Abstract

http://ssrn.com/abstract=758424
 
 

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From Bounded Rationality to Behavioral Economics


Massimo Egidi


Luiss Guido Carli University

July 2005


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.

Number of Pages in PDF File: 22

Keywords: Bounded Rationality, Behavioral Economics, Cognition, Evolution

JEL Classification: C44, D7, D0

working papers series


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Date posted: July 20, 2005  

Suggested Citation

Egidi, Massimo, From Bounded Rationality to Behavioral Economics (July 2005). Available at SSRN: http://ssrn.com/abstract=758424 or http://dx.doi.org/10.2139/ssrn.758424

Contact Information

Massimo Egidi (Contact Author)
Luiss Guido Carli University ( email )
viale Pola 12
Roma, Roma 00198
Italy
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