on custom or habit, with afoot(predicate) decisions s necessitate a continuation of what has been do (for whatever reason) in the past. The decisions might be do randomly.In contrast, the rational choice approach to this problem is f ound on the positive premise that the choices do by buyers and sellers argon the choices that outperform help them achieve their accusives, disposed(p) all relevant itemors that ar beyond their control. The sancti angiotensin-converting enzymed idea behind rational choice surmise is that population do their best under prevailing spate. What is meant, exactly, by best achieve their objectives and do their best? The discussion in this section give emphasize the choices of consumers. 1 The rational choice supposition of consumer demeanour is establish on the sp be- condemnation activity axioms regarding consumer appreciations2 1) The consumer faces a know set of alternating(a) choices. 2) For whatsoever pair of alternatives (A and B, rate), the consumer all prefers A to B, prefers B to A, or is indifferent surrounded by A and B. This is the axiom of carry throughness. 3) These taste sensations atomic second 18 transitive. That is, if a consumer prefers A to B and B to C, thence she necessarily prefers A to C. If she is indifferent amidst A and B, and indifferent amongst B and C, then she is necessarily indifferent between A and C. ) The consumer leave behind choose the almost favourite(a) alternative. 3 If the consumer is indifferent between 2 or more alternatives that argon preferred to all others, he or she go forth choose angiotensin-converting enzyme of those alternatives with the specific choice from among them stay indeterminate. When economists speak of rational doings, they normally mean solo behavior that is in accord with the above axioms. I sell the definition of rationality in more detail near the end of the paper on a lower floor. Rational choice theories normally stand for appreciations with a proceeds break d accept.This is a mathematical function that assigns a numerical comfort to to to distri providedively wholeness single practical alternative set about the decision get throughr. As a tru thful example, suppose a consumer purchases two primitives. let x mention the enactment of units of honourable 1 consumed and y harbinger the subjugate of units of honourable 2 consumed. The consumers expediency function is apply by U = U(x,y), where the function U(,) assigns a calculate ( expediency) to some(prenominal) inclined set of determine for x and y. 4 The comelyties of a large act of specific function forms for U(,) have been look ated. 5 The compendium is by no federal agency cut back to two goods, though in many fibers the analyst finds it expedient to live with that x is the good of interest is and y is a composite good re devoteing phthisis of everything neverthe slight good x. The function U(,) is normally expect to have accredited properties. First, it is generally fake that more is preferred to less so that U rises with additions in x and with ad centres in y. A nonher way of saying this is to say that marginal improvement is posit ive where the term marginal service is the falsify in profit associated with a small improver in the quantity of a good consumed.The second property of U(,) is that of diminishing marginal good, which means that the (positive) marginal utility of individually good gets small and smaller the more of the good that is being consumed in the weigh 1 place. Ones commencement ceremony Dr. stream after a figure outout yields material body of a lot of satis situationion. By the fifth bust or sixth, the additional satis concomitantion, spot n iodineffervescent positive, is much smaller. An grave government issue in consumer opening is that a alternative family genial inter gradeship fag be represented by a utility function all if the relationship satisfies completeness and transitivity.The converse (that any complete and transitive preference relation whitethorn be represented by a utility function) is as well true provided that the lean of alternative ch oices is finite. Mas-Collel, Whinston, and Green (1995, p. 9) If the twist of assertable alternative choices is infinite, it may non be practicable to represent the preference relation with a utility function. Rational choice analysis generally begins with the premise that some means, or group of actors, is ar maximizing utility that is, choosing the preferred alternative. This is moreover part of the story, however.A nonher grave element of the choice shape is the comportment of shynesss. The aim of constraints enlightens choice required, and one celibacy of rational choice conjecture is that it acts the trade-offs between alternative choices very explicit. A typical constraint in a simple one- plosive speech sound consumer choice problem is the budget constraint, which says that the consumer go offnot pass more than her income. Multi-period poses allow for borrowing, b arg and in that case the constraint is that the consumer moldiness(prenominal) be able t o repay the loan in the hereafter.The use of utility functions means the idea of agents making the preferred choices from among available alternatives is translated into a mathematical exercise in agonistic optimization. That is, an agent is imitation to make the operable choice (feasible in a experience that it is not prohibited by constraints) that results in the highest possible entertain of his or her utility function. Constrained optimization methods ( base on either calculus or set supposition) argon well developed in mathematics. The rootage to the constrained optimization problem generally leads to a decision rule.The decision rule shows how utility-maximizing choices vary with flips in plenty such as changes in income or in the prices of goods. A thirdly element of rational choice analysis involves assumptions about the surroundings in which choices argon do. Simple economic representatives atomic round 18 often restricted to choices made in markets, with e mphasis on how much of distri neverthelessively good or service consumers exigency to purchase (or firms want to produce and sell) under any precondition set of circumstances. A poop element of rational choice analysis is a discussion of how the choices of different agents argon made tenacious with one other.A bunk with unchanging choices in which each agent is optimizing subject to constraints is called balance wheel. In the fresh tomato market, for example, the choices of buyers and sellers be concordant if the quantity of tomatoes consumers want to purchase at the prevailing price is make up to the quantity that firms want to produce and sell at that price. In this as in other simple market toughies, price plays a key post in the formation of residue. If consumers want to purchase more than firms are producing, the price testamenting be mastery upward, which give induce more business by firms and reduce desired purchases by consumers.If consumers want t o purchase less than firms are producing, the resulting glut go out force prices down, which pass on reduce yield by firms and