Projects / Programmes
Bounded rationality and economic performance
| Code |
Science |
Field |
Subfield |
| 7.00.00 |
Interdisciplinary research |
|
|
| Code |
Science |
Field |
| S180 |
Social sciences |
Economics, econometrics, economic theory, economic systems, economic policy |
| Code |
Science |
Field |
| 5.02 |
Social Sciences |
Economics and Business |
Economic decision-making, bounded rationality, laboratory experiments, mathematic modelling, behavioral evolution, cultural specifics
Researchers (7)
Organisations (3)
Abstract
The standard models of economic behaviour assume selfish and rational choice. Traditionally these assumptions were seen sufficient to explain market dynamics. Recent experimental research as well as the empirical evidence from financial markets have not supported of the standard economic model, however. This has now led to the relaxation of the selfishness assumption in the economic theory. The model of rational choice has remained rather unchallenged, however, despite the extreme conditions it assumes from human cognition. One reason for its persistence is the lack of empirical evidence about its limits in economic environments.
Here we propose to empirically test the idea that in complex economic environments humans resort to simple heuristics to make decisions. In particular, a sequence of laboratory experiments with human subjects will be developed with the aim to detect (i) when do people use simple rules of thumb rather than rational optimization, (ii) the distribution of these rules in different populations, and (iii) whether simple rules spread by means of learning, imitation or best response. The focus will be on environments in which trust, cooperation and reputation are necessary to achieve efficiency, attending the classic economic problems of asymmetric information and incomplete contracts.
Using our empirical method, we will achieve the following objectives:
1. Determine the conditions behind the shift from rational to heuristic decision making.
2. Determine the roles of institutions and culture on the use of heuristics.
3. Use empirical evidence to develop models of behavioural adaptation in market environments.
We will conduct economic laboratory experiments with human subjects, which will enable a candid insight into the details of (boundedly) rational decision making. In order to investigate the institutional and cultural determinants of behavioural rules we will replicate baseline experiments in Slovenia, Netherlands and Serbia, which have or used to have a similar institutional environment. We will use the methodology of evolutionary game theory to investigate the dynamics of behavioural rules and how they adapt to institutional change. The novelty of our research is to base the dynamic models on the actual strategies detected in our experiments, rather than on abstract assumptions.
The main applicant, dr. Aljaž Ule, has a proven research record in both experimental economics and in game theoretic modelling, based on his tenure at the major economic laboratory at the University of Amsterdam. His expertise will be complemented by two teams, one at the Faculty of Mathematics, Natural Sciences and Informatics (Famnit) at the University of Primorska and another at the Institute of Anthropological and Spatial Studies at ZRC SAZU in Ljubljana. The Famnit team will contribute experts in data analysis and evolutionary modelling. The ZRC team will contribute experts in cultural research in the Balkans. The main experiments will be conducted in collaboration with the CJM center at the Faculty of Social Sciences at the University in Ljubljana.
Significance for science
The results of the 50 years of economic laboratory experiments with human subjects suggest that people systematically violate the assumptions of classical economic theory. In particular, they demonstrate the limitations of the idea of ??methodological individualism, which is expressed in economic theory through the assumptions of selfish and rational maximization of one's own benefit. Previous research has focused mainly on the tests of the assumption of selfishness. Over the past two decades, people were shown to not unconditionally maximize their financial gains. These discoveries have translated to modern economic models of decision-making, which for example now include the possibility of altruistic preferences. On the other hand, much less attention is given to the second economic premise about the rationality of decision-making. Despite some initial evidence about human bounded rationality, it is not yet part of economic theory. There are two main reasons for this. First, there are insufficient data on the causes, triggers and types of limited rationality. Second, the existing models of bounded rationality are mathematically too demanding for practical application in economic theory and practice. The results of our project are useful primarily in the development of decision-making theories, which, instead of rational consideration, assume the role of simple behavioral strategies, or heuristics. In laboratory experiments with human subjects we investigated the conditions under which people rely on heuristics and analyze which heuristics they use in various short-term or long-term interactions. Using evolutionary approaches and game theory, we developed mathematical models of dynamics, stability, and the extinction of strategies in populations. Our research has shown that people in economic environments with common individual interests most often make decisions that are rational for the group. Since economic models are based solely on the rationality of the individual, these results propose a new direction for the future development of the theory. Our research has also shown that people in environments with a conflict between the interests of individuals and the interest of the group, use behavioral strategies of varying complexity. This is important both from the point of view of economic theory, which presupposes that people use the best strategy regardless of its complexity, and from the evolutionary view of behavior, which assumes the advantage of less complex strategies. Our results do not support either of these views, but suggest a more complex connection between limited rationality, learning and adaptation of behavioral strategiest that drive economic decisions.
Significance for the country
The 2017 Nobel Prize for Economic Sciences was awarded to Richard Thaler for his work on the application of economic behavioral findings in economic policies. Although this award was awarded already in the years 2002 and 2012 for the development and results of behavioral and experimental economics, this was the first time the reward exposed how economic experiments can help changing the behavior of individuals, groups or companies. The spread and visibility of public agencies for behavioral research within the various governments around the world also demonstrate that this is an extremely important research and public area. The Behavioral Insights Team (BIT) in UK already employs 126 researchers who advise various government institutions around the world on how to progress public welfare, efficiency, sustainability and health through small steps. Despite the importance of the field and even though the economic laboratory experiments have been carried out since the 1970s, the field did not develop in Slovenia, with the exception of the occasional experiment ran there by researchers from foreign universities. With our project we wanted to set up behavioral economics in Slovenia, as a research, pedagogical and an applied scientific field. In 2016 we opened the first Slovenian laboratory dedicated to behavioral experiments in economics and game theory (Laboratory for Empirical Game Theory, LETI) and have by now conducted five laboratory experiments with human subjects. Best practices and methods were also transferred to the University of Ljubljana, where we conducted a series of experiments at the Faculty of Social Sciences (FDV) in Ljubljana. Besides the project leader, one other member of the project team and one masters student, who has now become a young researcher at the LETI laboratory at the University of Primorska, trained to independently run laboratory experiments. Behavioral insights into game theory and economics were included in the curricula of Biopsychology, Mathematics, Computer Science and Economics programs at the University of Primorska. All students of these programs attend an obligatory series of experiments, as a tool to teach about the laboratory approach to the analysis of social behavior. One of the laboratory experiments within the project compares the decisions of Slovene and foreign students in a number of economic environments. Among other things, we compared Slovenian and foreign students with regard to the levels of solidarity, trust, cooperation, reciprocity, risk taking, truthfulness and superstition. With this, we developed a more direct way of measuring public attitutdes, and an alternative to hypothetical questions used in public surveys.
Most important scientific results
Annual report
2014,
2015,
final report
Most important socioeconomically and culturally relevant results
Annual report
2014,
2015,
final report
