Maps of Bounded Rationality: Psychology for Behavioral Economics

American Psychologist, 2003

issue of the American Economic Review. Author's note. This article revisits problems that Amos Tversky and I studied together many years ago and continued to discuss in a conversation that spanned several decades. The article is based on the Nobel lecture, which my daughter Lenore Shoham helped put together. It draws extensively on an analysis of judgment heuristics that was developed in collaboration with Shane Frederick . Shane Frederick, David Krantz, and Daniel Reisberg went well beyond the call of friendly duty in helping with this effort.

The work cited by the Nobel committee was done jointly with the late Amos Tversky during a long and unusually close collaboration. Together, we explored the psychology of intuitive beliefs and choices and examined their bounded rationality. This essay presents a current perspective on the three major topics of our joint work: heuristics of judgment, risky choice, and framing effects. In all three domains we studied intuitionsthoughts and preferences that come to mind quickly and without much reflection. I review the older research and some recent developments in light of two ideas that have become central to social-cognitive psychology in the intervening decades: the notion that thoughts differ in a dimension of accessibility -some come to mind much more easily than others -and the distinction between intuitive and deliberate thought processes.

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 empirical research presented here emerged as a tentative answer to a cluster of questions related to the identification of heuristics’ building blocks and associated cognitive processes involved in decision-making as suggested by the Fast & Frugal Heuristics research program (Gigerenzer et al., 1999; Gigerenzer & Selten, 2001). The Fast & Frugal Heuristics research program is a direct consequence of a well succeeded critical analysis of Unbounded Rationality models (Gigerenzer, 1991a; Gigerenzer & Murray, 1987) such as the general Subjective Expected Utility model (Savage, 1972; von Neumann & Morgenstern, 1953) as well as of a hegemonic research program known as the Heuristics and Biases (Kahneman et al., 1982a). It turned out to open the door for a new approach on judgment and decision-making research by proposing that neither complete information nor full capacity minds are duly theoretical premises or plausible conditions for agents to be rational in their judgments and decisions. In order to describe this broader context of the problem and research, we first summarize on one side Subjective Expected Utility model and Heuristics & Biases agendas, followed by the Fast & Frugal Heuristics program, showing how they correspond to antagonist views of rationality despite the differences between the former two. Subsequently, we select the relevant theoretical and empirical consequences of that clash and fence them as general research hypothesis. Finally, six experiments designed to investigate deduced predictions will be described and discussed. Theoretical and practical conclusions as well limitations and heuristic value are drawn.

Psychology into Economics: Fast and Frugal Heuristics, 2017

The present essay focuses on the fast and frugal heuristics program set forth by Gerd Gigerenzer and his fellows. In particular, it examines the contribution of Gigerenzer and Goldstein (1996) 'Reasoning the Fast and Frugal Way: Models of Bounded Rationality'. This essay, following the theoretical framework and the empirical evidence of Gigerenzer and Goldstein, points out that simple cognitive mechanisms such as fast and frugal heuristics can be capable of successful performance in real world, without the need of satisfying the classical norms of rational inference.

Cambridge University Press eBooks, 2001

People who make or implement public policy must often estimate probabilities, predict outcomes, and make decisions that affect the welfare, values, and lives of many others. Until recently many of the disciplines that study policy employed a model of individuals and organizations as rational agents whose predictions conform to the prescriptions of probability theory and whose actions maximize their expected gains in conformity with classical decision theory. Such theories lead a double life. They are sometimes viewed as normative models that tell us what we should do in order to be rational (even if we rarely manage to pull it off). Construed this way, they offer advice: we should have logically consistent beliefs, coherent probability assignments, consistent preferences, and maximize expected utilities. But these same theories have also been viewed as descriptive models; construed this way, they are meant to provide an approximate characterization of the behavior of real people. It is this interpretation that has played a central role in economics, management science, and parts of political science, sociology, and the law. Since the early 1970s this descriptive picture of judgment and decision making has come under increasing attack from scientists working in behavioral decision theory, the field concerned with the ways in which people actually judge, predict, and decide. Much of the criticism derives from the work of Tversky, Kahneman, and others working in the heuristics and biases tradition. Scientists in this tradition argue that people often

Personality and Individual Differences, 2018

Review of Philosophy and Psychology, 2015

Adaptive rationality (AR) theorists question the manner in which psychologists have typically assessed rational behavior and cognition. According to them, human rationality is adaptive, and the biases reported in the psychological literature are best seen as the result of using normative standards that are too narrow. As it turns out, their challenge is also quite controversial, and several aspects of it have been called into question. Yet, whilst it is often suggested that the lack of cogency comes about due to the implausibility of the alternative normative framework, in this paper I articulate a different strategy to resist the revolutionary rhetoric of AR. As I argue here, even if we accept the normative framework of AR, the challenge from AR is less damaging than usually accepted. In particular, I challenge the claim that biases reported in the literature should be conceived of as violations of axiomatic rationality. I argue that the category of bias refers instead to a range of heterogeneous phenomena and that, since several important families of biases are not just violations of axiomatic rationality, these are not vulnerable to the AR challenge. In fact, I also show that the families I consider here look like plausible cases of irrational behavior from the perspective of AR, and that the outcome of my analysis does not sit well with AR theorists' claim that people are generally successful at achieving prudential and epistemic goals.

2004

In a complex and uncertain world, humans draw inferences and make decisions under the constraints of limited knowledge, resources, and time. Herbert Simon, with his call for models of bounded rationality, can be seen as one of the fathers of the recently initiated research program on “simple heuristics that make us smart”(Gigerenzer/Todd/the ABC Research Group, 1999).