Skip to main content
Log in

Bounded Rationality of Economic Man: Decision Making under Ecological, Social, and Institutional Constraints

  • Standards Studies
  • Published:
Journal of Bioeconomics Aims and scope

Abstract

Neoclassical economic theory is implicitly based on the assumption of atomistic individuals living in anonymous societies, unconnected to other individuals by kinship, ethnic, friendship or other social ties. Furthermore, neoclassical economic theory is based on a model of rational, omniscient individuals operating in a zero transaction costs world of perfect markets without institutions. In the last forty years or so, New Institutional Economics (NIE) have criticized Neoclassical economics and have incorporated concepts of bounded rationality, transaction costs, and uncertainty. Neoclassical economic theory has also been challenged by behavioral studies of decision-making showing that cognitive constraints lead to various decisional biases and judgmental errors. However, similar to neoclassical economic theory, behavioral models of risky choice have largely ignored environmental variables such as social structure (group size, group composition, etc.) and institutional infrastructure (the formal and informal ‘rules of the game’). In this paper, we show how social structure and institutions serve as important constraints influencing rational choice in risky situations. Wang’s experimental work shows that a famous ‘cognitive illusion’ called framing effects disappear when kinship relations, the smallness of group size, and group homogeneity are taken into account. These empirical findings are explained in a framework of ‘Bounded Risk Distribution’. Landa’s NIE theory of the ethnically homogeneous Chinese middleman group, based on fielwork, shows that in an environment characterized by contract uncertainty, hence positive transaction costs traders choose their trading partners along kinship and other particularistic basis, a phenomenon not predicted by Neoclassical theory of exchange. Our paper shows that economic and descriptive psychological risky choice theories of decision-making need to take into account the social and institutional environment: the boundly rationality of economic man is influenced by the social contexts in which he makes decisions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

References cited

  • Axelrod, Robert & William D. Hamilton. 1981. The evolution of cooperation in biological systems. Science 211:1390–96. Pp. 88–105 in R. Axelrod, The Evolution of Cooperation. Basic Books, Inc., Publishers, New York.

    Google Scholar 

  • Brunswik, Egon. 1940. Thing constancy as measured by correlation coefficients. Psychological Review 47:69–78.

    Article  Google Scholar 

  • Carr, Jack L. & Janet T. Landa. 1983. The economics of symbols, clan names and religion. Journal of Legal Studies 12:15–156.

    Article  Google Scholar 

  • Frey, Bruno S. & Reiner Eichenberger. 1989. Anomalies and institutions. Journal of Institutional and Theoretical Economics 145:423–437.

    Google Scholar 

  • Gigerenzer, Gerd & Peter Todd & the ABC Research Group. 1999. Simple heuristics that make us smart. Oxford University Press, Oxford.

    Google Scholar 

  • Hamilton, William D. 1964. The evolution of social behavior. Journal of Theoretical Biology 7:1–52.

    Article  Google Scholar 

  • Holland, John H. 1975. Adaptation in natural and artificial systems. University of Michigan Press, Ann Arbor.

    Google Scholar 

  • Kahneman, Daniel, Paul Slovic & Amos Tversky. (ed.) 1982. Judgment under uncertainty: Heuristics and biases. Cambridge University Press, New York.

    Google Scholar 

  • Kahneman, Daniel & Amos Tversky. 1979. Prospect theory. Econometrica 47:263–292.

    Article  Google Scholar 

  • Knauft, Bruce M. 1991. Violence and sociality in human evolution. Current Anthropology 32:391–428.

    Article  Google Scholar 

  • Landa, Janet T. 1978. The economics of the ethnically homogeneous Chinese middleman group: a property rights-public choice approach. Unpublished Ph.D. dissertation, Virginia Polytechnic Institute & State University.

  • Landa, Janet T. 1981. A theory of the ethnically homogeneous middleman group: an institutional alternative to contract law. Journal of Legal Studies 10(2):349–362.

    Article  Google Scholar 

  • Landa, Janet T. 1988. Underground economics: generic or sui generis? Pp. 76–103 in J. Jenkins (ed.) Beyond the Informal Sector: Including the Excluded in Developing Countries, ICS Press.

