Bounded rationality: the two cultures

Abstract

Research on bounded rationality has two cultures, which I call 'idealistic' and 'pragmatic'. Technically, the cultures differ on whether they (1) build models based on normative axioms or empirical facts, (2) assume that people's goal is to optimize or to satisfice, (3) do not or do model psychological processes, (4) let parameters vary freely or fix them, (5) aim at explanation or prediction and (6) test models from one or both cultures. Each culture tells a story about people's rationality. The story of the idealistic culture is frustrating, with people in principle being able to know what they should do, but in practice systematically failing to do it. This story makes one hide in books for intellectual solace or surrender to the designs of someone smarter. The story of the pragmatic culture is empowering: If people are educated to use the right tool in the right situation, they do well.

An Heuristic Framework for Non-Conscious Reasoning

“…Katsikopoulos [6] proposed a definition of psychological heuristics which is a hybrid of these three interpretations. As in [2], this definition focuses on heuristics that not only are computational shortcuts but also have a psychological basis; and these heuristics are formalized.…”

An outlook on behavioural OR – Three tasks, three pitfalls, one definition

“…Research that follows the behavior-as-choice paradigm can roughly be divided into two streams, both of which have their historical origin in the seminal work by Herbert Simon (1949), which was intended to overcome the limitations of the classical economic perspective. One stream focusses on studying the "boundedness" of human rationality, either by studying deviations from rational behaviour or by exploring alternative ways to describe and formalize human decision making (see Katsikopoulos, 2014, for an overview). While this first stream has strong connections mainly with economics and psychology, the second stream, within Management Studies, has also taken up ideas from sociology.…”

Uncertainty, Decision Science, and Policy Making: A Manifesto for a Research Agenda

“…Although this assumption is not necessary to explain empirical behavior, as shown by other models that do not incorporate the assumption (Katsikopoulos and Gigerenzer 2008), some practitioners of behavioral economics think its empirical basis is firm enough that they advocate it as a prescriptive approach to how people should make decisions. The story goes as follows (Katsikopoulos 2014): People are systematically behaving irrationally, but because they are in principle able to figure out how to behave rationally, they should keep trying to do so. Interestingly, however, the proponents of the idealistic approach do not believe that people can actually learn to behave "rationally" (Bond 2009).…”

“…Insofar as these new pragmatic approaches clearly have value, we need to understand why the idealistic culture has been so dominant and remains so attractive and so resistant to change despite its impracticality and its relative lack of empirical support (Katsikopoulos 2014). Perhaps approaches that draw on shortcuts, narratives, and emotions tend to be stigmatized in the academic community.…”

“…The key feature of these standard models is that they are both idealized and "idealistic" (Katsikopoulos 2014). They are idealized or unrealistic because they tend not to be supported by actual observations of how reasonable people make decisions in real-world settings and are usually divorced from the uncertainty and complexity of implementation.…”