*** Welcome to piglix ***

Money pump


In economic theory, the money pump argument is a thought experiment intended to show that rational behavior requires transitive preferences: If one prefers A to B and B to C, then one should not prefer C to A. Standard economic theory assumes that preferences are transitive.

However, many people have argued that intransitive preferences are quite common, and often observed in real world settings. A cognitive bias is called the focusing effect: people focus on one characteristic which stands out in order to make decisions In choosing potential mates, candidate A is more beautiful/handsome than candidate B. B is wealthier then C. C is far better attuned on a personal level than A – the hearts meet. Then choices could be intransitive because instead of evaluating the whole package, people focus on one characteristic which distinguishes between two candidates to make decisions. See the Stanford Encyclopedia of Philosophy article "Preferences" for a discussion of intransitive preferences and their relation to the Money Pump argument.

The Money Pump argument was invented to show that rational behavior requires transitive preferences. It argues that people can be made to act as money pumps if they have intransitive preferences. Suppose Mr X prefers A to B, B to C, and C to A. In each of these three cases, X is willing to pay $1 (or for the sake of argument, $0.0000…0001; it doesn't really matter) to have his preferred choice. Then he can be made to act as a money pump. Give him C, and then offer him B if he pays a dollar. When he takes B, offer him A for a $1. When he takes A, offer him C for a $1. At the end of this procedure, X is exactly where he was before, but $2 has been "pumped" out of him. Alternatively, he will keep cycling through these choices and paying $1 for each choice, effectively becoming a money pump. This does not seem like rational behavior.

There are many counter-arguments which can be made to this. One of the simplest was made by Cubitt. His paper shows that the argument rests on some very strong assumptions and is tautological: to say that X acts as a money pump is no different from saying that X has intransitive preferences, and does not add anything to evidence for or against the existence of intransitive preferences.


...
Wikipedia

...