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.     

A uniqueness proof for monetary steady state

The framework in Lagos and Wright (2005) [20] combining decentralized and centralized markets is used extensively in monetary economics. Much is known about that model, but there is a loose end: only under special assumptions about bargaining power or decentralized market preferences has it been shown that the monetary steady state is unique. For general decentralized market utility and bargaining, I prove uniqueness for generic parameters with fiat money, and for all parameters with commodity money. As a corollary, I get monotone comparative statics.     

Towards Sustainability Economics: Principles and Values

Synopsis  Radical alternatives, in terms of our ideas about science in society, about economics, ideology and institutional arrangements, should be included among possibilities considered within the scope of a pluralistic philosophy. While all these aspects of our mental maps are interrelated and important, economics plays a key role in attempts to get closer to a sustainable society. Mainstream neoclassical economics is not enough. The tendency to exclusively rely on this particular theory is considered part of the problems faced. A ‘sustainability economics’ more in line with dominant ideas of democracy is proposed, emphasizing the ethical, ideological and political elements. Reference is made to institutional theory but the principles and concepts suggested are in many ways similar to other kinds of heterodox economics and developments in other social sciences. Neoclassical economics is used as a point of reference in pointing to alternative ideas about human beings, organizations, markets, decision- making, efficiency, rationality, progress in society and institutional change processes. Predilection for such an alternative conceptual framework (or for neoclassical economics) is not exclusively a scientific choice but as much a matter of political and ideological preferences. One paradigm may be dominant at a time, but because of the ideological specificity of each paradigm, competing theoretical perspectives should be accepted and even encouraged in a democratic society.      

Equilibrium with arbitrary market structure

Summary. Fifty years ago Arrow [1] introduced contingent commodities and Debreu [4] observed that this reinterpretation of a commodity was enough to apply the existing general equilibrium theory to uncertainty and time. This interpretation of general equilibrium theory is the Arrow-Debreu model. The complete market predicted by this theory is clearly unrealistic, and Radner [10] formulated and proved existence of equilibrium in a multiperiod model with incomplete markets.In this paper the Radner result is extended. Radner assumed a specific structure of markets, independence of preferences, indifference of preferences, and total and transitive preferences. All of these assumptions are dropped here. We - like Radner - keep assumptions implying compactness.Received: 17 April 2003, Revised: 26 March 2004, JEL Classification Numbers: D52, D40.     

Revolution and counter-revolution: two views of unemployment

There is a view in economics that Keynes did not have a microeconomictheory underpinning his explanation of macroeconomics. For example,Friedman (1970) even goes so far as to maintain that pricesare arbitrary in Keyne's approach to economics. The conclusionwhich follows from this critique of Keynes is that Keynesianeconomics cannot explain the occurrence of unemployment in amarket economy except by invoking ad hoc assumptions. It isargued in this paper that the above critique is based on a misunderstandingof the focus of the Keynesian explanation of unemployment. Thefocus in Keynes is not choice, but exclusion from choice. Inconventional microeconomics, the concept of choice is not consideredproblematic. The observation that a particular action is takenis confused with the view that the action is voluntarily chosen.The Keynesian explanation entails an exploration of what theconcept of voluntary choice means.     

Environmental Policy Theory Given Bounded Rationality and Other-regarding Preferences

Established environmental policy theory is based on the assumption of homo economicus. This means that people are seen as fully rational and acting in a self-regarding manner. In line with this, economics emphasizes efficient policy solutions and the associated advantages of price incentives. Behavioral economics offers alternative, more realistic views on individual behavior. In this paper we investigate opportunities to integrate bounded rationality and other-regarding preferences into environmental policy theory to arrive at recommendations for more effective policies. For this purpose, we will address decisions made under risk and uncertainty, intertemporal choice, decision heuristics, other-regarding preferences, heterogeneity, evolutionary selection of behaviors, and the role of happiness. Three aspects of environmental policy are considered in detail, namely sustainable consumption, environmental valuation and policy design. We pay special attention to the role of non-pecuniary, informative instruments and illustrate the implications for climate policy.     

