Risk,uncertainty, and heuristics

Nearly a century ago, Frank Knight famously distinguished between risk and uncertainty with respect to the nature of decisions made in a business enterprise. He associated generating economic profit with making entrepreneurial decisions in the face of fundamental uncertainties. This uncertainty is complex because it cannot be reliably hedged unless it is reducible to risk. In making sense of uncertainty, the mathematics of probability that is used for risk calculations may lose relevance. Fast-and-frugal heuristics, on the other hand, provide robust strategies that can perform well under uncertainty. The present paper describes the structure and nature of such heuristics and provides conditions under which each class of heuristics performs successfully. Dealing with uncertainty requires knowledge but not necessarily an exhaustive use of information. In many business situations, effective heuristic decision-making deliberately ignores information and hence uses fewer resources. In an uncertain world, less often proves to be more.     

Are their designs iterative or fixated? Investigating design patterns from student digital footprints in computer-aided design software

This paper investigates iteration and fixation in design by mining digital footprints left by designers. High school students used computer-aided design software to create buildings in an urban area, with the goal of applying passive solar design techniques to ensure optimal solar gains of the buildings throughout a year. Students were required to complete three different designs. Fine-grained data including design actions, intermediate artifacts, and reflection notes were logged. Computational analytics programs were developed to mine the logs through three indicators: (a) frequency of the action of using energy analysis tools; (b) solar performance of the final designs; and (c) difference in solar performance between the prototype and final designs. Triangulating results from the indicators suggests three types of iteration—efficacious, inadequate and ineffective. Over half of the participants were detected as being efficacious iterative during the first design and becoming more and more fixated toward the end of the project, which resonates with previous findings on fixation effect among college students and professional designers. Overall the results demonstrate the power of applying computational analytics to investigate complex design processes. Findings from this work shed light on how to quantitatively assess and research student performance and processes during design projects.     

Behind and beyond a shared definition of ecological rationality: A functional view of heuristics

Observing human behavior in laboratories reveals time and again the undeniable influence of social components, even in the isolation of carefully designed experiments. Clearly, social and cultural constructs shape human cognition. The study of ecological rationality recognizes the importance of specifying these and other characteristics of the environment as a basis of cognition. In this paper, we compare the views of Vernon Smith and Gerd Gigerenzer, the founders of two leading research programs on ecological rationality, one in economics and one in psychology. Based on their written work and on interviews conducted by one of the authors, this article brings together for the first time the essence and principles of the study of ecological rationality in these two traditions. This conjoint presentation poses important questions and clarifies methodological challenges in the understanding of actual human behavior from experimental data. Smith sees ecological and constructivist rationality as two complementing versions of economic rationality, while Gigerenzer regards the study of fast-and-frugal heuristics as the appropriate scientific method for exploring real-world rationality. Drawing a connection between forms of rationality and emergence of experimental knowledge, we note that a theory of behavior cannot be deducted from observations alone. Establishing a theoretical framework for observed behavior starts with a search for norms that are sensitive to the context and content of the situation in which a choice is made. Studying the ecological rationality of heuristics, markets, and institutions reveals such norms.     

A Classroom Exercise: Voting by Ballots and Feet

This classroom experiment illustrates the efficiency-enhancing property of a Tiebout system in which local public goods decisions are determined by a political process. Students are given playing cards that induce diverse preferences for expenditures on alternative public goods and are initially assigned to specific communities. Then those in each community vote on the type and level of public goods provision, which determine the tax cost. After the provision and tax results are announced, students are free to move to a location where the prior results are more consistent with their preferences. This process continues for several rounds, with a new vote taken at each location after moves have been made. The exercise demonstrates that the combination of voting with feet and ballots tends to increase the total net benefit for all communities. The voting on provision levels is structured to facilitate a discussion of the median voter theorem.