Seeking Rationality: $500 Bills and Perceptual Obviousness

Abstract

The concept of bounded rationality—and the work of Herbert Simon, Daniel Kahneman, Richard Thaler, and many others in behavioral economics—has provided a much-needed counterweight to rational expectations theory in economics. In this chapter we revisit the contrast between rational expectations and bounded rationality, specifically as they relate to the psychology of perception and the nature and origins of value. We use the proverbial $500 bill as a way to informally discuss perception, obviousness and value. We highlight some perceptual concerns with existing arguments about the idea of obviousness and bias (by Kahneman, Thaler, Sunstein and colleagues), as well as heuristics (by Gigerenzer and colleagues)—linking this to empirical findings in cognitive psychology and behavioral economics. We point toward some theoretical alternatives by building on insights from biology and the psychology of perception. We specifically discuss two key issues related to perception and rationality: (a) perception and the organism-environment relationship and (b) seeking or “looking for” rationality. We conclude with a discussion of the economic implications of our argument by discussing perception, belief heterogeneity and the origins of value in markets.

Keywords: rationality, rational expectations, perception, cognition, firms and markets

JEL Classification: D9, D91, G4, G41, D8, D83