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Shared Mental Models: Ideologies and Institutions

  • Arthur T. Denzau

    (Claremont Graduate School)

  • Douglass C. North

    (Washington University)

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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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
Date of revision:
Handle: RePEc:wpa:wuwpeh:9309003
Note: 24 pages ascii text
Contact details of provider: Web page: http://econwpa.repec.org

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  1. 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.
  2. 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.
  3. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
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  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.
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  7. Heiner, Ronald A, 1983. "The Origin of Predictable Behavior," American Economic Review, American Economic Association, vol. 73(4), pages 560-95, September.
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  9. Jamal, Karim & Sunder, Shyam, 1991. "Money vs gaming: Effects of salient monetary payments in double oral auctions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 49(1), pages 151-166, June.
  10. 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.
  11. 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.
  12. Hahn, F H, 1987. "Information, Dynamics and Equilibrium," Scottish Journal of Political Economy, Scottish Economic Society, vol. 34(4), pages 321-34, November.
  13. 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.
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