300178 Models of Bounded Rationality (S) (SoSe 2018)

The paradigm of rational man, that serves as the foundation of most of economics and its elegant, though abstract model building, has always been criticized by sociology and psychology as being too narrow. But while sociologists have not yet offered an equally well design and robust alternative and in the main only tried to charm themselves by insinuating to be less selfish, economists have started to question the paradigm from a quite different perspective. It was mostly Herbert Simon who since the mid-fifties of last century did not only wonder, how economic man could possibly do all the calculations he was supposed to handle on the spot and in an instant, but came forward with a small number of precisely formulated and apparently more realistic models of bounded rationality. Economists quickly started to give lip-service to this critique and also sociologist began to refer to it with malicious joy. Simon eventually received the Nobel-prize, but research in this area remained confuse and idiosyncratic and due to a certain lack of deductive elegance could never really outcompete the standard paradigm. However, the career and recent institutionalization of Behavioral Economics and the establishment of laboratories in economic departments does indicate an important shift and might perhaps catalyze a reshuffling of the social sciences within the world of academia. So, sociologists should be aware.
Boundedly rational decision makers have to follow specific procedures and in this seminar we will first look at the micro level procedures of deliberate decision making. Here we will basically follow Ariel Rubinstein´s book “Modeling Bounded Rationality”. In a second step and should time allow for this we will then take a look at some of the extraordinary claims of Behavioral Economics, to find out, whether these force us to embrace a model of man that incorporates certain psychological biases and deficits, or whether there is some way back to the standard paradigm, perhaps leading to its enrichment or its more specific contextualization. Here, the small booklet by David Levine, though admittedly taking sides, should serve as our guide.
Both books occasionally are quite technical and might look somewhat cryptic to sociologists. However, this seminar should offer an environment to handle these challenges and you should not stay away because you feel frightened by numbers and equations. The seminar does not presuppose any specific formal skills. Everything will be explained as we go along.

Literature:

Ariel Rubinstein, Modeling Bounded RationalityCambridge, Mass., 1998.

David K. Levine Is Behavioral Economics Doomed? The Ordinary versus the Extraordinary, Cambridge 2012.

P.S.: You should have both books at hand and you can download them for free, as both authors work at universities and their research has already been paid for by tax-payers.

Bibliography

Herbert Simon, Models of Thought, New Haven 1979.

Ariel Rubinstein, Modeling Bounded Rationality, Cambridge, Mass. 1998.

H. Peyton Young, Strategic Learning and its Limits, Oxford 2004.

David K. Levine Is Behavioral Economics Doomed? The Ordinary versus the Extraordinary, Cambridge 2012.