nep-cbe New Economics Papers
on Cognitive and Behavioural Economics
Issue of 2005‒07‒11
six papers chosen by
Marco Novarese
Universita del Piemonte Orientale

  1. From Bounded Rationality to Behavioral Economics By Massimo Egidi
  2. The Entrepreneurial Theory of the Firm and the Theory of the Entrepreneurial Firm By Richard N. Langlois
  3. Some Remarks on Convention in Keynes's Economic Thinking By Elke Muchlinski
  5. Is It Culture or Democracy? The Impact of Democracy, Income, and Culture on Happiness By Justina Fischer; GEBHARD KIRCHGÄSSNER; DAVID DORN; ALFONSO SOUSA-POZA
  6. An explorative analysis of the links between learning behavior and change orientation By Sluis, Lidewey van der; Caluwe, Leon de; Nistelrooij, Antonie van

  1. By: Massimo Egidi (CEEL University of Trento)
    Abstract: The paper provides an brief overview of the “state of the art” in the theory of rational decision making since the 1950’s, and focuses specially on the evolutionary justification of rationality. It is claimed that this justification, and more generally the economic methodology inherited from the Chicago school, becomes untenable once taking into account Kauffman’s Nk model, showing that if evolution it is based on trial-and-error search process, it leads generally to sub- optimal stable solutions: the ‘as if’ justification of perfect rationality proves therefore to be a fallacious metaphor. The normative interpretation of decision-making theory is therefore questioned, and the two challenging views against this approach , Simon’s bounded rationality and Allais’ criticism to expected utility theory are discussed. On this ground it is shown that the cognitive characteristics of choice processes are becoming more and more important for explanation of economic behavior and of deviations from rationality. In particular, according to Kahneman’s Nobel Lecture, it is suggested that the distinction between two types of cognitive processes – the effortful process of deliberate reasoning on the one hand, and the automatic process of unconscious intuition on the other – can provide a different map with which to explain a broad class of deviations from pure ‘olympian’ rationality. This view requires re-establishing and revising connections between psychology and economics: an on-going challenge against the normative approach to economic methodology.
    Keywords: Bounded Rationality, Behavioral Economics, Evolution, As If
    JEL: C9
    Date: 2005–07–08
  2. By: Richard N. Langlois (University of Connecticut)
    Abstract: The entrepreneurial theory of the firm argues that entrepreneurship, properly understood, is a crucial but neglected element in explaining the nature and boundaries of the firm. By contrast, the theory of the entrepreneurial firm presumably seeks not to understand the nature and boundaries of “the firm†in general but rather to understand a particular type of firm: one that is entrepreneurial. This paper is an attempt to reconcile the two. After briefly delving for the concept of entrepreneurship in the work of Schumpeter, Kirzner, and (especially) Knight, the paper makes the case for the entrepreneurial theory of the firm. In such a theory, the firm exists as the solution to a coordination problem in a world of change and uncertainty, including Knightian or structural uncertainty. Taking a historical or developmental perspective, the paper then examines the changing nature of the entrepreneurial coordination problem over the life-cycle. In this formulation, “the entrepreneurial firm†is a nascent firm or proto-firm facing a problem of coordinating systemic change in economic capabilities. Lacking (by definition) adequate guidance from existing systems of rules of conduct embedded in markets or organizations, the entrepreneurial firm typically relies on a form of organization Max Weber called charismatic authority. In the end, although there is no such thing as a non-entrepreneurial firm, firms that must solve coordination problems in a world of novelty and systemic change ("entrepreneurial firmsâ€) are perhaps the purest case of the entrepreneurial theory of the firm.
    Keywords: entrepreneurship, transaction costs, coordination, Coase, Knight, Schumpeter, Weber.
    JEL: B25 L22 M13
    Date: 2005–06
  3. By: Elke Muchlinski (Free University of Berlin, Department of Economics)
    Abstract: The purpose of this paper is to explain why Keynes revolutionized economic theory. He developed an epistemological approach to economic theory by integrating the categories of knowledge, ignorance, rational degree and precariousness. He abandoned constructivism because he rejected empty concepts as dry dones. He also left empiricism and realism behind since he needed to discuss his categories as a priori principles. He viewed bivalent logic as inadequate for his purpose to find solutions on economic problems. To defend his view of uncertainty inherent in all economic decisions he relied on the concepts of degree of credibi¬ity, degree of confidence and conventional judgement. His economic theory can be interpreted as an integrative approach to applied economics.
    Keywords: Epistemology, mental mapping, decision making under uncertainty
    JEL: A12 B22 D81 D83
  4. By: Luigi Guiso (Università degli Studi di Sassari); Monica Paiella (Bank of Italy)
    Abstract: We use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay to buy a risky asset. We relate this measure to a set of consumers’ decisions that in theory should vary with attitude towards risk. We find that elicited risk aversion has considerable predictive power for a number of key household decisions such as choice of occupation, portfolio selection, moving decisions and exposure to chronic diseases in ways consistent with theory. We also use this indicator to address the importance of self-selection when relating indicators of risk to individual saving decisions.
    Keywords: risk aversion, heterogeneous preferences, choice under risk, entrepreneurship, self selection.
    JEL: D1 D8
    Date: 2005–02
    Abstract: We look at the relation between democracy and perceived subjective well-being, taking also into account the impact of income and culture. After briefly reviewing the empirical results for Switzerland, we re-estimate this relationship allowing for the relative income position of individuals and also using a new more recent data from the Swiss Household Panel. No robust relationship between the extent of (direct) democracy and happiness can be observed. In a second step, we conduct a cross-national analysis, covering 28 countries with data from the 1998 International Social Survey Programme (ISSP). There we observe a robust positive and significant relationship between democracy and happiness.
    JEL: I31 H10
    Date: 2005–06
  6. By: Sluis, Lidewey van der (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Caluwe, Leon de; Nistelrooij, Antonie van
    Abstract: The article presents an explorative study on the links between learning behavior and change orientation of individuals. When reading literature on how to develop employees and organizations, it strikes one how less focus there is on learning and change needs of individuals. This paper deals with this missing notion by detecting the learning behavior of employees and the change orientation of individuals in organizations. We explored the interconnections between these two individual developmental characteristics. From our pilot study can be suggested that learning behavior and change orientation are linked with eachother based on two distinguished dimensions; a prospective orientation and a reflective orientation. We argue that managing learning or change in organisations should be in line with the dominant learning and change orientations of the employees. Given the need for a reflective change program, interventions should be made to stimulate learning behavior and thinking about change in the direction of reflection. The same holds for situations in which there is a need for a prospective change program. Based on these insights, the article outlines a research agenda and researchable questions in the field of learning and change in organizations.
    Keywords: Learning behaviour; Change orientation; Organization development
    Date: 2005

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