Introduction: methodologies of bounded rationality

The modelling of bounded rationality is currently pursued by approaches that exhibit a wide diversity of methodologies. This special issue collects five contributions that discuss different methodological aspects of these approaches. In our introduction, we map the variety of methodological positions with respect to three questions. First, what kinds of evidence do the respective approaches consider relevant for modelling bounded rationality? Second, what kind of modelling desiderata do the respective approaches focus on? And third, how do the respective approaches justify the normative validity of bounded rationality? To broaden the picture, we not only discusss the five contributions of this issue, but also include relevant positions from the extant literature.     

Normative ecological rationality: normative rationality in the fast-and-frugal-heuristics research program

The purpose of this paper is to examine the normative interpretation of the fast-and-frugal research program and in particular to contrast it with the normative reading of rational choice theory and behavioral economics. The ecological rationality of fast-and-frugal heuristics is admittedly a form of normative naturalism (Gigerenzer and Sturm 2012) – it derives what agents “ought” to do from that which “is” ecologically rational – and the paper will examine how this differs from the normative rationality associated with rational choice theory. I will also attempt to assess the relative adequacy of normative ecological rationality.     

Bounded rationality: the two cultures

Research on bounded rationality has two cultures, which I call ‘idealistic’ and ‘pragmatic’. Technically, the cultures differ on whether they (1) build models based on normative axioms or empirical facts, (2) assume that people's goal is to optimize or to satisfice, (3) do not or do model psychological processes, (4) let parameters vary freely or fix them, (5) aim at explanation or prediction and (6) test models from one or both cultures. Each culture tells a story about people's rationality. The story of the idealistic culture is frustrating, with people in principle being able to know what they should do, but in practice systematically failing to do it. This story makes one hide in books for intellectual solace or surrender to the designs of someone smarter. The story of the pragmatic culture is empowering: If people are educated to use the right tool in the right situation, they do well.     

Back to Buchanan? Explorations of welfare and subjectivism in behavioral economics

In light of behavioral findings regarding inconsistent individual decision-making, economists have begun to re-conceptualize the notion of welfare. One prominent account is the preference purification approach (PP), which attempts to reconstruct preferences from choice data based on a normative understanding of neoclassical rationality. Using Buchanan’s notion of creative choice, this paper criticizes PP’s epistemic, ontological, and psychological assumptions. It identifies PP as a static position that assumes the satisfaction of given ‘true preferences’ as the normative standard for welfare. However, following Buchanan, choice should be understood dynamically as a process whereby preferences constantly regenerate. Accordingly, the meaning of welfare emerges from an ongoing quest for individual self-constitution. If this holds true, then rationality axioms cannot serve as a priori normative standards. Instead, creative imagination and learning processes must remain central to any understanding of welfare in economics.     

Beauty contest,bounded rationality,and sentiment pricing dynamics

We present a dynamic asset pricing model that incorporates investor sentiment, bounded rationality and higher-order expectations to study how these factors affect asset pricing equilibrium. In the model, we utilize a two-period trading market and investors make decisions based on the heterogeneous expectations principle and the “sparsity-based bounded rational” sentiment. We find that bounded rationality results in mispricing and reduces it in next period. Investor sentiment produces more significant effects than private signals, optimistic investor sentiment increases hedging demand, thus causing prices to soar. Higher-order investors are more rational and attentive to the strategies of other participants rather than private signals. This model also derives the dampening effect of higher-order expectations to price volatility and the heterogeneity expectation depicts inconsistent investor behavior in financial markets. In the model, investors' expectations about future price is distorted by their sentiment and bounded rationality, so they obtain a biased mean from the signal extraction.     

A cognition paradigm clash: Simon,situated cognition and the interpretation of bounded rationality

Simon’s notion of bounded rationality is deeply intertwined with his activity as a cognitive psychologist and founder of so-called cognitivism, a mainstream approach in cognitive psychology until the 1980s. Cognitivism, understood as ‘symbolic information processing,’ provided the first cognitive psychology foundation to bounded rationality. Has bounded rationality since then fully followed the development of cognitive psychology beyond symbolic information processing in the post-Simonian era? To answer this question, this paper focuses on Simon’s opposition during the 1990s to a new (paradigmatic) view of cognition called situated cognition, which has since put into question the entire view in cognitive psychology of humans as symbolic information processors. This paper then reads the cognitivism/situated cognition debate through the lens of current bounded rationality research in economics, in order (i) to inquire into whether it has tackled the issues in that controversy; (ii) to envisage possible new foundations for a cognitive psychology-based bounded rationality.     

