The psychology and rationality of decisions from experience

Most investigations into how people make risky choices have employed a simple drosophila: monetary gambles involving stated outcomes and probabilities. People are asked to make decisions from description. When people decide whether to back up their computer hard drive, cross a busy street, or go out on a date, however, they do not enjoy the convenience of stated outcomes and probabilities. People make such decisions either in the void of ignorance or in the twilight of their own often limited experience of such real-world options. In the latter case, they make decisions from experience. Recent research has consistently documented that decisions from description and decisions from experience can lead to substantially different choices. Key in this description-experience gap is people's treatment of rare events. In this paper, I briefly review studies that have documented the description-experience gap, offer several explanations for this gap, and discuss to what extent people's decisions from experience are in conflict with benchmarks of rationalit

Herbert Simon's decision-making approach: Investigation of cognitive processes in experts

This is a post print version of the article. The official published can be obtained from the links below - PsycINFO Database Record (c) 2010 APA, all rights reserved.Herbert Simon's research endeavor aimed to understand the processes that participate in human decision making. However, despite his effort to investigate this question, his work did not have the impact in the “decision making” community that it had in other fields. His rejection of the assumption of perfect rationality, made in mainstream economics, led him to develop the concept of bounded rationality. Simon's approach also emphasized the limitations of the cognitive system, the change of processes due to expertise, and the direct empirical study of cognitive processes involved in decision making. In this article, we argue that his subsequent research program in problem solving and expertise offered critical tools for studying decision-making processes that took into account his original notion of bounded rationality. Unfortunately, these tools were ignored by the main research paradigms in decision making, such as Tversky and Kahneman's biased rationality approach (also known as the heuristics and biases approach) and the ecological approach advanced by Gigerenzer and others. We make a proposal of how to integrate Simon's approach with the main current approaches to decision making. We argue that this would lead to better models of decision making that are more generalizable, have higher ecological validity, include specification of cognitive processes, and provide a better understanding of the interaction between the characteristics of the cognitive system and the contingencies of the environment

Decision-Making: A Neuroeconomic Perspective

This article introduces and discusses from a philosophical point of view the nascent field of neuroeconomics, which is the study of neural mechanisms involved in decision-making and their economic significance. Following a survey of the ways in which decision-making is usually construed in philosophy, economics and psychology, I review many important findings in neuroeconomics to show that they suggest a revised picture of decision-making and ourselves as choosing agents. Finally, I outline a neuroeconomic account of irrationality

The institutional context of rationality

In the last three decades, mainstream economics has been influenced by authors associated with new institutional economics and new behavioral economics. The dispute over rationality as an assumption of economic theories is becoming particularly evident and is taking new forms. The aim of this article is to examine the connections between the institutional and behavioral approaches as well as between researchers’ ideas as to what rationality is and their beliefs regarding an optimal economic system. It will demonstrate that so-called behavioral and institutional economists have more in common than not. Institutions play a key role in the arguments of behavioural economists, whereas the argument of institutional economists is almost always based on the issue of human cognitive abilities and emotions. What directly links the two trends is the attention given to the rationality of actions that an individual takes as a premise of economic choices and as an assumption of economic theories. Differences in views relate to the understanding of rationality and exist within the framework of behavioral economics itself. At the core of the dispute is the distinction between two concepts of rationality: constructivist and ecological. This distinction serves as a starting point for the second matter discussed in the article. The author argues that the concept of constructivist rationality is related to the vision of the top-down creation of social order, while the proponents of the ecological approach to rationality stress the importance of market institutions. Interestingly, from the perspective of cognitive psychology and the heuristics of Daniel Kahneman, it can be presumed that the convictions of a scholar about the “ideal system” can influence his or her arguments on the essence of human rationality.Publication of English-language versions of the volumes of the “Annales. Ethics in Economic Life” financed through contract no. 501/1/P-DUN/2017 from the funds of the Ministry of Science and Higher Education devoted to the promotion of scholarship

Strategic decision-making process (SDMP) in times of crisis:evidence from Greek banks

