IDEAS home Printed from
   My bibliography  Save this article

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


  • Janet Landa


  • Xiao Wang



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

Suggested Citation

  • 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

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    1. 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.
    2. Wang, X. T., 1996. "Framing Effects: Dynamics and Task Domains," Organizational Behavior and Human Decision Processes, Elsevier, vol. 68(2), pages 145-157, November.
    3. Luce, R Duncan, 1992. "Where Does Subjective Expected Utility Fail Descriptively?," Journal of Risk and Uncertainty, Springer, vol. 5(1), pages 5-27, February.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. 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.
    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.


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:jbioec:v:3:y:2001:i:2:p:217-235. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.