Shared Mental Models: Ideologies and Institutions

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.