对"经济人"假设的反思

“经济人”假设是新古典主义经济学对经济个体行为动机的最基本假设。它被认为是一种简单而有价值的经济学智慧。但现实生活中也有大量现象无法用“经济人”假设来解释。为了加强该假设的解释力,经济学家不断拓宽和发展其中心概念的含义,但这样做的一个不利后果是基本概念就往往变得过于宽泛和模糊,从而失去可操作性。     

Experimental evolution of color preference for oviposition in <Emphasis Type="Italic">Drosophila melanogaster</Emphasis>

Preferences are the foundation of economics. Preferences are taken by economists as fixed by some implicitly biological process. In recent decades, behavioral economics has documented the divergence between the nature of human preferences and the assumptions of standard economics. In this study, we use the tool of experimental evolution to study the evolution of color preferences in fruit flies (Drosophila melanogaster). In particular, we select for a preference for laying eggs on the color aqua. We find that the flies evolve to lay more than twice as many eggs on aqua. However, this evolution occurs entirely because the flies lay more eggs overall. The flies in this study, do not evolve to lay a higher percentage of eggs on the selected color, aqua.     

On the Use of the Prisoners' Dilemma to Analyze the Relations Between Employment Security,Trust, And Effort

Sociologists and political scientists have argued that the explanatory adequacy of economics is undermined by unreasonable assumptions of rationality. Yet interpretations that make strong rationality assumptions remain common. Analyses of the effects of employment security on work effort provide one example. The iterated prisoners' dilemma has been used to deduce a positive effect of employment security on work effort. Several difficulties with this approach are identified, including that the cooperative solution to the iterated prisoners' dilemma game i) requires infinite play or uncertainty about the end of the repetitions of the game; ii) is made less likely where there are structural bases for divergent interests; iii) ignores the possibility that employers might choose to shift the game to another arena. In general, there is the difficulty that employer-employee relations involve three simultaneous prisoners' dilemmas. The paper concludes that the hyper-rational approach implied in the prisoners' dilemma is an unpromising route for the analysis of the effects of employment security.     

Why incoherent preferences do not justify paternalism

A variety of recent arguments emerging from behavioural economics claim to undermine the credibility, and even the conceptual coherence, of the economist’s traditional rejection of paternalism. Indeed, some suggest that the incoherent nature of preferences inevitably implies a form of paternalism, since some basis for officiating between expressed preferences is required, and some preferences will be over-ridden in favour of others. This paper reviews and contests these arguments. It argues that markets operate according to a normatively defensible and non-paternalistic principle of mutual advantage, and that this principle does not require preferences to be coherent.      

寻找理性经济行为的逻辑新起点——试论中国传统伦理下的中庸理性经济人

在主流经济学的视野中,追求效用最大化是社会个体理性行为的基本准则。文章认为主流经济学理性假设的根本问题在于没有揭示特定人类社会的独特复杂特征。主流经济学家忽略了在现实生活中存在于西方文明之外的实然——中庸理性。文章尝试在以中庸理性为假设的理性经济人模型基础上,探讨中国传统伦理下中庸理性经济人的演化及其存在的可能空间。     

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.     

The Market Instinct: The Demise of Social Preferences for Self-Interest

Environmental policy design has much to gain from a better understanding of existing voluntary behaviour and motivations. In laboratory experiments, participants often exhibit social preferences such as altruism, spite, reciprocity and notions of fairness. In contrast, traditional neoclassical theory assumes that people act rationally in a way that maximises their self-interest. In environmental markets, social preferences and self-interest interact. We apply experimental economics to test the hypothesis that social preferences are not maintained in the presence of a competitive market institution. In the initial public goods game, many participants were prepared to make costly voluntary contributions. However the introduction of the market institution triggered a ‘market instinct’ in experimental participants. They abandoned the social preferences they were previously expressing and became self-interested profit maximisers. This self-interested behaviour persisted even after the market institution was discontinued. These findings are important to understanding the role and impact of markets for environmental policy.     