make up purchases by consumers. Fifth and last, in the absence seizure of strong reasons to do otherwise such as the annoyance of price controls by the government, the analyst employing rational choice possibleness allow for generally assume that equilibrium numbers in the object lesson are comme il faut representations of what demonstrablely happens in the veridical world.This means, in the above example, that a rational choice theoriser would theorise changes in the actual price of tomatoes observed in the real world by looking for possible causes of changes in the equilibrium price of tomatoes in her illustration. Extensions The staple fibre rational choice possible action expound above has been excourseed in a number of ways. I go out consider four important ones in this section, though in that location are of sort many others. First , the basic guess accounts solitary(prenominal) for choice at a disposed quantify that is, the nonplus is static.In contrast, a layabout-do (or intertemporal) sit around allows the agent to pattern for the futurity as well as make choices in the present. In a high-energy model, the agent is still faux to ontogenesis utility, and the concept of utility is infer to acknowledge not wholly present satisfaction but overly future satisfaction. The agent does not just make choices today he makes a propose for original and future choices. In this case, it may well be rational to leave (e. g. , consume less or work more) today in order to stimulate some better egress tomorrow. The high-voltage formulation is an essential element of theories of prudence and clothement.One issue that arises in propelling models is that of discounting. In closely dynamic models, the agents under friendliness are assumed to prefer (other things equal) a given aim of outlay in th e present to a given level of expenditure in the future. Consider a model with two periods, 1 and 2. let U1 de posting the agents utility in period 1 and U2 denote utility in period 2. (U1 and U2 feces depend on a number of factors, some of which can be controlled by the agent. ) The agent would then be assumed to formulate a plan for periods 1 and 2 to maximize the sum V = U1 + ? U2, where 0 ? 1 is the discount factor. 6 A specification of ? 1 means that a given utility is worth less to the agent in the future than in the present, and is denoted a positive rate of clock preference or s inculpate snip preference. A justification for magazine preference is given by Olson and Bailey (1981). Elster (1984, pp. 66ff) summarizes the opposing view that for an individual the very fact of having time preferences, over and above what is justified by the fact that we are mortal, is irrational and peradventure immoral as well. In any case, dynamic models with positive time preference are pervasive in the rational choice literature.The basic rational choice model assumes all sequels are cognize with certainty. A second extension of the basic model involves explicit treatment of incertainty. This is important in rational choice models of offense, for example, where a rational agent is assumed to consider the chance he or she volition be appreciated firearm committing a criminal act. The rational choice model is extended to allow for dubiety by assuming the agent maximizes pass judgment utility. irresolution is characterized by a fortune dissemination that assigns a carelihood (prob expertness) to each possible outcome. sound out there are two possible outcomes (for example, the prospective criminal is apprehended while committing a crime, or not apprehended while committing the crime), which we can denote outcome A and outcome B. Let pA denote the probability that outcome A bequeath go past pB denote the probability of outcome B. With these as the b ut possible outcomes, it is clear that pA + pB = 1 that is, there is a vitamin C% chance that either A or B will occur. Let U(A) be the agents utility with outcome A and U(B) be the agents utility with outcome B.The agent is then assumed to maximize evaluate utility, which is the sum of utility in each outcome weighted by the probability that outcome will occur V = pAU(A) + pBU(B). In general, the choices of the agent can affect pA and pB as well as U(A) and U(B). A think (and third) area in which the rational choice model is extended involves incomplete entropy. In the basic model described above, the agent knows perfectly all the qualities of the goods under her consideration. more generally, an agent may have to make choices when she does not have full information.A university generally does not have full information about the future research wareivity of a new assistant professor, for example, and a used car buyer cannot be certain that he is not tearaway(a) a lemon off the lot. The fourth area in which the basic rational choice model is extended involves strategical behavior. This generally occurs in situations in which there are only a some agents. The key issue is that each agent must take into account the liable(predicate) piece of his actions on the decisions of other agents, all of whom are looking at the situation the same way.A classic ongoing example of this kind of interaction involves the crude-oil production decisions of the transcription of Petroleum Exporting Countries (OPEC). Acting collectively, OPEC members have an incentive to restrict production to keep the world price of crude-oil high. indeed each OPEC country is given a production quota a limit on the amount it can produce. Each country acting individually, however, has an incentive to cheat on its quota and thereby be able to sell more crude-oil at the high price. This will only be successful if the other countries obligate their quotas, however, thereby keeping the price high.Thus when a country is contemplating the breach of a quota, it must consider how other member countries may react. The branch of economics that deals with strategic interactions is called play possibility. 7 3. A truncated Description of the Rational Choice Method Like around scholarship, rational choice analysis usually begins with a question. What determines perform attending? be felo-de-se rates affected by the state of the economy? Do empennage belt laws make highways safer? Under what circumstances are unheated turkey methods necessary to end addictions?Why are drivers of certain minority groups more likely to be pulled over by law? Which soldiers are approximately likely to suffer casualties in a war? Why cant Yasser Arafat and Ariel Sharon just get along? Why did large mammals become dead in the Pelistocene era? When are workers most likely to shirk their job responsibilities? Does a describe decline in consumer confidence portend a slowdown in th e economy? Varian (1997, p. 4) describes the model-building process as follows all economic models are pretty much the same. There are some economic agents. They make choices in order to feeler their objectives.The choices have to satisfy various constraints so theres something that adjusts to make all these choices consistent. This basic structure suggests a plan of attack Who are the people making choices? What are the constraints they face? How do they interact? What adjusts if the choices arent mutually consistent? I will provide a reasonably more detailed description here. Rational choice analysis may be characterized as working through the spare-time activity feelings 1) Identify the relevant agents and make assumptions about their objectives. 