03/08/2014

Rationality for Mortals: How People Cope with Uncertainty

"The agent's behavior is like a bird that drops down instantaneously to the optimal bundle, rather than like a worm that actually moves through the choice space in real time to arrive at the optimal choice. Of course, if the behavior was worm-like, the particular path taken might matter to the final choice" (Georgescu-Roegen).

Gerd Gigerenzer’s book presents a richer interpretation of human beings' cognitive processes when compared to economists’ workhorse. Following Herbert Simon’s concept of bounded rationality, the author argues that humans use fast and frugal heuristics to cope with uncertainty. In many decisions time and information are limited and we use simple rules of thumb to guide our choices. Imagine a baseball player trying to catch a flying ball; according to the economics modus operandi the homo economicus solves a system of differential equations and calculates where the ball will land, whereas, in the real world, players use the gaze heuristic keeping a straight angle between their eyes and the ball and adjusting their speed accordingly.

Herbert Simon’s bounded rationality has led to two different approaches; in game theory many authors have examined its implications for equilibrium while behavioral economics has set numerous experiments that illuminate agents’ deviations from rational behavior. Gigerenzer is critical of both interpretations of bounded rationality, he stresses that human beings are neither rational individuals facing constraints, as in game theory, nor irrational individuals as proposed by behavioral economists. Rather humans are ecologically rational in the sense that they have developed several heuristics which are evoked depending on the environment surrounding them. This is a much brighter picture of the actual decision making process than utility maximization, for institutions, social contracts and the environment play an important role.

The economics reformulation agenda must focus on transforming the one way road that leads from micro to macro into a system with feedback effects, recognizing that decisions taken by individuals reshape the environment, which, in turn, implies reevaluation of their choices.

I end this post with a timeline I have created based on the paper “Deviations From Homoeconomicus and its Impacts on Economy” (Billur Şeniğnea and Hale Kirerb). They discuss how the concepts constructivist rationality and bounded rationality have divided some of the greatest minds through the last centuries. In addition to the theorists cited on this paper (in black) I add a few more (in orange). 



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