理性选择向非理性选择转化的行为分析

本文针对不确定条件下的人类选择行为提出一个新的可供研究的观点:人的非理性选择在很大程度上是由理性选择转化而来的。文章首先简要评说了早期行为经济学的动物实验和认知心理学,认为人的选择行为是理性和非理性的同构;继而,通过解析丹尼尔·卡尼曼等人创立的前景理论所蕴涵的理性向非理性选择转化的思想,构建了这种转化的抽象模型;最后,作为对本文分析观点的一种联系实际的论证,研究了金融市场中的非理性选择以说明这种转化现象的客观存在。本文的分析可视为对行为经济学非理性选择理论之深邃见解的一种挖掘。     

USING LABORATORY EXPERIMENTS TO DESIGN EFFICIENT MARKET INSTITUTIONS: THE CASE OF WHOLESALE ELECTRICITY MARKETS

ABSTRACT ** :  This paper assesses the contribution of laboratory experiments to the economics of design applied to the electricity industry. The analysis is dedicated to wholesale markets, and reviews the results accumulated to date concerning both the general architecture of power markets and the very details of the market rules or institution, that is the auction rule. We argue that these experimental results contribute to a better understanding of the performances properties and implementation features of competitive market designs and that experimental economics has proven very useful to public authorities to inform the restructuring of the electricity industry. It thus confirms the role of experimental economics as a complement to theoretical approaches in the design effort.     

Vertical price leadership on local maize markets in Benin

This paper considers vertical price relationships between wholesalers and retailers on five local maize markets in Benin. We show that the common stochastic trend and the long-run disequilibrium error must explicitly be considered to correctly interpret the restrictions on the error–correction structure in terms of economic power in the channel. Interesting differences between markets are found. In the two major towns, retailers play a more prominent role in the price formation process than generally assumed in the literature on development economics. In the two larger rural centers, however, wholesalers involved in arbitrage among urban markets do influence price formation.     

ON DETAIL‐FREE MECHANISM DESIGN AND RATIONALITY*

Mechanism design theory has been criticized, because mechanisms depend on the detail of specification and agents’ behaviour relies on strong rationality assumptions. Hence the study of “detail‐free” mechanism design with weak rationality is important as a practical theory. This paper emphasizes that, even if we confine our attention to detail‐free mechanisms with weak rationality, there exists plenty of scope for the development of new and significant ideas. I describe my recent work along these lines, and argue that stochastic decisions work in large double auction environments, and that moral preferences improve the implementability of social choice functions.     

Agreeing to pay under value disagreement: Reconceptualizing preference transformation in terms of pluralism with evidence from small-group deliberations on climate change

Plural values contribute to multiple arrays of expressed preferences. Conventionally, preference convergence toward consensus among initially disagreeing decision makers is understood in terms of diminishing value differences. A cogent account of consensual decision that respects non-diminishing value plurality is lacking. Instead there is a theoretic expectation for categorical consistency between subjective values and expressed preferences. Valuing agents in social interaction are expected to indicate identical preference orderings only if they hold correspondingly identical categories of values. This expectation precludes meaningful conceptualization of preference convergence under divisive normative dispositions. An alternative framework is proposed and illustrated by results from a designed deliberative forum on Australia's climate change policy. Data were analyzed based on Q methodology. Results show that small-group deliberations enabled effective communication between distinctive subjective positions and broadened understandings between individuals. While a consensual decision gained progress, no identified value discourse diminished below a significant degree. Observed changes in values did not run parallel to the converging preferences, suggesting a decline in value-preference consistency. These changes nonetheless are amenable to the principle of value pluralism. An alternative rationality concept is needed to account for this moral ideal within economics.     

Time-inconsistent preferences in a general equilibrium model

This paper introduces time-inconsistent preferences in a multicommodity general equilibrium framework with incomplete markets. The standard concept of competitive equilibrium is extended in order to allow for changes in intertemporal preferences. Depending on whether or not agents recognize that their intertemporal preferences change, agents are called sophisticated or naïve. This paper presents competitive equilibrium notions for economies with naïve agents and economies with sophisticated agents and provides assumptions under which both types of equilibria exist. Surprisingly, the set of naïve equilibria in societies populated by time-consistent households is not allocationally equivalent to the set of competitive equilibria. For sophisticated equilibria, the equivalence holds. Time-inconsistency also raises conceptual issues about the appropriate concept of efficiency. Choices have to be made concerning the incorporation of future preferences and the appropriate instruments to create Pareto improvements. For both naïve and sophisticated societies, we present four possible efficiency concepts. Suitable conditions are specified for which both naïve and sophisticated equilibria satisfy appropriate efficiency concepts.