Bounded Rationality in the Digital Age

The fifteenth in a series of excerpts from Minds, Models and Milieux: Commemorating the Centennial of the Birth of Herbert Simon.

Peter E. Earl

One of the great tragedies in economics in the decades since Simon received the 1978 Alfred Nobel Memorial Prize in Economic Sciences is that the uptake of his ideas within the discipline has been either poor or in a partial manner that does not properly capture his vision (as with mainstream models purporting to address bounded rationality). In this chapter I begin by trying to make sense of this situation and then argue that the digital revolution is making it more imperative than ever that economists take up Simon’s key ideas – not merely his satisficing view of choice in the face of bounded rationality but also his thinking on artificial intelligence and the evolutionary roles of altruism and system design. The modern economy is undergoing supply side upheavals at the heart of which lie the issues of programmability and modularity. On the demand side, buyers now have to contend with choice problems of extraordinary complexity, whose solutions increasingly rely on social inputs.

A recurrent theme in what follows is that, in the digital age, Simon’s (1991, pp. 306–7) Travel Theorem takes on a wider significance. He set out the Theorem with reference to what one can hope to learn about something in a good public library, as opposed to making a journey to study it at first-hand for a short period (for example, as a tourist or business consultant). His contention was that if information is all one hopes to obtain, being there is far less efficient that trying to gather it remotely. Hence, if journeys are actually undertaken, they are/should be for reasons other than the gathering of information. In the world of the Internet, the webcam, smartphones, Skype, virtual reality experiences, and so on, Simon’s Travel Theorem provides a powerful starting point for asking questions about motivation and economic organisation.