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Shared Mental Models: Ideologies and Institutions

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  • Arthur T. Denzau

    (Claremont Graduate School)

  • Douglass C. North

    (Washington University)

Abstract

The rational choice framework assumes that individuals know what is in their self interest and make choices accordingly. However, sometimes, especially in situations of uncertainty rather than risk, people act in part upon the basis of myths, dogmas, ideologies and "half-baked" theories. We begin this essay by noting that it is impossible to make sense out of the diverse performance of economies and polities if one confines one's behavioral assumptions to that of substantive rationality in which agents know what is in their self-interest and act accordingly. But once we open up the black box of "rationality," we encounter the complex and still very incomplete world of cognitive science. This essay is a preliminary exploration of some of the implications of the way by which humans attempt to order and structure their environment and communicate with each other. Over time, the approach has fundamental implications for understanding economic change. The performance of economies is a consequence of the incentive structures put into place; that is, the institutional framework of the polity and economy. These are in turn a function of the shared mental models and ideologies of the actors. The presence of learning creates path-dependence in ideas, ideologies and then in institutions. Systems of mental models exhibit path-dependence such that history matters, and in both suboptimal performance can persist for substantial periods of time.

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Bibliographic Info

Paper provided by EconWPA in its series Economic History with number 9309003.

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Length: 24 pages
Date of creation: 08 Sep 1993
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Handle: RePEc:wpa:wuwpeh:9309003

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  1. Jamal, K. & Sunder, S., 1988. "Money Vs. Gaming: Effects Of Salient Monetary Payments In Double Oral Auctions," GSIA Working Papers 88-89-16, Carnegie Mellon University, Tepper School of Business.
  2. Heiner, Ronald A, 1983. "The Origin of Predictable Behavior," American Economic Review, American Economic Association, vol. 73(4), pages 560-95, September.
  3. Coursey, Don L & Mason, Charles F, 1987. "Investigations Concerning the Dynamics of Consumer Behavior in Uncertain Environments," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 549-64, October.
  4. Easley, David & Ledyard, John., . "Theories of Price Formation and Exchange in Double Oral Auctions," Working Papers 611, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. La Croix, Sumner J, 1989. "Homogeneous Middleman Groups: What Determines the Homogeneity?," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(1), pages 211-22, Spring.
  6. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  7. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
  8. Dhananjay, K.G. & Sunder, S., 1992. "A Comparative Analysis of Efficiency of Economic Institutions with Zero Intelligence Traders," GSIA Working Papers 1992-23, Carnegie Mellon University, Tepper School of Business.
  9. repec:feb:framed:00135 is not listed on IDEAS
  10. Hahn, F H, 1987. "Information, Dynamics and Equilibrium," Scottish Journal of Political Economy, Scottish Economic Society, vol. 34(4), pages 321-34, November.
  11. Sunder, S., 1992. "Lower Bounds for Efficiency of Surplus Extraction in Double Auctions," GSIA Working Papers 1992-17, Carnegie Mellon University, Tepper School of Business.
  12. Gode, D.K. & Sunder, S., 1991. "Allocative Efficiency of Markets with Zero Intelligence (Z1) Traders: Market as a Partial Substitute for Individual Rationality," GSIA Working Papers 1992-16, Carnegie Mellon University, Tepper School of Business.
  13. Thomas McCaleb & Richard Wagner, 1985. "The experimental search for free riders: Some reflections and observations," Public Choice, Springer, vol. 47(3), pages 479-490, January.
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  1. > Schools of Economic Thought, Epistemology of Economics > Heterodox Approaches > Institutional Economics
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