What Is Bounded Rationality?

Bounded rationality refers to the rationality under a certain limit between complete rationality and incomplete rationality. Bounded rationality is the rational behavior under the condition of simplifying the decision variables in order to grasp the essence of the problem. The concept of bounded rationality was originally proposed by Arrow, and he believed that bounded rationality was human behavior "that is, conscious geographical, but this rationality is limited."

Bounded rationality

(Economic theory)

The main advocates of the concept of "bounded rationality" are

Since the 1980s, several research directions have begun to touch the essence of the concept of bounded rationality. Game theory economists have long used

We use several examples to illustrate the concept of Walrasian sequential equilibrium. First of all. Look at the establishment and development of McDonald's chain stores. Before the establishment of McDonald's chain stores, the price of restaurants was quite high. At that time, the market demand for restaurants also seemed to be comparable to the supply. If the price of the restaurant service is slightly reduced (in economic terms, it is adjusted marginally), the profit will be reduced. Therefore, using traditional economics to guide decision-making will lead to the conclusion that the market is in equilibrium and profits have been maximized, and more restaurants or large-scale price reductions will only cause losses. However, when the founder of the McDonald's chain store thought that there might be another market equilibrium, in this equilibrium, the price of restaurant services is much lower than existing restaurants, so many people will reduce the number of times they cook, and increase the professional restaurant Due to the expansion of the production scale and the deepening of internal specialization in professional restaurants, the cost of services can also be reduced on a large scale, so large-scale price reductions will also be profitable. In this way, the founders of McDonald's did not price information at the marginal adjustment information of the market at that time, but set the price at a very low level that ordinary people can often go to the restaurant. McDonald's set the goal for large-scale operations from the beginning, using the contract form of the chain store to organize the division of labor between the headquarters and the branches, so that professional planning management, restaurant design, raw material procurement, advertising into the headquarters' specialized departments. As a result, this 'organizational innovation' has become one of the greatest business successes of this century. Traditional economics is completely powerless in analyzing the mysteries of this type of 'organizational innovation'. The reason is that the marginal analysis of traditional economics is based on the optimal decision of the interior point,

And when the decision is changed from one corner to another, it will cause discontinuous and large jumps in output and prices, so the marginal adjustment cannot provide the information required for optimal decision at all.

To get all the information they need to make a decision, they have to experiment with all the different corners. On the one hand, this means that organizational experimentation generates risks, and success or failure cannot be as certain as marginal regulation: on the other hand, tests must be a jump from one organizational structure to another completely different structure, not just marginal regulation. This means that many bankruptcy cases are actually the organizational experiments that people need to obtain decision information. The contribution of bankrupt entrepreneurs is not necessarily lower than that of successful entrepreneurs. In this process of organizational experimentation, success is largely a matter of chance. If everyone has to wait until they are fully confident before experimenting with a non-existent organization, people will never get the information they need to make decisions. . If a considerable part of the population tries to experiment with various organizational structures (different corners) without full confidence, many different corners will be tested, most of which are certainly not optimal structures, and bankruptcy Provides information on optimal structures that enable successful organizations to be imitated and developed.

So, looking at the economically developed United States, we can see that it has one of the highest bankruptcy rates. This shows that many entrepreneurs take risks to experiment with different organizations, so the probability of successful organizations will rise. The development of the legal person system and the stock market has dispersed the risks of this type of organizational experimentation, thus accelerating the development of organizational experimentation and entrepreneurship. From this point of view, the society should attach great importance to and give due respect to the experience of failed companies, and should not simply equate economic theory with success.

This example shows that entrepreneurs must use a lot of capital to conduct organizational experiments. Because the new corner equilibrium does not exist in the existing market, and people generally only trust the information provided by the marginal regulation of the existing market, the entrepreneur has to convince people to go with him to carry out this risky organizational experiment. Money led them out. Once the new corner equilibrium is inferior to the existing equilibrium, the investment will be lost. Therefore, capital and risk are two indispensable characteristics of organizational experimentation. This view of capital is very different from that of traditional economics. In traditional economics, capital is a resource required for production. The more resources there are, the more output there is. And use the corner analysis method to look at capital. Our optimal decision-making on the economy depends on our information on the organization, but this information depends on sufficient organization experiments, and the organization experiments are to use money to attract people to work with entrepreneurs. The cost of this experiment It is capital, and the return of capital is the money made through the information about the organization obtained through experiments.

