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From Bounded Rationality to Behavioral Economics

Author

Listed:
  • Massimo Egidi

    (CEEL University of Trento)

Abstract

The paper provides an brief overview of the “state of the art” in the theory of rational decision making since the 1950’s, and focuses specially on the evolutionary justification of rationality. It is claimed that this justification, and more generally the economic methodology inherited from the Chicago school, becomes untenable once taking into account Kauffman’s Nk model, showing that if evolution it is based on trial-and-error search process, it leads generally to sub- optimal stable solutions: the ‘as if’ justification of perfect rationality proves therefore to be a fallacious metaphor. The normative interpretation of decision-making theory is therefore questioned, and the two challenging views against this approach , Simon’s bounded rationality and Allais’ criticism to expected utility theory are discussed. On this ground it is shown that the cognitive characteristics of choice processes are becoming more and more important for explanation of economic behavior and of deviations from rationality. In particular, according to Kahneman’s Nobel Lecture, it is suggested that the distinction between two types of cognitive processes – the effortful process of deliberate reasoning on the one hand, and the automatic process of unconscious intuition on the other – can provide a different map with which to explain a broad class of deviations from pure ‘olympian’ rationality. This view requires re-establishing and revising connections between psychology and economics: an on-going challenge against the normative approach to economic methodology.

Suggested Citation

  • Massimo Egidi, 2005. "From Bounded Rationality to Behavioral Economics," Experimental 0507002, EconWPA.
  • Handle: RePEc:wpa:wuwpex:0507002 Note: Type of Document - pdf; pages: 22
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    File URL: http://econwpa.repec.org/eps/exp/papers/0507/0507002.pdf
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    References listed on IDEAS

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    1. Sidney G. Winter, 1964. "Economic "Natural Selection" and the Theory of the Firm," LEM Chapters Series,in: Yale Economic Essays, pages 225-272 Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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    Cited by:

    1. Alexander Harin, 2005. "Gains and losses. The same or different choices?," International Finance 0508004, EconWPA.
    2. Alexander Harin, 2006. "A Rational Irrational Man?," Microeconomics harin_alexander.34115-060, Socionet.
    3. Enrique Alberola & Luis Molina & Daniel Navia, 2005. "Say you fix, enjoy and relax: the deleterious effect of peg announcements on fiscal discipline," Working Papers 0523, Banco de España;Working Papers Homepage.
    4. Alexander Harin, 2005. "Scientific Revolution. A Farewell to EconWPA," Method and Hist of Econ Thought 0512003, EconWPA.
    5. Salvatore Rizzello & Anna Spada, 2012. "The knowledge–Rationality Connection in Herbert Simon," Chapters,in: Handbook of Knowledge and Economics, chapter 7 Edward Elgar Publishing.
    6. Concetta Sorropago, 2014. "Behavioral Finance and Agent Based Model: the new evolving discipline of quantitative behavioral finance ?," DIAG Technical Reports 2014-13, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    7. Alexander Harin, 2005. "A Rational Irrational Man," Public Economics 0511005, EconWPA.

    More about this item

    Keywords

    Bounded Rationality; Behavioral Economics; Evolution; As If;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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