Bounded Rationality: Two Cultures

by Ben Pace1 min read29th May 20181 comment

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Bounded Rationality
Frontpage

Have not read this in any detail, but looked like interesting food for thought. Here's the first section of the paper.

Introduction and Outline
Bounded rationality does not speak with one voice. This is not only because bounded rationality is researched in various fields such as economics, psychology, engineering and management. Even within a single field such as economics, there are clear differences. For example, Selten (2001) rejects the optimization of a utility function as an expression of bounded rationality, contrary to the standard approach of behavioral economics as in bargaining games by Fehr and Schmidt (1999). There are multiple views of bounded rationality, as many authors including Rubinstein (1998) have pointed out.
The first contribution of this article is to analyze the formal modeling used to describe people’s bounded rationality. At the risk of oversimplifying, I distinguish between two cultures, which I call ‘idealistic’ and ‘pragmatic’. At a first approximation, the idealistic culture pursues a minimum departure from the neoclassical-economics framework of unbounded rationality, which assumes the ideals of omniscience and optimization of a utility function and adds factors such as inequity aversion or probability weighting to the utility function. On the other hand, the pragmatic culture holds that people sometimes ignore information and use simple rules of thumb in order to achieve satisfactory outcomes. A detailed discussion of the differences in modeling between the two cultures is provided in Section 2. The reality of the cultures and their differences is demonstrated by examples drawn from the literatures on risky choice and bargaining games. Note that it does not make sense to try to perfectly map specific researchers or programs of research to one or the other culture; for example, Amos Tversky worked on both cultures, with prospect theory being an idealistic model and elimination by aspects being a pragmatic model.
Although the distinction between the idealistic and pragmatic cultures of bounded rationality can be criticized, as all binary distinctions can be, it provides food for thought and new insights. I aim at emulating Breiman’s (2001) analysis of two cultures in statistics. Breiman argued that there exist two cultures that lead to two very different kinds of statistical theory and practice, proof-based and data-driven. Analogously, I argue in Section 3 that the idealistic and pragmatic cultures tell two very different stories about people’s bounded rationality and how to improve it. This is the second contribution of this article. Echoing Morgan (2001), I conclude that these stories play a vital role in our understanding of the economic world and the economic policies we develop. I also venture outside economics and psychology to consider the idealistic and pragmatic cultures in engineering and management. I argue that the idealistic culture reigns in these fields, but at the same time the pragmatic culture is gaining momentum. Section 4 concludes the article.

Whole paper is ~7k words, or ~14 mins read time. Also, I'm at a university, so let me know if the link doesn't actually work for people outside of academia.

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