Home/Adaptation, Decisions, Economics, Expertise, Organizational Culture and Learning/What bad-tempered cows can tell us about economic policymaking

What bad-tempered cows can tell us about economic policymaking

The economic models policymakers and academics use can sometimes be very remote from practical experience. Actual decision-makers know that theories and plans are often of little help, and can sometimes be outright dangerous.

One American teenager learnt that the hard way when he joined with some friends to try to raise cattle on a desolate stretch of land in Wisconsin, named Rock Marsh.  The cattle wandered into flooded land or got caught on fences or failed to thrive in the winter. Bad-tempered cows did not cooperate with the plan.

But unlike most teen ventures, Herbert Simon took the experience and eventually turned it into a Nobel Prize in Economics in 1978. As he puts it in his autobiography, Models of My Life:

In essence our failure was a vivid demonstration, which I have never forgotten, that theories, however plausible and “obviously” valid, can be destroyed totally by the obstinate facts of the real world… No doubt my later deep skepticism of the a priorisms of mainstream economics had some of its origins in this experience.

Simon is one of the titanic intellectual figures of the last century. As the lines here hint, he was no orthodox economist, despite winning the Nobel  “for his pioneering research into the decision-making process within economic organizations.” For most of his career he worked outside economics altogether. He followed his interest in how people actually make decisions into psychology and computing and organization science.

He is also  one of the founding fathers of modern cognitive psychology, which  led to the “cognitive revolution” in many disciplines today. He did massively important work in the study of expertise and human problem solving. He investigated complex adaptive systems. And he was one of the main pioneers of artificial intelligence and machine learning, which is the forerunner of many of the algorithms and approaches underlying modern software engineering.

But he is most known for his investigation into “bounded rationality”.  People, he said,  do not have the capacity or knowledge to make optimal decisions in the way mainstream neoclassical economics believes (or at least assumes for working purposes.) Instead, they look for and find solutions which are “good enough”, or as he called it, they satisfice. They make decisions within and through organizations. They use different representations of problems.

Why does it matter? I’ve been looking at how our understanding of decision-making has evolved since WW2. Mainstream economics and finance continue to be based essentially on the microeconomics of expected utility which Simon attacked in the 1950s –  albeit in the last decade or two with small tweaks from Kahneman & Tversky’s Prospect Theory and other kinds of behavioral economics. But beginning in the 1960s more and more work surfaced which showed the standard economic view of the way people make decisions had major gaps and flaws.

Simon’s approach did not in the end prevail in the Economics Department of even his own university, Carnegie-Mellon. The career imperatives and mathematical requirements for economists were too strong to resist. As a result, most PhD-educated economists still stick very much to traditional methodologically-individualist, constrained-optimization approaches. Much of the standard analysis of the economy and markets contains  serious blind spots as a result.

Sometimes bad-tempered cows are more useful than an economics PhD from MIT.

2017-05-11T17:32:45+00:00 March 28, 2014|Adaptation, Decisions, Economics, Expertise, Organizational Culture and Learning|