September 27, 2013
Adoption of the “Behavioral” Approach
• Economically suboptimal decision
o Buying a truck because it suits you, rather then a cost
o Going to school over working in the oil patch
What do we do when we encounter a problem that is not easily
explained on the basis of existing knowledge?
1. Was the problem appropriately specified?
2. Did we use the appropriate theory to draw our hypotheses?
3. Did we collect our data correctly?
4. Maybe our theory (or the assumptions underlying our theory)
needs to be questioned?
Simon’s Satisficing Theory and Bounded Rationality
• Central elements in Simon’s critique of “economic rationalism”
o Economically suboptimal decisions are not nonrational
o Decision makers lack the cognitive capacity and other resources (time,
money) to collect and process the information necessary to make the
o Bounded rationality = selecting the best option available
o Decisions are made with reference to multiple considerations some of
Julian Wolpert, 1964
• “Economic Man is free from the multiplicity of goal and imperfect knowledge
which introduce complexity into our own decision behavior”
• “Economic Man has a single profit goal, omniscient powers of perception,
reasoning, and computation, and is blessed with perfect predictive abilities.”
• “as a group, the sample population does not achieve profit maximizatio