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From Bounded Rationality to Behavioral Economics

Author

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  • Massimo Egidi

    (CEEL University of Trento)

Abstract

The paper provides an brief overview of the “state of the art” in the theory of rational decision making since the 1950’s, and focuses specially on the evolutionary justification of rationality. It is claimed that this justification, and more generally the economic methodology inherited from the Chicago school, becomes untenable once taking into account Kauffman’s Nk model, showing that if evolution it is based on trial-and-error search process, it leads generally to sub- optimal stable solutions: the ‘as if’ justification of perfect rationality proves therefore to be a fallacious metaphor. The normative interpretation of decision-making theory is therefore questioned, and the two challenging views against this approach , Simon’s bounded rationality and Allais’ criticism to expected utility theory are discussed. On this ground it is shown that the cognitive characteristics of choice processes are becoming more and more important for explanation of economic behavior and of deviations from rationality. In particular, according to Kahneman’s Nobel Lecture, it is suggested that the distinction between two types of cognitive processes – the effortful process of deliberate reasoning on the one hand, and the automatic process of unconscious intuition on the other – can provide a different map with which to explain a broad class of deviations from pure ‘olympian’ rationality. This view requires re-establishing and revising connections between psychology and economics: an on-going challenge against the normative approach to economic methodology.

Suggested Citation

  • Massimo Egidi, 2005. "From Bounded Rationality to Behavioral Economics," Experimental 0507002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpex:0507002
    Note: Type of Document - pdf; pages: 22
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/exp/papers/0507/0507002.pdf
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    References listed on IDEAS

    as
    1. Sidney G. Winter, 1964. "Economic "Natural Selection" and the Theory of the Firm," LEM Chapters Series, in: Yale Economic Essays, pages 225-272, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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    Cited by:

    1. Alexander Harin, 2005. "A Rational Irrational Man," Public Economics 0511005, University Library of Munich, Germany.
    2. Bugala, Anna & Dybowski, Grzegorz, 2018. "Market information in the Polish food chain – qualitative factor of development," 166th Seminar, August 30-31, 2018, Galway, West of Ireland 276185, European Association of Agricultural Economists.
    3. Alexander Harin, 2005. "Gains and losses. The same or different choices?," International Finance 0508004, University Library of Munich, Germany.
    4. Alexander Harin, 2006. "A Rational Irrational Man?," Microeconomics harin_alexander.34115-060, Socionet.
    5. Alexander Harin, 2005. "Gains and losses: the same or different choices? A “non-ideal” economics approach," International Finance 0509002, University Library of Munich, Germany.
    6. Alexander Harin, 2005. "Scientific Revolution. A Farewell to EconWPA," Method and Hist of Econ Thought 0512003, University Library of Munich, Germany.
    7. Salvatore Rizzello & Anna Spada, 2012. "The knowledge–Rationality Connection in Herbert Simon," Chapters, in: Richard Arena & Agnès Festré & Nathalie Lazaric (ed.), Handbook of Knowledge and Economics, chapter 7, Edward Elgar Publishing.
    8. Concetta Sorropago, 2014. "Behavioral Finance and Agent Based Model: the new evolving discipline of quantitative behavioral finance ?," DIAG Technical Reports 2014-13, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".

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    More about this item

    Keywords

    Bounded Rationality; Behavioral Economics; Evolution; As If;
    All these keywords.

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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