Andy Isaacson
Economic Rationality: Adaptive Artifice
Herbert Simon
Simon’s why-question: Why is it impossible for humans to select the optimal course of action in any situation?
Simon’s motivational mechanism:
 Humans are self-interested.
 Given that humans have bounded rationality based upon:
o The uncertainty of the outer environment
o The imperfectness of expertise (expert knowledge is based upon history)
o The inability of humans to compute very much information at one time.
 It is in a person’s interest to attach to groups (identification) to protect oneself from the uncertainty of the outer environment
and to conserve information/calculation.
Key concepts:
Outer Environment (p. 25): the behavior of other –
individuals, firms, markets, economies
Inner Environment (p. 25): Individual’s, firm’s, market’s,
economy’s – goals and capabilities for rational adaptive
behavior
Procedural Rationality (p. 25): Asks how? Evaluates
Satisficing solutions (what humans do in reality) – given that
the inner environment cannot possibly sort out all potentially
useful information about the outer environment, the method
that the inner environment goes through to perceive the outer
environment and determine a satisfactory course of action
Substantive Rationality (p. 25): Asks what? Evaluates
Optimal solutions (what economists calculate) – given that the
inner environment is able to sort out all potential useful
information about the outer environment, the determination of
the best course of action.
Aspiration Level (p. 30): how satisfactory decisions are determined.
 Aspirations have many separate dimensions (i.e., work satisfaction, love, travel, etc.)
 These dimensions are not transitory (i.e., no universal utility function, thus satisfaction in one area does not balance out
dissatisfaction in another area)
 Aspirations are based upon expectations (which are based upon history). Thus, expectations define satisfactory outcomes.
1
Market: Where inner environments meet to interact with their outer environments
Mutual expectations (p. 36): When interacting in a market, the process of trying to outguess competitors.
Organization: A hierarchical inner environment that operates within the group’s perception of the outer environment.
“Collecting Points” (p. 41): Within an organization, where “matters of fact” (determined wherever the most skill and information is
located) relevant to an issue
accumulate so that a decision can be made.
Docility (p. 45): the tendency to accept information and advice from the social groups [such as organizations] to which one belongs
[identifies].
“Taxing” Docility = Altruism (p. 45): Influencing people to take actions that are not personally beneficial, but beneficial to the
group.
 Benefits of docility must exceed costs: Benefit (conservation of information/calculation) > Cost (altruistic action)
Generator (p. 46): Creation of innovative actions
Test (p. 46): Feedback to innovative actions
Borrowing (p. 48): implementing schemas that have been successful for other organizations
 Costs: learning time
 Limitations: Patent protection & commercial secrecy (people want to maintain a competitive advantage)
2
Outer Environment = Uncertainty
Market = Area of Uncertainty
Area where inner
environments interact with
other inner environments
Org. – Inner Environment
A place of certainty based
upon perception of the
outer environment
Generator
Innovative action
(incorporates mutual
expectations)
Market
Org A
Individual – Inner Environment
Bounded Rationality makes it
difficult to deal with outer
environment individually
Docility Benefit
Conservation
of information
and
computation
Org B
Test
Feedback from action
Hobbesian War
ALL AGAINST ALL
CP
CP
CP
CP
Collecting Points
Where decisions are
made, based upon
information gathered
from many different
locations.
Identification
Leads to docility
CP
CP
CP
Borrowing
Incorporate successful
schemas from other
organizations
Leave Organization if:
“Taxing” of Docility > Benefits of Docility
Docility Cost
Altruistic actions for
the organization
(“taxing” docility)
3
Aspiration Level
Inner environments goals are
based upon expectations
(derived from history).
Aspiration (Satisfaction) Thermometer
Positive: (E)xpectations < (A)chievements
Neutral: E = A (long-term equilibrium)
Negative: E > A