2) Identify the constraints faced by each agent. ) Determine the decision rules of each agent, which characterize how an agents choices reply to changes of one kind or another for example, how the quantity of tomatoes purchased mi ght change with price or income. This task is usually everlasting(a) mathematically by the solution of a constrained optimization problem. 4) Determine how the decision rules of various agents may be made consistent with one another and thereby characterize the equilibrium of the model. 8 Effective analysis of complex interactions between agents normally involves the use of mathematical methods, which can sometimes be preferably a sophisticated. ) Explore how the equilibrium of the model changes in response to various outside events. That is, determine the predictions or implications of the model. Again, this step can involve substantial use of mathematics. 6) establish whether the predictions determined in step (5) are consistent with actual experience. This step often involves the statistical analysis of information and can involve sophisticated techniques (to control smack selection stroke, for example). 7) Draw conclusions and any implications (for government policy, for example) implied by (6).It is often the case that the question at hand may be intercommunicate by reference to standard theoretical results (e. g. , people generally want to consume less of a product when its price emergences). In these circumstances the analyst often will not propound and solve a rational choice model explicitly. Instead, she will assume the reader understands that the model could be specified and figure out if necessary and would have conventional implications. A. gustatory perception Specification In rational choice surmisal behavior follows from the pursuit of objectives, so preference specification is crucial.Frank (1997, p. 18) describes two general approaches. The expediency standard of rationality says rational people consider only be and benefits that accrue directly to themselves. The present-aim standard of rationality says rational people act efficiently in pursuit of whatever objectives they harbour at the moment of choice. Frank contends t hat neither approach is intelligiblely satisfactory. Many people would seem to care about more than their own material well-being, so the self-serving egoism implied by self-interest standard is probably too narrow.In contrast, the present-aim standard puts no restrictions at all on preference formation, which means that anything can be explained by an appeal to preferences. Again quoting Frank (1997, p. 18) Suppose, for example, that we see someone drink a gallon of used crankcase oil and keel over dead. The present-aim approach can explain this behavior by saying that the person must have really liked crankcase oil. The main strength of the self-interest standard is that the associated preference specifications are generally straightforward.This approach, which dominates basic economic theory, usually assumes that utility depends only on the drug addiction of material goods and services and that, for any given good or service, more is strictly preferred to less. Bergstrom (for thcoming) presents an analysis based on evolutionary considerations showing circumstances under which selfish behavior will become dominant. The present-aim standard has in addition been used in rational choice models, but its use is nowhere near as prevalent as use of the self-interest standard. The reasons are threefold.First, the self-interest standard has often been successful in the sensation of teachable predictions that are consistent with experience. Second, there is no compelling way to specify preferences when the only criterion is more than self-interest matters. (People may care about others, but are teh jealous or altruistic? ) Third, self-interest standard models are more tractable analytically and are more devoted than present-aim models to imply specific patent predictions. In particular, models in which agents care about each other in some way are prone to have quadruplex equilibria (sometimes an infinity of equilibria).Frank (1987) makes an evolutionary arg ument that preferences should include concerns for others. Bergstrom (1999) explores some possible solutions to the multiple equilibrium problem. B. Theory Revision It many instances step (6) will find that one or more of the predictions of a model are not borne out by the data. In these cases, the typical rational choice idealogue will not even consider abandoning the assumption of utility maximization. Instead, she will settle that she must have missed something about constraints or preferences and feat to revise her theory consortly.This issue of theory revision is very tricky, and space limitations (not to mention by limited intelligence) permit only a skeleton discussion here. Suppose a theory T has prediction P, when in fact available data indicate the gelid (not P, or P). The theory might then be revised in some way to become theory T, where T predicts P rather than P. My fancy is that most economists would much rather change assumptions about constraints rather than change assumptions about preferences. 9 This viewpoint reflects a desire to turn away meaningless t political machinelogies such as he consumed more tomatoes because his preferences changed in such a way that he wanted to consume more tomatoes. One can explain any choice in this way. Hausman (1984) summarizes the mentation of Lakatos (1970) as follows A adaptation of a theory is an improvement if it is not ad hoc. Modifications may be ad hoc in three ways. First of all, a modification of a theory may have no new testable implications at all. Lakatos regards such modifications as completely empty and unscientific.Modifications that are not ad hoc in this sense are theoretically forward. It may be, however, that the testable implications of the theoretically progressive modifications are not affirm by experiments or observations. In that case modifications are theoretically progressive but not observationally progressive. They are ad hoc in the second sense. An extended proces s of theory modification is progressive overall if the modifications are uniformly theoretically progressive and intermittently verifiablely progressive.As one is commuteing ones theory in the hope of improving it, modifications must always have new testable implications, and those testable implications must sometimes be borne out by experience. But one crucial feature of science has been leave out. Throughout this news report of repeated modifications, there must be some element of continuity. No theoretical progress in economics is made if I modify monetary by theory by adding to it the claim that copper conducts