Logic,rationality and knowledge in Ramsey's thought: reassessing ‘human logic’

This paper reconsiders Frank Ramsey's essay on subjective probability (1926) as a consistent way to articulate logic, rationality and knowledge. The first part of the essay builds an axiomatic theory of subjective probability based on ‘formal logic’, defining rationality as choice-consistency. The second part seems to open up different horizons: the evaluation of degrees of belief by ‘human logic’. Because of the interest Keynes (1931) had taken in ‘human logic’, it was considered to be a possible alternative to the formal logic underlying the neoclassical theory of individual behaviour. The analysis of Ramsey's method in the entire paper, the relation between logic and rationality it constructs and the conception of uncertainty it reveals, lead me to note on the contrary that Ramsey's human logic was a complementary logic rather than an alternative to formal logic. Defining a standard to evaluate beliefs formation according to a frequentist criterion, it completes a normative representation of rationality which supports an original theory of knowledge that appears more in line with further developments of neoclassical methodology than with Keynesian economics.     

Psychological versus economic models of bounded rationality

That the rationality of individual people is ‘bounded’ – that is, finite in scope and representational reach, and constrained by the opportunity cost of time – cannot reasonably be controversial as an empirical matter. In this context, the paper addresses the question as to why, if economics is an empirical science, economists introduce bounds on the rationality of agents in their models only grudgingly and partially. The answer defended in the paper is that most economists are interested primarily in markets and only secondarily in the dynamics of individual decisions – specifically, they are interested in these dynamics mainly insofar as they might systematically influence the most useful approaches to modeling interesting markets. In market contexts, bounds on rationality are typically generated by institutional and informational properties specific to the market in question, which arise and are sustained by structural dynamics that do not originate in or reduce to individuals' decisions or psychological dispositions. To be sure, these influences interact with psychological dispositions, so economists have reason to attend to the psychology of valuation. But no general model of bounded rationality should ever be expected to feature in the economist's toolkit, regardless of the extent to which psychologists successfully identify specific human cognitive limitations. Use of moderate rational expectations assumptions should be understood in this light. Such assumptions are readily relaxed in specific applications, and in ways customized to modeling circumstances, that modelers, experimentalists, and econometricians are making steadily more sophisticated.     

The internal organization of complex teams: Bounded rationality and the logic of hierarchies

This paper explains the emergence of hierarchical organization in teams of specialized producers carrying out a production activity when their members are constrained by bounded rationality. In contrast to the focus on transaction costs, monitoring and incentive structures, it derives hierarchical organization as the only feasible organizational response to the need to solve complex coordination and information problems that emerge in carrying out the production, in a changing environment, of a product composed of many parts.     

New axioms for top trading cycles

The school choice problem is of great importance both in theory and practice. This paper studies the (student-optimal) top trading cycles mechanism (TTCM) in an axiomatic way. We introduce two new axioms: MBG (mutual best group)-quota-rationality and MBG-robust efficiency. While stability implies MBG-quota rationality, MBG-robust efficiency is weaker than robust efficiency, which is stronger than the combination of efficiency and group strategy proofness. The TTCM is characterized by MBG-quota rationality and MBG-robust efficiency. Our results construct a new basis to compare the TTCM with the other school choice mechanisms, in terms of both fairness and incentive-related axioms.     

Welfare distribution of collective in-kind transfers in education: an application to the extended schools programme

In this study, we employ the distributional characteristics approach to analyse the welfare distribution of the Extended Schools Programme, a social programme that fights inequality in Northern Ireland’s public schools. Our main result is that increasing funding to schools as their size increases penalizes the most deprived students. This is because the school size, although related to the educational supply, does not reflect the distribution of deprivation within schools. Thus, although in the Northern Irish context the largest welfare gains are possible if funds are redistributed among middle-size schools, our general result indicates an excessive support of small-size schools at the expenses of large-size schools.     

Life cycle saving: Insights from the perspective of bounded rationality

This paper provides a new life cycle model that takes into account key elements of bounded rationality. The paper shows that the model can account for patterns in the data that are hard to explain by the standard life cycle model. Among other patterns, the model predicts that, typically, the young either hold no equity or their equity portfolio share is rather low and then increases over working life. The analytical solution of the model demonstrates its high degree of tractability.     

