Two Types of Ecological Rationality: Or How to Best Combine Psychology and Economics

Abstract

This paper argues that there are two rival meanings of the concept of ecological rationality, which are often believed to be closely related if not similar. The first type is ecological rationality (ER1) as used in the work of Gerd Gigerenzer, which refers to the use of cognitive strategies, heuristics in particular, in real-world decisions. The second type is ecological rationality (ER2) as used in the work of Vernon Smith, which refers to cognitive systems consisting of multiple individuals, institutions, and social norms. The two authors have positively referred to each other’s use of the term, but we demonstrate in this paper that their respective uses originate in different psychological (or cognitive) approaches; Brunswikian functionalism and distributed cognition respectively. The former is primarily interested in pragmatic achievement in particular real-world tasks by individuals, whereas the latter is primarily interested in learning, feedback and selection facilitated by the institutional environment. By uncovering the different psychological underpinnings we are able to analyze the methodological differences between the two types of ecological rationality, the different way in which central concepts are employed, and the difference in resulting experimental practices. We also provide a comparison of both uses of ecological rationality with the cognitivist psychology underpinning mainstream behavioral economics. Furthermore we show that the reintroduction of psychology into economics has not coincided with a serious consideration of which psychological approach is best fitted for the social sciences, and economics in particular. Our paper does not suggest the superiority of one type of approach, but does show what choices and stakes are involved in making that choice.

Keywords: Ecological Rationality, Distributed Cognition, Functionalism, Bounded Rationality, Cognitivism

JEL Classification: B21, B41, D91