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Daniel Kahneman

Here are some high profile thinkers assessing the impact of DK especially in light of his accessible Thinking, Fast and Slow. Below is a encyclopedia entry I did on DK.

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Daniel Kahneman (b. 1934) is a social psychologist who, along with experimental economist Vernon Smith, shared the Nobel prize in economics for 2002. Though the prize was conferred upon Kahneman, it was in in effect recognition of the seminal work dubbed “prospect theory” that Kahneman formulated in collaboration with the late Amos Tvesky. Independently and jointly they were interested in studying the cognitive biases (and cognitive illusions) of intuitive thinking; of how minds actually operate in a social world shot through with limitations, complexity and contingency. Their research can be understood as a finer-grained and more technical explication of Simon’s “bounded rationality” pursuing three different, though not unrelated, lines of inquiry – heuristics, prospect theory and framing effects – that all came to be distilled in Kahneman (2011).

The “framing effect” connotes the idea that options are described in terms of gains (positive frame) rather than losses (negative frame) and under study, elicits systematically different choices. Prospect theory concerns the psychophysics of wealth utility: that is, the perceived tradeoffs between potential outcomes and the probability of some outcome occurring. Kahneman and Tversky reworked Bernoulli’s long established orthodoxy of wealth utility that supposedly explained loss aversion through quantifiable states of wealth. Instead, they took the view that by asking subjective questions rather than propositional (or abstract) questions regarding terms of loss and gain, they presented a richer explanation for loss aversion. They found that that though agents like winning and dislike losing, they in effect are orientated to dislike losing more.

Kahneman and Tversky (1979) initially articulated decisions under risk (as opposed to decisions under uncertainty) involving at most two non-zero outcomes. Later as cumulative prospect theory (1992) they accommodated decisions under uncertainty and risky conditions that employs cumulative, rather than separable decision weights with any number of outcomes.

Out of prospect theory grew Kahneman’s “two minds” thesis, summarized for a popular audience in his book Thinking, Fast and Slow. The title of the book connotes two fictional systemic ideal types or characters: fast thinking connotes the “on the fly” or “online” or automatic intuitive operation of the human perceptual and memory apparatus; slow thinking by contrast is “conscious,” deliberate, effortful, conceptual, analytical and propositional in character. Four things should be noted. The positing of these two systems should not lead one to any of the following inferences:

(a) that there is indeed a sharp duality and that ne’er the twain shall meet;
(b) that these two “systems” have definitive brain structure instantiations;
(c) that fast thinking is intrinsically irrational;
(d) that slow thinking is intrinsically rational.

In support of his thesis Kahneman’s presents a raft of empirically based puzzles, illusions and paradoxes illustrating our innate capacity for deluding ourselves and perhaps more importantly just about how little we know. Kahneman illustrates how heuristics or rules of thumb deployed to solve statistical problems can quite easily result in biased estimates and predictions. Respondents, when confronted with a problem to which they are unlikely to know the correct answer to, tend to allow their ruminations to be influenced by objectively irrelevant frames. Other heuristic tests showed that even if respondents receive all the information needed, it is not used correctly.

This said, it should be understood that Kahneman is not suggesting that agents are necessarily and irredeemably irrational – what he’s proposing is merely that one is alert to the supposedly infallible deliverances of intuition. Kahneman’s and Tversky’s work illustrated that neither the lay individual nor indeed even the expert in any knowledge community, are immune from systematic error. Given the vast scope of the “expertise industry” be within an academic or in a public life setting, Kahneman is viewed as highly controversial, not least in his own field of psychology where he has called for a more rigorous validation of priming effect studies.

See also: Anchoring; bounded rationality; ecological rationality; errors and biases; heuristics

Further Reading:

Kahneman, D., & Tversky, A. 1973. On the psychology of prediction. Psychological Review, 80, 237-25l.
Kahneman, D., & Tversky, A. 1974. Judgment Under Uncertainty: Heuristics and Biases. Science, New Series, Vol. 185, No. 4157: 1124-1131.
Kahneman, D., & Tversky, A. 1979. Prospect theory: An analysis of decisions under risk. Econometrica, Vol. 47, No. 2: 263-291.
Kahneman, D., & Tversky, A. 1992. Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5 (4): 297–323.
Kahneman, D. 2011. Thinking, Fast and Slow. Toronto: Random House.