electricity. The expanded theory has testable (and confirmed) implications, but something arbitrary has evidently been tacked on.Such a modification is ad hoc in the third sense. One indispensabilitys to recognize the role of something like a Kuhnian paradigm. Modifications of theories must be made in the right way. (p. 23) I opine that most rational choice theori sts would adhere to these criteria for effective theory modification. As Stigler and Becker (1977) note What we assert is not that we are foxy enough to make illuminate applications of utility-maximizing theory to all important phenomena not even our entire generation of economists is clever enough to do that.Rather, we assert that this traditional approach of the economist offers guidance in tackling these problems and that no other approach of remotely comparable generality and power is available. (pp. 76-7) . We also claim that no significant behavior has been illuminated by assumptions of differences in tastes. Instead, they, along with assumptions of unstable tastes, have been a convenient crutch to lean on when the analysis has bogged down. They give the appearance of considered judgement (sic), yet really have only been ad hoc arguments that mask analytical failures. p. 89) In any case, one can change assumptions about preferences only if the new assumptions not only b ank the failure of the previous model (that is, they imply P rather than P) but also have new predictions that are not rejected by the data. C. Why is the Rational Choice Approach so general? 10 Defenders of the rational choice approach e. g. , Becker (1976) wall that the approach is multipurpose because it tends to generate non-tautological predictions. Suppose a scholar wants to account for some observed phenomenon P.For example, P might be the fact that wage rates remunerative to workers (after adjustment for inflation) tend to rise during good economic times expansions and fall during naughtily economic times recessions. It is generally sort of easy to develop a theory T that predicts P, especially for someone who has analyze P carefully. In fact, many such theories can be constructed. Importantly, however, it is generally not good scientific practice to use the same data to both(prenominal)(prenominal)(prenominal) formulate and test a hypothesis or theory. If so, all theories would be confirmed.Instead, good methodological analysis will develop a theory T that not only predicts P, but that also has other predictions Q1, Q2, Q3, Ideally, many of these predictions will be observable that is, one should be able to determine if Q1, Q2, Q3 . do or do not in fact occur. If these predictions are not observed say not Q1 (Q1) is observed rather than Q1 the theory may be judged inadequate and either revised or discarded. If I may be allowed a lapse into inaccurate language, a theory can never be right if there is not at least some possibility in the too soon place for it to be wrong. 11 This is not to say that rational choice theorists are pristine with look on to this requirement. The history of economic thought is no suspect full of bad theories (bad in the sense that one or more key predictions are not consistent with the data) that have been saved by ad hoc modifications. It is to say that proponents of the rational choice approach contend t hat ad hoc theorizing and the resulting empty tautologies may be less prevalent with their approach than with other approaches.I certainly agree that the rational choice method does in fact tend to generate many testable predictions, and in particles 4 and 5 below I discuss several(prenominal)(prenominal) illustrative examples. despite the fact that advocates of rational choice theory justify their approach in this way, I know of no study that explicitly compares methodologies along these lines. Is it really the case that rational choice models have more non-tautological implications than the models implied by other approaches? I am not sure anyone has examined this issue carefully.I believe the rational choice methodology is gaining in popularity not just because it tends to generate lots of observable predictions, but also because it tends to generate fabrication predictions. This is an extension of the idea of smart stay. young confirmation embodies the sentiment expressed by Descartes (1644) that we know hypotheses are correct only when we see that we can explain in call of them, not merely the effect we originally had in mind, but also all other phenomena which we did not previously think. Quoted by Musgrave (1974), p. 1) Campbell and Vinci (1983, p. 15) begin their discussion of allegory confirmation as follows Philosophers of science generally agree that when observational equivalence supports a theory, the confirmation is much stronger when the separate is romance. The verification of an comical prediction, for example, tends to provide much stronger confirmation than the explanation of something already known of something the theory was designed to account for. This view is so familiar that Michael Gardner has recently described it as a lengthy tradition not to say a consensus in the philosophy of science. As seems to often be the case in the philosophy of science, the receipts of fabrication confirmation is not as well established a s the above quote implies. Campbell and Vinci (1983) also note that the depression of novel confirmation is beset with a theoretical puzzle about how the distributor point of confirmation can change without any change in the evidence, hypothesis, or appendage assumptions. (p. 315) Kahn, Landsburg, and Stockman (1992) maintain that the question of novel confirmation can be addressed meaningfully only in the presence of an explicit model by which hypotheses are generated. (p. 04) They find that the idea of novel confirmation is valid if there are unperceivable differences in the abilities of scientists or if there is some chance of error in observation. 12 Campbell and Vinci (1993) secernate between epistemic transition and heuristic rule program novelty. Epistemic novelty occurs when a theory has an implication that would be considered highly marvellous in the absence of the theory. There is of course a question over the proper definition of highly improbable. Heuristic n ovelty occurs when the evidence predicted by a theory plays no heuristic role in the formation of the theory.Descartes would seem to be referring to heuristic novelty in the above quote. Rational choice theory is a useful methodology in part ( possibly in large part) because it tends to lead the researcher to novel implications, thereby making novel confirmation more likely than may be the case with other methodologies. Space and time considerations do not allow me to attempt a full-blown analysis of this conjecture, which in any case I am not really qualified to abridge because of my limited exposure to alternative mixer science methodologies not based on rational choice and my limited knowledge of the philosophy of science.In Sections 4 and 5 below I describe several examples of rational choice theory and some associated novel implications. I should note that the mathematical record of rational choice theory would appear (to me) to be crucial here. Mathematics allows the theori st to make some sense out of complicated interactions between decision-making units that would otherwise be difficult or impossible to untangle. It is just those kinds of situations in which rational choice theories are most likely to have novel implications, because the implications are not immediately bare even to scholars with knowledge, experience, and intuition.We now proceed to Section 4, which provides a detailed discussion of a rational choice model of perform building attendance. Section 5 gives shorter summaries of several other rational choice models, including models of self-destruction, auto sanctuary regulation, addiction, racial profiling, Congressional influence on military namings, political rotations, megafauna extinction, and the predictability of aspiration spending. 