When there is the effect of specialization to accelerate learning speed, the inherent comparative advantage is not important, but it is very important to enter a virtuous circle (positive feedback) of specialization and learning acceleration. A congenitally deficient person, once entering a profession through the success of advertising or self-promotion, professional production will improve his learning ability, which in turn expands his market with high efficiency, giving him the opportunity to deepen his specialization and further accelerate learning process. This process of self-acceleration can often make some people who do not have an innate advantage surpass those who have an innate advantage in the short term, but have not entered this virtuous cycle. Some people call this virtuous cycle process 'self-discovery'. In fact, this process is 'self-creation', rather than discovering the innate self.

Because organizational tests are necessary for people to obtain economic information, and the combination of possible corners results in an infinite number of possible organizational structures and property rights structures, it is impossible for people to exhaust all organizational tests. Therefore, people s total information on organizations Is limited. In the absence of such information, people should not be overly superstitious about economic rationality, but fully open their minds to organizational experiments that seem to be irrational, without preconceptions. It is more advisable to fully understand the attitude of experimenting with different organizations as much as possible and relying on luck to make a fortune in a sufficient number of experiments, rather than calculating in advance a clear and stable attitude. 1000 years ago, merchants were considered an industry that did not contribute to society, and this preconceived prejudice greatly hindered the development of the economy. The question is not whether the profession of business has its value, but this kind of closed mind. Now we are also talking about how Taiwan's 'industrial hollowing out' is harmful to the economy, how the development of China's labor-intensive industries is not conducive to technological advancement, and how the business cycle is harmful to productivity. All these paradoxical arguments are the same way of thinking as those that emphasized agriculture and business suppression. How do you know that Taiwan's 'industrial hollowing' is not good? An organizational structure appears spontaneously in the market competition, and there must be reasons for its survival. For such complicated reasons, we better not draw conclusions easily, but open our minds to various organizational experiments and let time to correct Conclusions from different tissue experiments. In terms of industrial policy, Hong Kong and Taiwan have no industrial policy effect at present, it seems not worse than the industrial policy of Singapore and South Korea (many economists have argued that Hong Kong's non-industry policy is better than Singapore's industrial policy, And Taiwan is better than South Korea).

In the 1950s, the Hong Kong government did not have any industrial policies, and created the world's first successful export-oriented industrialization model of exporting labor-intensive products. In the 1950s, the government forced import substitution in the 1950s, which was not effective. Under the pressure of international competition and the United States, it changed to a Hong Kong style in the late 1950s.

Liberalization and internationalization policies, the market automatically adopted Hong Kong-style export-oriented industrialization model, creating a miracle in Taiwan. Later generations said that it was the government's intention to design this industrialization model. In fact, no government has the ability to design this model. Instead, the Hong Kong market spontaneously created this model, but the other three dragon's governments imitated it. These experiences show that markets are much better at organizing experiments than governments. Why is the market much better at organizing experiments than the government?

This is because the essence of economic development lies in the development of specialization of division of labor. With the evolution of division of labor, the information that each expert knows is less and less than the knowledge of the whole society, and the information is more and more scattered in different professions. The function of the market on the one hand is to promote the decentralization and asymmetry of this information (the knowledge difference between the buyer and seller of a professional product on the production process increases), in order to promote the society's overall ability to acquire knowledge and increase productivity; enjoy all Productivity brought about by different professional information. The market is not for everyone to share all information, but for people to enjoy the productivity of society without having to know production knowledge outside of his specialty. Because fair competition in the market can make comprehensive use of scattered expertise, the market uses more information than any expert knows. As a result, markets use more information than economists or government officials know. Coupled with the superstition that the economic rationality of the government or economist will limit the test of economic organization, the ability of the market to test economic organization is much higher than that of government and economists. Therefore, I urge readers not to trust the current arguments of some economists criticizing Taiwan's "hollow industry" or China's "low-level industry." The reason is that the organizational models that appear on the market contain much more information than these economists know.

Due to the fundamental uncertainty, people cannot calculate the interaction between their own decisions and the decisions of others. They can only rely on the Walras pricing mechanism to gradually understand all people's decision-making interactions and the consequences of decision-price interactions through social experiments. If there is a time lag between the price signal and the decision in this dynamic process, the feedback mechanism will produce fluctuations in the market price that are either higher than or lower than the static equilibrium level, which is what Soros, the financier said, "the market is always wrong" . If all decisions in the market are highly dependent on each other or in mathematical language, the differential-difference equations representing this mechanism are highly non-linear. This Walrasian price mechanism produces a well-known chaotic system. Although this chaotic system is generated by deterministic differential-difference equations, its only predictable characteristic is unpredictability. The author will discuss the issues of "the market is always wrong" and "the market is unpredictable" in another article, which are the characteristics of the fundamental social uncertainty caused by the limited theory of man.