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Herbert Simon

Since I missed marking the birth of Simon on the 15th, here’s a belated posting of an obituary by his student Edward A. Feigenbaum. (I’m pleased to report that my co-edited project with Roger Frantz commemorating the centenary of HS’s birth is coming together very nicely. HS’s daughter has been incredibly responsive towards the project).

Herbert A . Simon, winner of the 1978 Nobel Prize in Economics, died on 9 February at the age of 84. He was Richard King Mellon Professor of Computer Science and Psychology at Carnegie Mellon University. In an era when universities assiduously preserve the names of their new buildings for generous donors, the new Computer Science Building at Carnegie Mellon University is instead named for Simon and another renowned computer scientist, Allen Newell.

The hallmark of Simon’s remarkable career is the extent of his cross-disciplinary contributions: from economic theory to psychology to behavioral science to computer science. Before his Nobel Prize, Simon had already won the A. M. Turing Award, the top accolade for computer science, prompting computer scientists to refer to him as “our Nobel Prize winner.” But psychologists also awarded him their top honor, the Distinguished Scientific Contribution Award, and they too claimed him as their own.

As his graduate student, in awe of his enormous knowledge and the range of his contributions, I once asked him to explain his mastery of so many fields. His unforget-table answer was, “I am a monomaniac. What I am a monomaniac about is decision-making.” Studies and models of decision-making are the themes that unify most of Simon’s contributions.

He challenged the assumptions of mid- 20th century economic theory, the so-called Rational Economic Man model. This model assumed the omniscience of human decision-making: that humans recognize all of their possible choices and the consequences of selecting each. Simon, the empiricist, observed that Rational Economic Man does not exist. The cognitive ability of people to recognize alternatives and calculate optima is in fact quite limited. He argued that economics could not be built upon a foundation of assumptions concerning human behavior that were patently false.

As a substitute, he introduced assumptions of bounded rationality and the concept of “Satisficing” Man, who cannot maximize – or minimize because the computational demands of doing so are beyond his capability. Satisficing man makes choices that are satisfactory-good enough, rather than the best. In the early 1950s, Simon introduced his theory with two classic papers in which he argued that objects (real or symbolic) in the environment of the decision-maker influence choice as much as the intrinsic information-processing capabilities of the decision-maker. In his book The Sciences of theArtificial (1), with his usual expository skill, he made this idea easy to grasp. His metaphor was the ant on the beach: The ant makes her way from a starting point to a food source along an intricate path. But the path appears to be complex only because of the patterns of the intervening grains of sand, not because of any complex information-processing by the ant.

Collaborating with James March, Simon applied the search model of problem-solving to the study of how organizations make decisions and how they innovate. Their book, Organizations (2), is the foundation of modern organization theory. March, Richard Cyert, and others extended Simon’s theory to microeconomic phenomena in the influential book, A Behavioral Theory of the Firm (3).

Simon, the theorist, sought to give these abstractions a concrete expression from which precise predictions of human problem-solving behavior could be made. Simon tried using mathematics but found its lan-guage was not rich enough to express the complexity of the problem-solving processes he was attempting to model. With Allen Newell in 1955, he discovered the right economics language: the language of the digital computer. Newell, Simon, and J. C. Shaw of RAND invented a powerful programming language for describing complex symbol processing. They used their new language to model problem-solving processes such as proving theorems in logic. This marked the start of the field of artificial intelligence and Si-mon considered this contribution to be his finest. Many computer simulation programs of human cognition followed. Newell and Simon’s 1972 book, Human Problem Solving (4), is perhaps .- the most important book on the scientific study of human thinking in the 20th century.

For the last 25 years of his life, Simon continued to experiment and build computer models of cognition. He designed models of human expertise, scientific discov-ery (he modeled how certain historically great discoveries of science were actually made), and human memory. He worked for decades on models of the processes through which symbols are learned, recognized, retrieved, and forgotten.