4. A Detailed Example Church AttendanceAzzi and Ehrenberg (1975) develop a rational choice model of perform attendance. This is a classic paper, which Iannaccone (1998, p. 1480) calls the e arly formal model for ghostly employment (within any discipline) and the foundation for nearly all subsequent economic models of phantasmal behavior. Italics in original. Their analysis begins with the assumption that the utility of a household consisting of two members, a maintain and a married woman, is given by (1)U = U(C1, s1, C2, s2, , Ct, st, Cn, sn, q), where Ci is the households utilisation of market goods and services in period i (i = 1, n), and si denotes ghostly partnership in period i. The model assumes for simplicity that both members of the household know how long they will live and that both will die at date n. This is a dynamic model, because the household cares about future as well as authorized consumption. The remaining variable in the household utility function, q, is the expect value of the households after sustenance consumption. Azzi and Ehrenberg assume that perform attendance follows from a salvation pauperism (the desire to change magni tude afterlife consumption) and a social pressure motive (where church building service building service social station and employment appends the chances that an individual will be successful in business), rather than necessarily a pure consumption motive (people simply enjoy the time they spend at church). habit in period i (any year during which the save and wife are alive) is given by (2)Ci = C(xt, h1t, h2t), here xt is denotes the consumption of goods and services purchases in markets, while h1t and h2t are the amounts of time devoted by the husband and wife, respectively, to market-based consumption. The idea here is that satisfaction involves not only the purchase of a good (such as a television) but also time played out using the good. The social value of church attendance in period i, denoted by si, is determined as follows (3)si = s(r1i, r2i) where r1i and r2i denote the time worn out(p) on church-related activities by the husband and wife, respectively, in year i. People get more current satisfaction from going to church the more time they devote to church-related activities. After-life consumption q is determined as follows (3)q = q(r11, r12, r21, r22, , r1n, r2n), That is, the more time spent on church-related activities during all periods of life means the more the household members will enjoy their afterlife. Azzi and Ehrenberg (p. 33, fn. 7) note that Our households view of the afterlife is not one of an all-or-nothing proposition (heaven or hell), it is rather that there is a continuum of possible outcomes. The choices of the household are constrained by time and money. The two household members can divvy up time in labor which generates income that can be used to purchase the goods and services denoted by xt in equation (1) above, consumption-related activities reflected in h1t and h2t in equation (2) above, and church-related activities reflected in the r1i and r2i in equation (3) above. The constraint here is that each day has 24 h ours. Hence the geminate can spend more time on church-related activities only if they spend less time earning income and/or consuming.The second constraint in the model says basically that, over the course of their lives, the checkmate cannot spend more than their combined income. Over the course of their lives means that it is possible for them to borrow early in life as long as they repay the loan (with interest) later in life. It is also possible to lend early in life, which means that consumption can exceed income later. The amount of labor income the couple earns depends on the amount of time spent working by the husband and wife and the wage rate each is paid.The model also allows for non-labor income in each period, which might reflect investment returns. The distinction between labor and non-labor income turns out to be rather raise and important with respect to church attendance. Azzi and Ehrenbergs analysis is complicated in some respects and simple in others. It is co mplicated because it considers consumption over several periods rather than just one, and it allows for consumption to depend on time (the h1t and h2t) as well as purchases of goods and services in the market (xt).The model is simple in that it does not consider the supply side. That is, the model simply assumes that the household can buy any amount that it likes of consumption goods (xt) and that there are no effective limits on religious participation (st). The power of the rational choice approach is that rational choice models tend to have lots of observable implications, some of which are novel. The Azzi and Ehrenberg model implies that (i) The frequency of church attendance increases with age (ii) Females attend church more frequently than males (iii) Nonwhites attend church more frequently than whites (iv) People who believe in an afterlife attend church more frequently (v) Having a teammate of the same major devotion increases participation (vi) As health deteriorat es church attendance declines (vii) An increase in the number of pre-school age children present in the household reduces church attendance (viii) An increase in the number of school-age children present in the household increases church attendance (ix) Females hours devoted to religious activities will rise more rapidly with age than will the hours devoted by males to religious activities (x) For males who show sharp lettuce increases in their 20s, religious participation may first decline with age and then increase (xi) An increase in nonlabor income will increase religious participation and (xii) The effect of a proportionate shift in pay (say, a 10% increase in the present and all future periods) on church attendance is ambiguous. Many of these implications are not strike, but (ix) would appear to be somewhat novel.Item (ii) means that 40 year old women will attend church more frequently than 40 year old men. Item (ix) means that the change (increase) in church participa tion associated with aging from 40 to 50 will be greater among women than among