渐进式抑或突破式：个体创新幅度对众包绩效的影响——基于计算仿真的分析

结合TCPE框架和NK模型，构建一个模拟众包问题解决过程的仿真模型，引入个体创新幅度表征个体创新搜索行为，引入个体有限理性水平和有限理性偏差表征个体认知能力，探讨个体创新幅度对众包绩效的影响机制,以及个体有限理性和任务复杂性的调节作用。结果发现：个体创新幅度与众包绩效存在两种影响模式：当任务非常简单时，个体创新幅度与众包绩效呈负相关关系；当任务复杂性较高时，个体创新幅度与众包绩效呈倒U型关系；两种影响模式不会受到个体有限理性水平和有限理性偏差的调节。在相对复杂的任务中，任务复杂性与个体有限理性偏差会调节实现最优众包绩效对应的个体创新幅度，任务复杂性越高、个体有限理性偏差越大，对应的个体创新幅度随之增加。个体创新幅度会削弱个体认知能力对众包绩效的影响，当个体认知能力较强时，需要采用渐进式创新；当个体认知能力较弱时，需要采用突破式创新。该结论可为企业在众包过程中营造平台创新氛围提供理论依据。     

THE RELATIVE EFFICIENCY OF CHARTER SCHOOLS

ABSTRACT ** :  This analysis compares the technical efficiency of charter school primary and secondary campuses with that of comparable campuses in traditional Texas school districts. Charter schools are hybrids—publicly funded, but not required to meet all the state regulations releant for traditional schools. Student performance is measured using value added on standardized tests in reading and mathematics, and efficiency is measured using the input distance function. The analysis suggests that at least in Texas, charter schools are substantially more efficient than traditional public schools.     

Dynamic Interactions in Trade Policy in a Differential Game Model of Tariff Protection

This paper develops a two‐country dynamic game model of tariff protection to reconsider optimal trade policies and their implications for welfare. The authors show that an import subsidy is optimal in the feedback Nash equilibria, which results in a curious possibility that the domestic market is monopolized by the foreign firrm. However, welfare comparisons among Nash equilibria, free trade, and autarky reveal that feedback Nash equilibria involve higher welfare than both autarky and free trade, i.e. dynamic noncooperative choices of policy serve as tacit policy coordination and ensure larger trade gains relative to free trade.     

实践理性语境下的经济理性分析

作为价值观念、行为标准的经济理性,是在突破了作为方法论的经济理性的心理学假设层面的基础上,将应用范围不断扩大,而成为一种实践理性.本文分析了实践理性语境下的经济理性的确立历程,即经济理性是随资本主义的诞生而确立的,是在自然经济、商品经济走向现代市场经济的发展过程中而确立的,是资本主义科学理性在经济领域的展开与呈现.实践语境下的经济理性具有计算主义和统计化倾向、个人物质利益至上主义、工具化倾向三大主要特征.经济理性的内在特征将不可避免地使社会陷入现代性的困境,为突破经济理性的思维界限,摆脱经济理性的困境,经济和谐为当下社会的发展提供了一种很好的发展理路.     

Two-tier rationality and reflexivity: an examination of the foundations of economic reason

This paper develops a two-tier concept of rationality which broadens the orthodox notion of instrumental rationality in economics. In the first section, I conceive the idea of “background rationality” to consist in the ability to act normally, i.e., according to social conventions appropriate to the context. Background rationality is a necessary condition for the exercise of its instrumental counterpart. Implications and applications of this for economic phenomena are investigated in Section II. The third section draws parallels between the approach to rationality developed in this paper and Thorstein Veblen's notion “habits of thought”. I argue that a viable concept of rationality must itself be subject to explanatory scrutiny and justification and not merely posited as given.     

HOW MUCH DO STUDENTS MATTER? APPLYING THE OAXACA DECOMPOSITION TO EXPLAIN DETERMINANTS OF ADEQUATE YEARLY PROGRESS

The federal government and many state governments have recently passed legislation that punishes school districts for not showing consistent improvement in standardized test scores. This article measures the extent to which school performance reflects student characteristics. After splitting schools in the state of Washington based on adequate yearly progress, the authors find that an overwhelming percentage of the difference between high- and low-performing schools is explained by characteristics beyond the control of school administrators. Thus legislation designed to penalize poorly performing schools may hurt students who are most in need of academic aid. (JEL I2 )     

The evolution of rationality and the Red Queen

Strategic rationality is subjected here to natural selection. In a zero-sum repeated game of incomplete information, one long-run individual is informed of the state of the world, and plays against a sequence of short-run opponents who are not. Strategies are noisy and have bounded recall. An equilibrium in these is shown to exist. Relative to any such equilibrium, sufficiently greater recall enjoys an advantage that is not decreasing in the original level of recall, thus capturing the Red Queen effect. The selection pressure to reduce a small amount of noise is less than that to increase recall.