If one were to read a single book that would encompass the essential Simon, I would suggest the slim volume The Sciences of the Artificial (1), written for a broad scientific audience. In an elegant and lucid way, Simon explains the principles of modeling complex systems, particularly the human in formation-processing system that we call the mind. There is no better epilogue for Herbert Simon than that imparted by one of his Carnegie Mellon University colleagues: As Herb Simon struggled to recover from complications of surgery a few days before his death, this author of nearly a thousand papers and 27 books finished a manuscript he was writing and gave instructions to his daughter about its publication.

References

1. H.A. Simon, The Sciences of the Artificial  [The Karl Taylor Compton Lectures] (MIT Press, Cambridge, MA,1969).

2. J. G. March, H. A. Simon, Organizations (Wiley, New York, 1958).

3. R.M. Cyert, J. G. March, A Behavioral Theory of the Firm (Prentice-Hall, Englewood Cliffs, NJ, 1963).

4. A. Newell, H. A. Simon, Human Problem Solving (Prentice-Hall, Englewood Cliffs, N J, 1972).

From: SCIENCE VOL 291 16 MARCH 2001

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Hayek and Behavioral Economics

Still on Hayek. Having just received my copy, I thought I’d give it another plug. My chapter Mindscapes and Landscapes: Hayek and Simon on Cognitive Extension is in this collection. The full line-up as follows:

Foreword; V. Smith

Introduction; R. Frantz & R. Leeson

Friedrich Hayek’s Behavioural Economics in Historical Context; R. Frantz

A Hayekian/Kirznerian Economic History of the Modern World; D. McCloskey

Was Hayek an Austrian Economist? Yes and No. Was Hayek a Praxeologist? No.; W. Block

Error is Obvious, Coordination is the Puzzle; P. Boettke, W. Caceres & A. Martin

Hayek’s Contribution to a Reconstruction of Economic Theory; H. Gintis

On the Relationships Between Friedrich Hayek and Jean Piaget; C. Chelini & S. Riva

Cognitive Autonomy and Epistemology of Action in Hayek’s and Merleau-Ponty’s Thought; F. Di Iorio

Hayek’s Sensory Order, Gestalt Neuroeconomics, and Quantum Psychophysics; T. Takahashi & S. Egashira

Mindscapes and Landscapes: Hayek and Simon on Cognitive Extension; L. Marsh

Hayek’s Complexity Assumption, Ecological and Bounded Rationality, and Behavioural Economics; M. Altman

Subjectivism and Explanations of the Principle; S. Fiori

Satisficing and Cognition; Complementarities between Simon and Hayek; P. Earl

The Oversight of Behavioural Economics on Hayek’s Insight; S. Rizzello & A. Spada

Complexity and Degeneracy in Socio-Economic Systems; G. Steel & H. Hosseini

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Inaugural Herbert Simon Society Conference

The Italian Cultural Institute of New York
The International Herbert A. Simon Society
The Italian Academy for Advanced Studies in America

cordially invite you to the

1st Conference Herbert Simon Society
BOUNDED RATIONALITY UPDATED
New York (USA), April 8th-10th 2013

8th-9th April
Italian Cultural Institute
686 Park Avenue, New York, NY 10065

10th April
The Italian Academy for Advanced Studies in America, Columbia University
1161 Amsterdam Avenue, New York, NY 10027

The Herbert A. Simon Society brings together some of the most important economists critical of contemporary economic models and aims at reformulating economic theory by starting with the many non-neoclassical directions that have been developed in recent years.This conference is focused on three themes that were identified as particularly relevant in order to apply Simon’s ideas in the contemporary debate: duality of mind, creativity, critics and alternative paradigms to rational expectations.

Welcoming Remarks
Natalia Quintavalle (Consul General)
Riccardo Viale (Director Italian Cultural Institute) and Massimo Egidi (Herbert Simon Society)

Introduction: Katherine Simon Frank

Lectures:
Gerd Gigerenzer: Homo Heuristicus: Why biased minds make better inferences
Roy Radner: Bounded rationality: In search of a definition
Alan Kirman: Is it rational to have rational expectations?
Ron Sun: On implicit vs. explicit and fast vs. slow processes
David Over: New paradigm psychology of reasoning and rationality
Laura Macchi: The interpretative function of thinking in insight problem solving
Jonathan Schooler: Keeping the mind open for inspiration
Joseph Stiglitz: Rethinking macroeconomics: What went wrong and how to fix it