  • Landa, Janet T. 1994. Trust, ethnicity, and identity: beyond the new institutional economics of ethnic trading networks, contract law, and gift-exchange. University of Michigan Press, Ann Abor.

    Google Scholar 

  • Landa, Janet T. 1997. Cognitive and classificatory foundations of trust and nformal institutions: a new and expanded theory of ethnic trading networks. Conference paper. Forthcoming in F. Salter (ed.) 2002. Risky Transactions: Trust, Kinship, and Ethnicity. Berghahn Books, Oxford.

    Google Scholar 

  • Lee, Richard B. & Irven DeVore (ed.) 1968. Man the hunter. Aldine, Chicago.

    Google Scholar 

  • Luce, Duncan R. 1992. Where does subjective expected utility fail descriptively? Journal of Risk and Uncertainty 5:5–27.

    Google Scholar 

  • Luce, Duncan R. & Howard Raiffa. 1957. Games and decisions. Wiley, New York.

    Google Scholar 

  • McNamara, John M. 1996. Risk-prone behaviour under rules which have evolved in a changing environment. American Zoologist 36:484–495.

    Google Scholar 

  • Miller, George A. 1956. The magical number seven, plus or minus two: some limits on our capacity for processing information. Psychological Review 63:81–97.

    Article  Google Scholar 

  • Reynolds, Vernon. 1973. Ethology of social change. Pp. 467–480 in C. Renfrew (ed.) The Explanation of Culture Change: Models in Prehistory, University of Pittsburgh Press, Pittsburgh.

    Google Scholar 

  • Savage, L.J. 1954. The foundations of statistics. Wiley, New York.

    Google Scholar 

  • Simon, Herbert A. 1956. Rational choice and the structure of the environment. Psychological Review 63:129–138.

    Article  Google Scholar 

  • Simon, Herbert. A. 1987. Rationality in psychology and economics. Pp. 25–40 in R.M. Hogarth & M.W. Reder (ed.) Rational Choice: The Contrast between Economics and Psychology. University of Chicago Press.

  • Simon, Herbert A. 1990. A mechanism for social selection and successful altruism. Science 250:1665–1668.

    Google Scholar 

  • Todd, Peter. 2000. The ecological rationality of mechanisms evolved to make up minds. American Behavioral Scientist 43:940–956.

    Article  Google Scholar 

  • Trivers, Robert L. 1971. The evolution of reciprocal altruism. Quarterly Review of Biology 46(4):35–57.

    Article  Google Scholar 

  • Tversky, Amos. 1969. Intransitivity of preferences. Psychological Review 76:31–48.

    Article  Google Scholar 

  • Tversky, Amos & Daniel Kahneman. 1981. The framing of decisions and the psychology of choice. Science 211:453–458.

    Google Scholar 

  • Tversky, Amos & Daniel Kahneman. 1986. Rational choice and the framing of decisions. Journal of Business 59:S251–S278.

    Article  Google Scholar 

  • Von Neuman, John & Oskar Morgenstern. 1947. Theory of games and economic behaviour. 2nd ed. Princeton University Press, Princeton.

    Google Scholar 

  • Wang, Xiao Tian (XT). 1996a. Domain-specific rationality in human choices: violations of utility axioms and social contexts. Cognition 60:31–63.

    Article  Google Scholar 

  • Wang, Xiao Tian (XT). 1996b. Framing effects: dynamics and task domains. Organizational Behavior and Human Decision Processes 68:145–157.

    Article  Google Scholar 

  • Wang, Xiao Tian (XT). 2002. Risk as reproductive variance. Evolution and Human Behavior 23:35–57.

    Article  Google Scholar 

  • Wang, Xiao Tian (XT), Frederic Simons & Serge BreÂdart. 2001. Social cues and verbal framing in risky choice. Journal of Behavioral Decision Making 14:1–15.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Rights and permissions

Reprints and permissions

About this article

Cite this article

Landa, J.T., Wang, X.T.(. Bounded Rationality of Economic Man: Decision Making under Ecological, Social, and Institutional Constraints. Journal of Bioeconomics 3, 217–235 (2001). https://doi.org/10.1023/A:1020597813814

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1020597813814

Navigation