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Bounded Rationality of Economic Man: Decision Making under Ecological, Social, and Institutional Constraints

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  • Janet Landa
  • Xiao Wang

Abstract

Neoclassical economic theory is implicitly based on the assumption of atomistic individuals living in anonymous societies, unconnected to other individuals by kinship, ethnic, friendship or other social ties. Furthermore, neoclassical economic theory is based on a model of rational, omniscient individuals operating in a zero transaction costs world of perfect markets without institutions. In the last forty years or so, New Institutional Economics (NIE) have criticized Neoclassical economics and have incorporated concepts of bounded rationality, transaction costs, and uncertainty. Neoclassical economic theory has also been challenged by behavioral studies of decision-making showing that cognitive constraints lead to various decisional biases and judgmental errors. However, similar to neoclassical economic theory, behavioral models of risky choice have largely ignored environmental variables such as social structure (group size, group composition, etc.) and institutional infrastructure (the formal and informal ‘rules of the game’). In this paper, we show how social structure and institutions serve as important constraints influencing rational choice in risky situations. Wang’s experimental work shows that a famous ‘cognitive illusion’ called framing effects disappear when kinship relations, the smallness of group size, and group homogeneity are taken into account. These empirical findings are explained in a framework of ‘Bounded Risk Distribution’. Landa’s NIE theory of the ethnically homogeneous Chinese middleman group, based on fielwork, shows that in an environment characterized by contract uncertainty, hence positive transaction costs traders choose their trading partners along kinship and other particularistic basis, a phenomenon not predicted by Neoclassical theory of exchange. Our paper shows that economic and descriptive psychological risky choice theories of decision-making need to take into account the social and institutional environment: the boundly rationality of economic man is influenced by the social contexts in which he makes decisions. Copyright Kluwer Academic Publishers 2001

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  • Janet Landa & Xiao Wang, 2001. "Bounded Rationality of Economic Man: Decision Making under Ecological, Social, and Institutional Constraints," Journal of Bioeconomics, Springer, vol. 3(2), pages 217-235, May.
    • Handle: RePEc:kap:jbioec:v:3:y:2001:i:2:p:217-235
    DOI: 10.1023/A:1020597813814
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    References listed on IDEAS

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    1. Wang, X. T., 1996. "Framing Effects: Dynamics and Task Domains," Organizational Behavior and Human Decision Processes, Elsevier, vol. 68(2), pages 145-157, November.
    2. Luce, R Duncan, 1992. "Where Does Subjective Expected Utility Fail Descriptively?," Journal of Risk and Uncertainty, Springer, vol. 5(1), pages 5-27, February.
    3. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages 251-278, October.
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    Cited by:

    1. Jack Vromen, 2007. "Neuroeconomics as a Natural Extension of Bioeconomics: The Shifting Scope of Standard Economic Theory," Journal of Bioeconomics, Springer, vol. 9(2), pages 145-167, August.
    2. Erin O’Hara O’Connor, 2012. "The limits of contract law harmonization," European Journal of Law and Economics, Springer, vol. 33(3), pages 505-519, June.
    3. Kevin Kniffin, 2009. "Evolutionary perspectives on salary dispersion within firms," Journal of Bioeconomics, Springer, vol. 11(1), pages 23-42, April.
    4. Tanjim Hossain & John A. List, 2012. "The Behavioralist Visits the Factory: Increasing Productivity Using Simple Framing Manipulations," Management Science, INFORMS, vol. 58(12), pages 2151-2167, December.
    5. Geoffrey Hodgson, 2007. "Taxonomizing the Relationship Between Biology and Economics: A Very Long Engagement," Journal of Bioeconomics, Springer, vol. 9(2), pages 169-185, August.
    6. Christopher Boehm, 2004. "What Makes Humans Economically Distinctive? A Three-Species Evolutionary Comparison and Historical Analysis," Journal of Bioeconomics, Springer, vol. 6(2), pages 109-135, May.

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