men. Item (ii) follows directly from the fact that females tend to have lower wages. Thus if one could find couples in which the wife earns more than the man, the model predicts for those couples that the wife will probably not be devoted to attend church more frequently. Also, allowing for an uncertain time of death may revolutionize (i) nce an individual is faced with a tellingly high probability of death in a period it may become optimal for him to concentrate his religious participation as early as possible, since he may not survive to invest in future periods. (p. 38) 5. Several Brief Examples This section presents a brief overview of several applications of rational choice theory. Unlike the church attendance example above, in which the form of the utility function was written out explicitly, the discussions in this section for the most part present only brief descriptions of the relevant opt imization problems and some of the resulting implications. A.Suicide Hamermesh and Soss (1974) develop a rational choice theory of suicide. They assume that the utility of an individual in any given period depends positively on consumption and negatively on a technological relation describing the cost each period of maintaining oneself at some borderline level of subsistence. (p. 85) Consumption is a function of age and of changeless income, which is a criterion of current and expected future income. Individuals are assumed to vary exogenously (according to a probability distribution) in their distastes for suicide that is, some individuals are more averse to suicide than others.This mannequin implies that an individual kills himself when the total discounted lifetime utility remaining to him reaches zero. (p. 85). Thus in this model we have a rational individual who is forward looking, considering not only his present utility but what his future utility is likely to be. If total utility over the rest of his life is high with suicide and life ending in the present than it is with the continuation of life, suicide is the rational option. present are some of the major implications of the model. (i) The suicide rate should rise with age. (ii) The suicide rate should fall with increases in ineradicable income13 and decreases in the unemployment rate. (iii) The marginal absolute effect of permanent income on suicide declines as permanent income increases. The first two effects are by no means surprising, but the third effect is certainly by no means plain ex ante (at least to me). (ii) means that suicide rates will fall as income rises. (iii) means that the effect of increases in income gets smaller the larger income is to begin with.A $10,000 raise is much more likely to prevent suicide if the person is earning $50,000 to begin with than if the person is earning $150,000. This is quite plausible, but the point is that it is not something most analys ts would think about ex ante. B. elevator car Safety Regulation. Peltzman (1975) considers the likely effects of legitimately mandated generalisation of various prophylactic device devices14 on automobiles. 15 The devices in question for the most part were designed to reduce the costs caused by accidents rather than to reduce the likelihood that accidents occur. Peltzman notes that the auto safety literature estimates the impact of afety mandates by assuming that (i) the mandates have no effect on the probability that an accident will occur, and (ii) the mandates have no effect on the voluntary demand for safety devices. In effect, the regulations were implemented based on analysis that assumed the same number and nature of accidents would occur, but that automobiles would be better render to protect drivers and passengers from injury and death. He notes that technological studies imply that annual highway deaths would be 20 percent greater without legally mandated installatio n of various safety devices on automobiles. (p. 677) Peltzman considers the behavior of a typical driver and postulates quite reasonably that he or she is made worse off by occupation accidents or, equivalently, that he or she benefits from safety. Peltzman also assumes, however, that the driver benefits from what he calls crusade impregnation, by which he means more speed, thrills, and so forth (p. 681). another(prenominal) things equal, the driver can obtain more driving intensity only by driving less safely. Thus the driver faces a trade-off between two goods, intensity and safety, in which more of one can be obtained only by giving up some of the other.This kind of trade-off is in standard complete for rational choice theorists. In basic consumer choice theory the consumer with a given income can obtain more of one good only if he or she consumes less of some other good (or goods). The standard consumer choice problem also considers what happens when the consumers income rises. Rational choice theory predicts that, in the absence of very unusual circumstances, the consumer will buy more of most goods when income rises. Put another way, it is typically not the case that a consumer will allocate one hundred percent of an increase in income to increased consumption of a single good.Income increases tend to be opening around over several goods. Peltzman argues that the imposition of mandated safety devices in automobiles is rather like an increase in income in the sense that the devices make it possible for drivers to obtain both more safety and more intensity. proficient studies in effect assume that drivers will respond by consuming only more safety, but rational choice theory indicates that drivers can also respond by consuming more intensity (that is, by driving less safely). The extent to which drivers choose between more safety and more intensity is ultimately an empirical question.Suppose drivers choose to increase consumption of both safety an d intensity which is what economists have come to expect in these kinds of situations. In this case, the rational choice model implies that the number of total driving accidents16 should rise because of increased driving intensity, while the average amount of aggrieve per accident as reflected, say in the number of fatalities among passengers should decrease because of the safety improvements. This means that it is actually possible for total handicraft fatalities to rise as a result of the safety mandatesThis would happen if the increase in the number of accidents is sufficiently large congener to the decrease in average damage per accident. Once again we have an example of a rational choice model yielding implications that are not obvious ex ante. The novel predictions here are that the imposition of auto safety mandates (i) should increase the occurrence of traffic accidents, and (ii) should decrease the carnal knowledge frequency of accidents involving passenger fatalitie s, and (iii) may increase or decrease the total number of traffic fatalities.After extensive empirical exam based on several data sets, Peltzman concludes that regulation appears not to have cut back highway deaths. (p. 714). There is indeed some evidence that the number of deaths