I was having lunch with a colleague last week when we touched on the topic of bounded rationality. In his research, he explores the theory as it applies to the knowledge management of organisations in times of disasters. Arguing that people only make rational decisions within the boundaries they see/are a part of, knowledge management in organisations should focus on providing specific contexts for people to make decisions.
I think the other aspect of bounded rationality, and the more important one to know with regards to the commons, points out that most people are only partly rational, and are in fact emotional or irrational in most of their actions (a point put forward by Herbert Simon, in Models of My life, 1991).
The problem with most economic theories lies in their vein of rigid optimisation. From my last post, the problem that I have with Hardin’s ‘Tragedy of the Commons’ (1968) is the assumption of rationality. Again, it is interesting that supporters of the ‘tragedy of the commons’ support it with the claim that resources are finite; yet they assume the infinite rationality of human actions.
Conlisk (1996) summarised a number of empirical evidence justifying why bounded rationality works as a feasible theory. For example, studies have found that:
[People] display intransitivity; misunderstand statistical independence; mistake random data for patterned data and vice versa; fail to appreciate law of large number effects; fail to recognize statistical dominance; make errors in updating probabilities on the basis of new information; understate the significance of given sample sizes; fail to understand covariation for even the simplest 2X2 contingency tables; make false inferences about causality; ignore relevant information; use irrelevant information (as in sunk cost fallacies); exaggerate the importance of vivid over pallid evidence; exaggerate the importance of fallible predictors; exaggerate the ex ante probability of a random event which has already occurred; display overconfidence in judgment relative to evidence; exaggerate confirming over disconfirming evidence relative to initial beliefs; give answers that are highly sensitive to logically irrelevant changes in questions; do redundant and ambiguous tests to confirm an hypothesis at the expense of decisive tests to disconfirm; make frequent errors in deductive reasoning tasks such as syllogisms; place higher value on an opportunity if an experimenter rigs it to be the â€œstatus quoâ€ opportunity; fail to discount the future consistently; fail to adjust repeated choices to accommodate intertemporal connections; and more.
In such experiments, the mental tasks put to people are often simple, at least relative to many economic decisions; whereas their responses are frequently way off. Most important, reasoning errors are typically systematic.
Let me clarify that this is not to mean that economic theories are not important. They are; but all good economists would also ask that we consider all costs in economic modelling. Some studies in economics have already incorporated the theory in recent years, such as deliberation costs as part of economic modelling.
What bounded rationality theory also raise is the dissatisfaction with the tragedy of the commons as one explanation of resource problems. It seems to suggest that the idea of having common pool resources is not feasible, or is doomed to fail. Yet history and stories have proven otherwise. Peer-to-peer networks, and other self-governing groups have proven themselves to be sustainable, and increased in value over time and space. The assumption of perfect rationality (a key argument of Hardin’s commons-tragedy) suggests that people cannot cooperate other than for their self interests – and therefore cooperative and collaborative will not last. A rather simplistic view I must say, simply because people do not live alone; they do not live without communities. What may appear to be selfish decisions of man are influenced by larger considerations of the communities they live in.
â€œWe know of no people without names, no languages or cultures in which some manner of distinctions between self and other, we and they, are not madeâ€¦ Self-knowledge â€“ always a construction no matter how much it feels like a discovery â€“ is never altogether separable from claims to be known in specific ways by others.â€ (Calhoun c.f. Castells, 2003)
Castells, M. (2003). The Power of Identity. Malden: Blackwell Publishing.
Conlisk, J. (1996). Why Bounded Rationality? Journal of Economic Literature, 34(June), 669-700.
Simon, H. (1991). Models of My Life. London: Basic Books.