Observation

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  • Topic: Economics, Decision making, Game theory
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  • Published : January 23, 2013
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A Simple Exploration of Bounded Rationality
by Susan Fisk

“Psychological theories of intuitive thinking cannot match the elegance and precision of formal normative models of belief and choice, but this is just another way of saying that rational models are psychologically unrealistic.” -Daniel Kahneman

Sit back and imagine that the United States is preparing for the outbreak of an unusual disease, which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. If program A is adopted, 200 people will be saved but if program B is adopted, there is a one-third chance that 600 people will be saved and a two-thirds probability that no one will be saved. If you are like the majority of respondents, you chose option A.[1] (Kahneman, 2003)

Let’s imagine that instead we stated that if program A is adopted, 400 people will die but if program B is adopted, there is a one-third probability that nobody will die and a two-thirds probability that 600 people would die. The majority of respondents to this question prefer option B to option A. Obviously, this is illogical because although the wording is different, option A and B are the same in both examples. The irrationality demonstrated by this simple question illustrates that classical economic thought may not have all of the answers when it comes to explaining human behavior. (Kahneman, 2003) Neoclassical economic thought makes certain assumptions about humans, their actions and their decision making processes. In the nineteenth century, economic rationalism was developed and extolled by utilitarians including Jeremy Bentham and James Mill (Tisdell, xiii). They believed that humans should strive to achieve, “The greatest happiness for the greatest number,” (Ekelund, 125). This strongly influenced economic thought through the development of concepts such as measurable utility, rational behavior, and economic equilibrium (Tisdell, xiii). It also led to the...
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