This paper investigates the strategic decision making process (SDMP) of Greek banks’ top management in the context of profound organisational changes introduced in 2012 due to the aftermath of the 2008 global financial crisis. It focuses on the impact of three key dimensions of the SDMP, namely, rationality, intuition and political behaviour, relating to four changes introduced, namely, mergers and acquisitions, branch network rationalisation, integration of information technology (IT) and downsizing of operations and personnel. A survey questionnaire was conducted, targeting Greek banks’ top management. Out of 140 questionnaires, 78 were returned, a 55.71% response rate. Data was analysed using structural equation modelling. Research findings identify rationality as a key dimension of SDMP for all organisational changes, as there was high focus on identifying and analysing all required information, use of external financial advisors, and reliance on multiple methods of information gathering. Decision-makers used their intuition in the form of past experience when making acquisition decisions, whilst their personal judgment and “inner voice” were neglected.Finally, political behaviour was not displayed during this process, as decision-makers were open with each other about their interests and preferences, and there was no bargaining, negotiation or use of power amongst them. One limitation was that of not considering all the factors that might help measure SDMP. Also, this study was conducted in a period of political and financial uncertainty for Greek banks, as well as for the Greek economy in general, so findings may not be generalizable to other industries and countries. Conducting interviews could have offered deeper insight as well. This study’s value lies in the fact that the organisational changes were determined by Greece’s leaders, and thus the Greek banks had to operate under a dynamic, inflexible and non-autonomous environment. Also, this study extends prior SDMP research by examining the impact of the three key SDMP dimensions on four types of organisational change

Looking for a psychology for the inner rational agent

Research in psychology and behavioural economics shows that individuals’ choices often depend on ‘irrelevant’ contextual factors. This presents problems for normative economics, which has traditionally used preference-satisfaction as its criterion. A common response is to claim that individuals have context-independent latent preferences which are ‘distorted’ by psychological factors, and that latent preferences should be respected. This response implicitly uses a model of human action in which each human being has an ‘inner rational agent’. I argue that this model is psychologically ungrounded. Although references to latent preferences appear in psychologically-based explanations of context-dependent choice, latent preferences serve no explanatory purpose

Rationality, irrationality and economic cognition

This paper contrasts the modern use of the assumption that rationality as reflected in simple models of utility and profit maximization guides individual economic behaviour to literature both between 1890 and 1930 which sharply challenged the use of such an assumption and later literature in economic psychology from Herbert Simon onwards which sees economic (and other) cognitive processes in different ways. Some of the earlier literature proposed objective and operational notions of rationality based on the availability of information, ability to reason (cognitive skills), and even morality. Learning played a major role in individuals achieving what was referred to as complete rationality. I draw on these ideas, and suggest that developing models in which economic agents have degrees (or levels) of economic cognition which are endogenously determined could both change the perceptions economists have on policy matters and incorporate findings from recent economic psychology literature. This would remove the issue of whether economic agents are dichotomously rational or irrational, and instead introduce continuous metrics of cognition into economic thinking. Such an approach also poses the two policy issues of whether raising levels of economic cognition should be an objective of policy and whether policy interventions motivated by departures from full economic cognition should be analyzed

The Simonian bounded rationality hypothesis and the expectation formation mechanism

Abstract. In the 1980s and at beginning of the 1990s the debate on expectation formation mechanism was dominated by the rational expectation hypothesis. Later on, more interest was directed towards alternative approaches to expectations analysis, mainly based on the bounded rationality paradigm introduced earlier by Herbert A. Simon. The bounded rationality approach is used here to describe the way expectations might be formed by different agents. Furthermore, three main hypotheses, namely adaptive, rational and bounded ones are being compared and used to indicate why time lags in economic policy prevail and are variable. JEL Codes: D78, D84, H30, E00.Keywords: bounded rationality, substantive and procedural rationality, expectation formation, adaptive and rational expectations, time lags

Philosophical Commitments, Empirical Evidence, and Theoretical Psychology

The philosophical or theoretical commitments informing psychological research are sometimes characterized, even by theoretical psychologists themselves, as nonempirical, outside the bounds of methodological consideration, and/or nonrational. We argue that this characterization is incoherent. We illustrate our concern by analogy with problematic appeals to Kuhn’s work that have been influential in theoretical psychology. Following the contemporary pragmatist tradition, we argue that our philosophical/theoretical commitments are part of our larger webs of belief, and that for any of these beliefs to have meaning their content must be informed by our practical engagement with the world, i.e., they are based on empirical evidence, broadly construed. It is this empirical basis that allows us to recognize our commitments at all and rationally to assess and criticize them when necessary. We conclude by demonstrating a rational assessment of the philosophical/theoretical commitments underlying a recent study in the social psychology of religion