Sublime Simon: The consistent vision of economic psychology's Nobel laureate

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Abstract

This essay contains a study of some of Herbert Simon's ideas, with particular emphasis on the role of bounded rationality in Simon's thinking and his contributions to economics and psychology. I describe Simon's visions for challenging rational choice theory, through limited rationality, and for bringing psychology into economics, putting this in perspective by describing the evolution of some of this thoughts, focusing on the continuity in his work.

Introduction

Herbert Simon died on 9 February 2001, aged 84. The first draft of this article was prepared shortly before his unexpected death and the present version is offered, with great sadness, as tribute to him. It combines a review of Simon's career where this related to the economics and psychology interface, and a review of his most recent book An Empirically Based Microeconomics (1997, Cambridge: Cambridge University Press, XI, 223 pages. Cloth, $59.95, ISBN: 0-521-62412-6). This combination serves to illustrate the remarkable continuity in his work and his consistent interest in the relationship between economics and psychology.

Simon is a key figure in the history of 20th century social sciences and his work has had lasting effects upon economics, psychology, organization theory, political science, management research, computer science, cognitive science, as well as other fields. In this essay, I focus on Simon's attempt to bring psychology into economics and into the understanding of decision making, via the introduction of the concept of bounded rationality. From his early work and throughout his life, Simon felt that only by employing more psychological research into economic questions relating to the understanding of decision making would we be able to make empirically valid statements about human behavior. Recently, a cross-fertilization has evolved in economics and psychology that goes long way toward confirming Simon's original concerns with regard to bounded rationality and the relations between psychology and economics (Conlisk, 1996, Earl, 1990, Lewin, 1996, Lunt, 1996, Simon, 1982b). In this literature it is recognized that rationality is essentially a psychological notion, and attempts are made to make economics more psychologically realistic. This has much in common with Simon's belief that economics, by bringing in more psychology will be able to advance its understanding of human decision making and to understand the psychological limits to rationality in economics (Simon, 1982b). Furthermore, the evolving field of economic psychology (Earl, 1990; Warneryd, 1988) emphasizes, as did Simon (1982b), the common ground of interest between economics and psychology. A detailed examination of this common ground seems likely to be advanced by examining in some detail Simon's thoughts on the interactions between economics and psychology. However, it is noteworthy that articles in this journal have paid rather little attention to Simon's work. Exceptions include Guth (2000), Lunt (1996), Wakeley (1997) and Witteloostuijn (1988). Few of these authors use more than one or two of Simon's contributions, and (with the possible exception of Lunt, 1996) have little to say about the potential of his work for the field of economic psychology.

The hope that the field of economic psychology will recognize the potentials in Simon's work for their agenda is one major motivation for this essay. The second, and equally important, motivation is to show that his work is characterized by a remarkable continuity. Whereas Simon is the only Nobel Prize-winning economist who was (and was at the time of the Prize) affiliated with a psychology department, his interest continued to be much broader than disciplinary boundaries allow. His movement from the Graduate School of Industrial Administration (GSIA) to the Psychology Department at Carnegie Mellon University marked a recognition that in order to analyze human decision making it was necessary to take more psychological factors into account (see, for example, Simon, 1982b). But this did not mean a significant change in Simon's research agenda. Starting with some of his most important contributions to the behavioral analysis of rational choice (Simon, 1955, Simon, 1956a), Simon appealed to psychology and cognitive science in order to understand how people behave and make decisions (whether it is called `decision making' or `problem solving'). Through his life, this overall research question brought him to economics, to political science, to management theory, to organization theory, to social psychology, to cognitive psychology, to organization theory, to game theory, and to computers.

This essay attempts to give a historical account of some of Herbert Simon's contributions to economics and psychology, and his introduction of bounded rationality. Simon's ideas of bounded rationality have important implications on both economics and psychology. In economics, bounded rationality challenged the assumptions of neoclassical ideas on maximization; in psychology, bounded rationality has been very important in the cognitive science-critiques of behaviorism as it was used in experimental psychology (Feigenbaum, 1989; Newell, 1989a). In what follows I will draw attention to the continuity in Simon's work and argue that his better-known work in psychology, such as Human Problem Solving (Newell & Simon, 1972), was a natural extension of his earlier work on decision making (1955, 1956a) and organizational behavior (March & Simon, 1958).