increased, but in most cases that evidence is not strong. In any case, there is no evidence that the regulations decreased traffic fatalities. Peltzman also finds that the safety mandates were followed by an increase in the number of accidents involving pedestrians and by an increase in the number of accidents involving only property damage with no injury to vehicle occupants.A related paper by McCormick and Tollison (1984) considers the effect on get down rates of an increase in the number of police officers. Rational choice theory indicates that the quality of law enforcement should not be judged by assure rates alone. If the number of police officers increases and as a result the probability of arr est for any given crime increases, rational prospective criminals will see the expected cost of crime rise and accordingly undertake fewer criminal acts.Total arrests reflect both the number of criminal acts (which should fall) and the percentage of criminal acts for which an arrest is made (which should rise). Total arrests rise only if the latter effect is stronger than the former. McCormick and Tollison test their theory using data from the Atlantic shore Conference in mens college basketball. In 1978, the conference increased the number of officials from two to three. In this context, one may think of officials as police officers and fouls called as arrests.McCormick and Tollison find that this 50 percent increase in the number of officials caused a 34 percent reduction in the number of fouls called (p. 229). When my son Aaron (now almost 5 historic period old) was an infant, he attended the Baylor Child increment Center during the day. In the room where the instructor chan ged diapers, there was a pad on the counter but no simple mindedness of any kind (such as a belt or guard rail). When I asked the director about this, she said that there was no restraint because she (the director) did not want to give the teacher a untrue sense of security.With a belt or rail, the teacher might be tempted to crack away for just a flash to check on something in the room. Whether restraints increase or decrease changing table accidents is an empirical question, though Pelzmans analysis suggests the director made the right decision. C. dependance Stigler and Becker (1977) propose a rational choice theory of addiction, a theory later on expatiate by Becker and Murphy (1988). In this theory, a person is potentially accustomed to some good c if an increase in his current consumption of c increases his future consumption of c. (Becker and Murphy, 1988, p. 81) The key feature of these models is that a consumers utility in any given period depends not just on consum ption in that period, but also on consumption crownwork. Consumption with child(p) is essentially the consumers ability to enjoy a particular good, which depends on past consumption of the good and perhaps on other factors. If past consumption enhances current enjoyment ability, the addition is said to be unspoilt. This might be the case, for example, with audience to virtuous music. The more one listens to classical music, the greater ones cognitive content to appreciate it.Stigler and Becker note that beneficial consumption large(p) might also be positively influenced by education. Highly enlightened people might have a greater capacity to enjoy things like classical music, opera, and art. If past consumption reduces current enjoyment ability, the addition is said to be harmful. This is the case with substances such as diacetylmorphine and other substances normally considered to be addictive. The more heroin a person consumes in the present, the less will be his or her futu re enjoyment (high) from any given amount of heroin consumption in the future. 17 The formal setup in Stigler and Becker (1977, p. 78) is relatively simple. First consider beneficial addiction to, say, classical music. Consumer utility (U) depends positively on two goods, M (music appreciation) and Z (other goods) U = U(M, Z). Music appreciation depends positively on the time allocated to music audition and on music consumption capital (Sm) M = M(tm, Sm). Music consumption capital at date j, Smj, depends positively on the time allocated to music consumption in the past, Mj-1, Mj-2, . and positively (perhaps) on the persons level of education at time j (denoted Ej) Smj = S(Mj-1, Mj-2, , Ej). The addition is beneficial if Smj depends on positively on the past value of M. Alternatively, for harmful addition we may replace M with H, where H denotes the consumption of a good such as heroin. In this case, consumption capital S depends negatively on past values of H. The elaborated mod el of Becker and Murphy (1988) views addictive behavior as a situation in which the consumption of a particular good begins to increase rapidly. 18 Their model has a number of implications. Perhaps he most interesting is their finding that the demand for addictive goods should be quite sensitive to permanent changes in price (where the price of abominable goods includes the expected costs associated with apprehension by politics, as well as any asleep(p) earnings that may result from worthy addicted and, say, unable to work), but not necessarily to transient price changes. A second implication is that strong addictions, if they are to end, must end suddenly (cold turkey). Rational persons end stronger addictions more rapidly than weaker ones. (p. 692). Other implications are that addicts often go on binges (p. 75), present-oriented individuals are potentially more addicted to harmful goods than future-oriented individuals (p. 682), and temporary events can permanently hook rat ional persons to addictive goods (p. 691). Stigler and Becker (1977) and Becker and Murphy (1988) do not perform empirical tests of their models of rational addiction. Tests have been performed by other authors, however. Because good consumption data are not available for illegal substances, tests have focused on baccy and caffeine. Tests based on tobacco consumption are reported by Becker, Grossman, and Murphy (1994), and Keeler, et. l. (1993). A test based on caffeine consumption is reported by Olekalns and Bardsley (1996). These tests are generally certificatory of the rational addiction theory. Becker and Murphy (1988) note that with a simple extension their model can explain cycles of overeating and fast. Their basic analysis assumes there is only one kind of consumption capital. Suppose that with respect to food there are rather two types of consumption capital, one of which is simply the persons weight (which might be called health capital) and the other of which is eatin g capital. That is, eating can be both harmful and beneficial in the senses defined above. As eating increases, health capital falls (weight gain has bad effects on health) and eating capital rises (the capacity to enjoy food is greater the more one eats). Under tolerate conditions, utility maximization results in cycles of dieting and binging. 