Massimo Egidi

Substantive and Procedural Uncertainty: An Exploration of Economic Behaviours in Changing Environments

Different sources of uncertainty are analysed and a representation of decision-making in principle consistent with behavioural evidence is proposed. The endogenous emergence of “innovations”, in the forms of unexpected events and novel behaviours is also examined.

From Bounded Rationality to Behavioral Economics

The paper provides an brief overview of the “state of the art” in the theory of rational decision making since the 1950’s, and focuses specially on the evolutionary justification of rationality. It is claimed that this justification, and more generally the economic methodology inherited from the Chicago school, becomes untenable once taking into account Kauffman’s Nk model, showing that if evolution it is based on trial-and-error search process, it leads generally to sub- optimal stable solutions: the ‘as if’ justification of perfect rationality proves therefore to be a fallacious metaphor. The normative interpretation of decision-making theory is therefore questioned, and the two challenging views against this approach , Simon’s bounded rationality and Allais’ criticism to expected utility theory are discussed. On this ground it is shown that the cognitive characteristics of choice processes are becoming more and more important for explanation of economic behavior and of deviations from rationality. In particular, according to Kahneman’s Nobel Lecture, it is suggested that the distinction between two types of cognitive processes – the effortful process of deliberate reasoning on the one hand, and the automatic process of unconscious intuition on the other – can provide a different map with which to explain a broad class of deviations from pure ‘olympian’ rationality. This view requires re-establishing and revising connections between psychology and economics: an on-going challenge against the normative approach to economic methodology.

Decomposition patterns in problem solving

The paper develops a theory of biases in decision making. Discovering a strategy for solving a game is a complex problem that may be solved by decomposition; a player decomposing a problem into many simple sub-problems may easily identify the optimal solution to each sub-problem: however it is shown that even though all partial solutions are optimal, the solution to the global problem may be largely sub-optimal. The conditions under which a decomposition process gives rise to a sub-optimal solution are explored, and it is shown that the sub-optimalities ultimately originate from the process of categorization that governs the creation of a decomposition pattern. Decisions based on a strategy discovered by decomposition are therefore frequently biased . The persistence of biased behaviours, observed in many experiments, is explained by showing the stability of different and non optimal representations of the same problem. An application to a simplified version of Rubik cube is finally developed.

Co-ordination and specialisation

This paper addresses the problem of division of labour as an evolutionary process in which co-ordinated agents attempt problem-solving as a search in problem space. Co-ordination stress and learning trigger adaptation but as complexity rises radical solutions are sought prompting radical organisational as well as technological change. The analytical issues involved are further explored by resorting to the so-called NKC model of evolution and co-evolution.

Schumpeter’s picture of economic and political institutions in the light of a cognitive approach to human behavior

Schumpeter’s theory of democracy can be read through the lens of the cognitive approach to rationality. Schumpeter himself constructed his theory on the basis of his (neglected) conception of conscious rationality, which considers the process of thinking as composed of conscious/deliberate and unconscious/automatic components. The prevalence of the deliberate over the automatic component can occur in different degrees; as a consequence, individuals exhibit different levels of conscious rationality. Schumpeter makes clear that an essential attribute of democracy is its being a system of government capable of working notwithstanding a low degree of conscious rationality among its citizens. Given this condition, the process of political communication and persuasion can lead to two very different outcomes: a fair social construction of the democratic institutions, in which the struggle for the vote is achieved through a critical debate among leaders and citizens; and an unfair construction, based on the prevalence of emotive forces of persuasion over rationality and on cheating of the leaders at the expense of their citizens. Schumpeter suggests that the main element that fosters a fair construction is the effectiveness of competition, which can advance the rational elements in the political debate and the self-determination of the citizens’ will: a slow process that – he warns - may be effective only in the long run, and does not preserve democracy from the risk of decline.

Paths in contemporary economics and sciences of artificial that originate from Simon’s bounded rationality approach

The article reviews the paths of artificial intelligence and behavioural sciences started by Herbert A. Simon. The author critically reflects on past and current state of crucial behavioural assumptions such as rational expectations and bounded rationality.

Organizational Decisions in the Lab

Bounded rationality is a label that covers the most important advancements of Herbert Simon’s scientific production. His fundamental contributions to cognitive psychology and to the theory of problem-solving were developed jointly each being nurtured by the discoveries emanating from the other discipline. I will briefly review some steps on the path to the creation of the theory of bounded rationality in order to introduce the issue of organizational decision-making and associated laboratory experiments.

The Dual Process Account of Reasoning: Historical Roots, Problems and Perspectives

Despite the great effort that has been dedicated to the attempt to redefine expected utility theory on the grounds of new assumptions, modifying or moderating some axioms, none of the alternative theories propounded so far had a statistical confirmation over the full domain of applicability. Moreover, the discrepancy between prescriptions and behaviors is not limited to expected utility theory. In two other fundamental fields, probability and logic, substantial evidence shows that human activities deviate from the prescriptions of the theoretical models. The paper suggests that the discrepancy cannot be ascribed to an imperfect axiomatic description of human choice, but to some more general features of human reasoning and assumes the i?½dual-process account of reasoningi?½ as a promising explanatory key. This line of thought is based on the distinction between the process of deliberate reasoning and that of intuition; where in a first approximation, i?½intuitioni?½ denotes a mental activity largely automatized and inaccessible from conscious mental activity. The analysis of the interactions between these two processes provides the basis for explaining the persistence of the gap between normative and behavioral patterns. This view will be explored in the following pages: central consideration will be given to the problem of the interactions between rationality and intuition, and the correlated i?½modularityi?½ of the thought.