The next sections introduce some main themes associated with Simon, such as the need for bounded rationality and the links between economics and psychology. These discussions provide a historical frame for Simon's introduction of these significant ideas and for a discussion his latest work. Specifically, 2 Early years, early ideas, 3 Introducing bounded rationality, 4 Further representations of bounded rationality: Computers, cognitive science and artificial intelligence will describe Simon's visions for understanding human decision making, while also attempting to provide an understanding of Simon himself and the evolution of Simon's ideas. It turns out that understanding Simon is not all that simple. The fact that he crossed disciplinary boundaries in his research might lead some to conclude that Simon moved significantly, from political science, organization theory, to economics, and finally to computer science and psychology through his career (Mirowski, 2001). But I will instead suggest that Simon during the years used elements of different disciplines in order to understand the same overall problem of human decision making. Following his research question on how to understand human behavior, Simon crossed disciplinary boundaries and used different theoretical tools for addressing different parts of the overall problem. My basic conclusion is that a substantial part of Simon's work over the past 50 years can be seen as reflecting his continuous interest in the science of decision making. Furthermore, his contributions to computer science and artificial intelligence can be seen as a natural extension of his economics and organization theory research and they are centered on the same overall problem, despite the disciplinary boundaries. I will illustrate this by reviewing his latest book in Section 5 and discuss Simon's views on the evolution of some ideas central in economics, before summarizing my discussions in the conclusion.

Section snippets

Early years, early ideas

`Once upon a time when the world was young,

Oh, best beloved.

There came to the banks of the Monongogo river,

All muddy and brown,

Oh best beloved,

A Djinn who was one thing on the inside

But many things on the outside' (Newell, 1989b, p. 443).


Herbert Simon was born in 1916 in Milwaukee, Wisconsin, and educated in political science at the University of Chicago. He held research and faculty positions at the University of California (Berkeley), Illinois Institute of Technology, and, since 1949,

Introducing bounded rationality

`And he camped by the banks of the Monongogo river,

All muddy and brown,

Oh best beloved.

And he stayed and stayed and never went away' (Newell, 1989b, p. 443).


Herbert Simon graduated in political science because he did not want to take the accounting course that was a requirement for graduating in economics (cf. Simon, 1991b, p. 39). His major in political science was public administration and he had strong training in economics in addition to a strong vision of applying mathematics to the study

Further representations of bounded rationality: Computers, cognitive science and artificial intelligence

`He had many hands, each hand with many fingers,

Oh best beloved.

More hands and fingers than you and I.

More hands than you have fingers,

More fingers on each hand than you have toes' (Newell, 1989b, p. 443).


Following naturally from his interest in boundedly rational decision making, outlined in the early (1955, 1956a) papers, Simon continued to work on parallel and complementary projects during the 1950s and 1960s. For example, by 1954, Simon had already begun working on understanding the

An example of Simon's later work: An empirically based microeconomics

Simon opens this book by offering a reflection upon the evolution of the idea of rationality, beginning with Adam Smith. Simon argues that Smith was in fact one of the first to bring attention to the essential psychological aspects of rationality. As Simon notes, Smith does not use the term rationality in his writings. Rather, rationality in Smith means `having reasons for what you do' (p. 6). This is very consistent, Simon notes, with his own views on rationality and his ideas on the

Closing

`Each hand played a tune on a magic flute

Oh best beloved.

And each was a tune for a separate dance,

And each was heard in a separate place,

And each was heard in a separate way,

And each was merged in the dance it swayed.

But it was still all the same tune,

For that was the magic of the Djinn' (Newell, 1989b, p. 444).


Simon reports in autobiography that he began his class in 1956 with the statement, referring to a discovery made on December 16, 1955: `Over the Christmas holiday, Newell and I invented

Acknowledgements

I am very grateful for Herbert Simon's time and efforts in commenting on my work for this essay, and in answering many questions. Some of the discussions in the following draw on work done in preparing (with Professor Simon) a book based on his correspondence, but Professor Simon should not be held responsible for opinions and interpretations in this essay. I am grateful to Peter Earl, Edward Feigenbaum, Brian Loasby, James G. March, and Oliver Williamson for helpful comments and suggestions

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