Parallel sessions on:
Rational expectations, bounded rationality, markets and investments
Slow and fast thinking
Creativity and other stuffs

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Hayek and Behavioral Economics

My chapter Mindscapes and Landscapes: Hayek and Simon on Cognitive Extension is published in this collection today. The full line-up as follows:

Foreword; V.Smith
Introduction; R.Frantz & R.Leeson
Friedrich Hayek’s Behavioural Economics in Historical Context; R.Frantz
A Hayekian/Kirznerian Economic History of the Modern World; D.McCloskey
Was Hayek an Austrian Economist? Yes and No. Was Hayek a Praxeologist? No.; W.Block
Error is Obvious, Coordination is the Puzzle; P.Boettke, W.Caceres & A.Martin
Hayek’s Contribution to a Reconstruction of Economic Theory; H.Gintis
On the Relationships Between Friedrich Hayek and Jean Piaget; C.Chelini & S.Riva
Cognitive Autonomy and Epistemology of Action in Hayek’s and Merleau-Ponty’s Thought; F.Di Iorio
Hayek’s Sensory Order, Gestalt Neuroeconomics, and Quantum Psychophysics; T.Takahashi & S.Egashira
Mindscapes and Landscapes: Hayek and Simon on Cognitive Extension; L.Marsh
Hayek’s Complexity Assumption, Ecological and Bounded Rationality, and Behavioural Economics; M.Altman
Subjectivism and Explanations of the Principle; S.Fiori
Satisficing and Cognition; Complementarities between Simon and Hayek; P.Earl
The Oversight of Behavioural Economics on Hayek’s Insight; S.Rizzello & A.Spada
Complexity and Degeneracy in Socio-Economic Systems; G.Steel & H.Hosseini

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Herbert Simon as Behavioral Economist

Here is a draft of a co-authored entry for Real World Decision Making: An Encyclopedia of Behavioral Economics. Morris Altman, editor. Santa Barbara: Praeger.

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Herbert Simon in Red

Many of you who follow this website will know of my enthusiasm for Herbert Simon. Here is an unusual portrait of Simon painted by the very distinguished Richard Rappaport (wikipedia entry) that I chanced upon and for good measure, I include a link to Simon’s last interview.

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Hayek and Behavioral Economics: Mindscapes and Landscapes: Hayek and Simon on Cognitive Extension

I see that the publisher now has a fully detailed page up for a volume that I’ve been privileged to be a part of. The Foreword is by a very nice chappie going by the name of V.Smith and includes luminaries such as McCloskey, Boettke, Gintis, Steel and others. My abstract:

Mindscapes and Landscapes: Hayek and Simon on Cognitive Extension

Hayek’s and Simon’s social externalism runs on a shared presupposition: mind is constrained in its computational capacity to detect, harvest, and assimilate “data” generated by the infinitely fine-grained and perpetually dynamic characteristic of experience in complex social environments. For Hayek, mind and sociality are co-evolved spontaneous orders, allowing little or no prospect of comprehensive explanation, trapped in a hermeneutically sealed, i.e. inescapably context bound, eco-system. For Simon, it is the simplicity of mind that is the bottleneck, overwhelmed by the ambient complexity of the environmental. Since on Simon’s account complexity is unidirectional, Simon is far more ebullient about the prospects of explanation. Hayek’s social externalism functions as a kind of distributed “extra-neural” memory store manifest as dynamic spontaneous orders. Simon’s organizational rule-governed externalism negotiates the “inner” world (the mind) with the “outer” world through a homeostatic interface that offloads the cognitive burden into the environment. Their respective externalisms may differ in detail but not in spirit in that it ameliorates their shared presupposition of cognitive constraint. Even though any “optimization talk” for Hayek and Simon is objectionable, knowledge acquisition can be represented by a contextualized stigmergic swarm optimization algorithm that gives due emphasis to both the individual and the environment. The key insight is that “perfect” knowledge is unnecessary, impracticable and indeed irrelevant if one understands the mechanism at work in complex sociality, a stigmergic sociality that in effect augments or scaffolds cognition.