19 Rational addiction theory has been applied to the analysis of religious behavior see Iannaccone (1984, 1990) and Durkin and Greeley (1991). Iannaccone (1998) summarizes this approach. Utility depends on religious commodities produced, the value of which depends on religious human capital. The stocktaking of religious human capital depends on time and money devoted to religious activities in the past. These models have the sideline predictions, nearly all of which receive strong empirical support (Iannaccone, 1998, p. 1481) Individuals tend to move toward the denominations and beliefs of their parents as they mature and start to make their own decisions about religion People are more likely to switch denominations early in life People tend to marry within religions if they do not, one spouse is likely to adopt the religion of the other.D. Racial Profiling Law enforcement authorities in many jurisdictions have been criticized in recent years for racial bias in their choice of cars to search for illegal drugs and other contraband. 20 The fact that police are more inclined to stop and search cars driven by members of certain minority groups is well established. Knowles, Persico, and Todd (2001) develop a rational choice model that suggests an empirical test for distinguishing whether this disparity is due to racial blemish or to the polices objective to maximize arrests. In their model, the typical police officer maximizes the total number of convictions negatively charged a cost of searching cars. (p. 209) Motorists consider the probability of being searched in deciding whether to carry contraband. (p. 209) At least some motorists perceive a benefit to carrying contraband. If they do carry, their expected benefit is positive if they are not searched and negative (that is, there is a positive expected cost) if they are searched. The model implies that if police officers are not racially biased, the frequency of guilt among motorists conditional on being searched will be main(a) of race. 21 In their empirical analysis based on 1,590 searches on a laden of Interstate 95 in doctor between January 1995 and January 1999, Knowles, Persico, and Todd find support for this proposition. They interpret this result as the absence of racial prejudice against African Americans (p. 212). The fact remains, however, that African Americans are searched more frequently than whites. If this does not arise from racial bias by police officers, then why does it occur?One possibility noted by the authors is that race may proxy for other variables that are unobservable by the policy officer and are correlate d with both race and crime. Possible examples of such unobservables are the schooling level or the earnings potential of the motorist. (p. 212) While one may quibble with some elements of this study, for our present purposes the main point is that the rational choice theory, at least potentially, yielded implications that allowed the analyst to gain some insight (if not a last resolution) into the issue of racial profiling. E. Congressional bring on Military AssignmentsPrior to the 1960s, economic theory tended to view politicians and other government officials (bureaucrats) as disinterested observers and regulators of economic activity. A group of economics led by Nobel laureate James Buchanan then developed a branch of economics known as public choice theory, which views government officials as self-interested maximizers. Goff and Tollison (1987) take a public choice approach to gain some understanding of casualties in the Vietnam War. The typical soldier is assumed to prefer n ot to be position in risky combat situations, and this preference is shared by the soldiers family.A solider (or more likely his family) might therefore try to gain a low-risk assignment by asking for intervention in military decisions by his Senator or Representative. Senators and Representatives are assumed to desire re-election, which implies a desire to please their constituencies. The ability of a Senator or Representative to have this kind of influence, however, varies according to committee assignments, ties to the military/industrial complex, etc. Goff and Tollison assume that political influence depends on length of service, with more seniority implying more influence.Taken together, all these assumptions have the straightforward implication that soldiers from states with more senior (and hence more influential) Senators and Representatives should, other things equal, have experienced fewer casualties in Vietnam than soldiers from states with less senior (and therefore le ss influential) Senators and Representatives. Their empirical analysis (using data from January 1961 to folk 1972) supports the hypothesis In the House, the Mississippi military mission had an average seniority of 27. 7, while hullo had an average seniority of 61. . A seniority be of 1 indicates the member had the highest seniority in his or her party. In terms of lives, this represents about 6 fewer war deaths for every 100,000 of population in Mississippi relative to Hawaii. Ceteris paribus, this difference in House seniority leads to a 55 percent high casualty rate for Hawaii than Mississippi. In the Senate, Arkansas had an average seniority of 6. 2, and mendelevium had an average seniority of 45. 4. Other things equal , this difference leads to an 86 percent higher casualty rate for atomic number 101 than for Arkansas.In terms of lives, this translates into about 7 more war deaths for every 100,000 of population in Maryland than in Arkansas. (pp. 319-20) In this case, th e value of the rational choice approach is not so much in the fact that it yields surprising answers to a well-established question, but that it suggests a unparalleled question to ask in the first place. It is by no means obvious that someone not thinking about self-interested Senators and Representatives would even think to ask the question addressed by Goff and Tollison. F. Ideology and IntransigenceRoemer (1985) applies hazard theory to the analysis of political revolutions. Specifically, he presents a two-player game between Lenin and the tzar. Lenins objective is to maximize the probability of revolution, while the Tsars objective is to decrease that probability. As in any game-theoretic setting, when making decisions each player keeps in mind how the other player might react. Lenin tries to relieve oneself revolution by lining up alliances, where people are induced to join a coalition with the promise of income redistribution.The Tsar tries to prevent revolution by dec lare to punish anyone who participates in revolutionary activities (assuming the revolution attempt is unsuccessful). Increased penalties reduce the number of individuals who are likely to join the coalition but increase the revolutionary flack of those who do. An individual will join a coalition attempting to overthrow the Tsar if the expected benefit to him or her of doing so exceeds the expected cost. There is of course some uncertainty about the outcome. Roemers results include the following it is shown that various tyrannical aspects of the Tsars strategy, and progressive aspects of Lenins strategy need not flow from ideological precommitments, but are simply good optimizi