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Heterodox Economics Newsletter

Issue 254 November 04, 2019 web pdf Heterodox Economics Directory

During public talks or in teaching contexts I am sometimes asked, whether there exists a clear-cut heterodox alternative to standard theories of individual economic decision-making. While there are some obvious responses to this question pointing to classic concepts - like social emulation of consumer preferences, consumption-learning, rent-seeking behavior, mark-up pricing or the marginal propensity to consume - many of these concepts operate on a systemic, rather than individual level, and are, hence, sometimes difficult to apply directly to individual decisions without invoking further assumptions. Similar issues can come up, when discussing the role of the ascent of behavioral economics and its impact on the development of economics in general (see also here or here for recent evaluations of this matter).

In such contexts it is, in my view, helpful to point out that a fuller heterodox theory of purposeful behavior does indeed exist. It has its roots in the early works of Herbert Simon, builds on "smart heuristics" and is sometimes dubbed 'ecological rationality' (for an introduction see here). It has been developed mainly in psychology and a key idea underlying this approach is that purposeful human action often employs mental shortcuts to approach complex phenomena, that are successful in application and, hence, evolutionary stable. A simple example is the physician's principle "do no harm" that shortly explicates some kind of MaxiMin decision rule. Another example, is Simon's idea of satisficing, which can be understood as a shortcut to circumvent costly/impossible procedures of optimization.

In my view, three major arguments can be made for embracing such a view. First, the concept of smart heuristics allows for deriving some of the more systemic heterodox arguments on behavioral patterns (e.g. marginal propensities to consume, cooperative attitudes or herd behavior).

Second, smart heuristics often allow for explaining many of the 'biases' found in conventional behavioral economics instead of simply 'recording' them as anomalies - indeed it makes the latter's modifications of standard utility functions sometimes look like epicycles in the Ptolemaic theory of celestial motion. For instance, in this vein the famous 'status quo bias' can be rationalized as a form of intuitive defense against fundamental uncertainty (as future incomes or belongings are discounted relative to those already owned).

Finally, a smart heuristics perspective provides conceptual alternatives, which has a twofold impact. For one, these alternative concepts help to illustrate how the tendency to frame findings in behavioral economics in terms of standard models contributes to an "assimilation" of behavioral ideas. For another, smart heuristics may also emerge from dealing critically with the inherent practical implications of the standard approach - e.g., when assuming fundamental uncertainty (e.g. here) or complex, multi-dimensional choice-options (e.g. here).

Hence, in sum I would argue that the smart heuristics approach can be seen as a highly useful complement to more established heterodox modes of analyzing behavioral patterns.

All the best,

Jakob

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