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Though the rationality postulate is generally considered the paradig- matic core of economics, there is little agreement about its specific content and methodological status. This paper seeks to clarify some of the ambiguity surrounding the postulate by drawing a distinction between the non-refutable, purely heuristic rationality principle and refutable rationality hypotheses. An alternative, evolutionary outlook at purposeful human behavior is outlined that captures much of what makes the rationality postulate attractive to economists but avoids the ambiguities that have made it the subject of enduring controversy.

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  • Journal of Economic Methodology 11:1, 129 March 2004

    Journal of Economic Methodology ISSN 1350-178X print/ISSN 1469-9427 online 2004 Taylor & Francis Ltd

    http://www.tandf.co.uk/journals

    DOI: 10.1080/1350178042000177987

    The rationality postulate in economics:its ambiguity, its deficiency and itsevolutionary alternativeViktor J. Vanberg

    Abstract Though the rationality postulate is generally considered the paradig-matic core of economics, there is little agreement about its specific contentand methodological status. This paper seeks to clarify some of the ambiguitysurrounding the postulate by drawing a distinction between the non-refutable,purely heuristic rationality principle and refutable rationality hypotheses. Analternative, evolutionary outlook at purposeful human behavior is outlined thatcaptures much of what makes the rationality postulate attractive to economistsbut avoids the ambiguities that have made it the subject of enduring controversy.

    Keywords: Rational choice theory, rationality principle, rule-following, program-based behavior, adaptive agentsJEL codes: A12, B41, D10, D80

    1 INTRODUCTION

    The rationality postulate is generally considered the paradigmatic coreof economics (Hogarth and Reder 1986: 2, Sugden 1991: 751, Foley 1998:23) and it has, in recent decades, gained increasing prominence in suchneighboring fields as political science (Friedman (ed.) 1996) and sociology(Hechter and Kanazawa 1997). It has also been, and continues to be, theprincipal target of long-standing and enduring criticism from heterodoxquarters within the economics profession as well as from other social andbehavioral sciences (Green and Shapiro 1994, Laville 2000). Yet despiteits central paradigmatic role and the extensive debate on its validity consi-derable ambiguity persists, among its advocates and its critics alike, withregard to its specific content and its methodological status. Some of thepostulates advocates treat it as an empirically testable explanatory theory,others portray it as a non-refutable axiomatic doctrine or a metaphysicalstatement (Boland 1981: 1034), while still others regard it as a normativeprinciple that tells us how, as rational agents, we ought to choose(Harsanyi 1977: 16, Sugden 1991: 752).1 The same ambiguity is to befound among those who criticise or reject the rational choice model. Whilesome critics accuse it of being empirically empty, others blame it forbeing in blatant conflict with reality, and others still consider it normativelyinadequate.

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    The principal concern of the present paper is with the role that therationality postulate can play as the fundamental behavioral conjecture ofan explanatory, empirical social science, i.e., a social science that aimsat providing refutable explanations of real world phenomena. The purposeof the arguments that will follow is twofold. First, I shall seek to clarifysome of the ambiguity surrounding the rationality postulate, and to identifythe reason for its shortcomings as an empirically contentful, explanatoryconjecture. Second, I shall outline an alternative, evolutionary outlook atpurposeful human action that, as I suppose, captures much of what appearsto make the rationality postulate so attractive to economists but allowsone to escape the ambiguities that have notoriously plagued the rationalitypostulate.

    2 RATIONALITY PRINCIPLE VS. RATIONALITYHYPOTHESES

    Rational choice theorists seem all to agree on the notion that humanbehavior is rational in the sense that human agents seek to advance whatthey consider to be in their own interest, given the constraints that theyface. Closer inspection reveals, however, that this assumption, as simple andstraightforward as it may appear, can be, and has been, interpreted in avariety of, sometimes quite different, ways. This has to do, in particular,with the fact that any choice of action must be based on the agents expec-tations or predictions about the effects that alternative actions will produce.Such expectations or predictions must, quite obviously, be based on theagents subjective beliefs or theories about how the world works.2 And therationality postulate may find quite different interpretations, depending onwhat assumptions are implied about agents beliefs or theories.

    If confusion about the status of the rationality postulate is to be avoidedit is imperative to categorically distinguish between two kinds of interpreta-tions that I propose to contrast as rationality principle on the one side andrationality hypotheses on the other.3

    Under the rubric of rationality principle I subsume those interpretationsof the rationality postulate that assert, in one way or another, that humanaction is rational, given the purposes (or preferences) and beliefs (or theories)of the actor at the time of action.4 The rationality principle is about localsubjective consistency of human action, local in the sense that reference isonly made to the agents purposes or preferences and beliefs at the momentof choice. Whatever the nature of his preferences or beliefs may be, in termsof the rationality principle his actions count as rational as long as they areconsistent with what his preferences and beliefs happen to be at the momentof choice.

    By contrast, under the rubric of rationality hypotheses I propose tosubsume versions of the rationality postulate that assert more than just local

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    subjective consistency of actions, preferences and beliefs. It is, in principle,in two respects that rationality hypotheses can make stronger claims. Theseare, on the one hand, claims about the overall, not just local, consistency ofa persons actions, preferences and beliefs, such as claims that a personsentire system of beliefs and preferences is internally consistent and consistentwith her choices. And these are, on the other hand, claims about the factualadequacy and instrumental suitability of a persons beliefs and preferences,such as, for instance, the claim that rational actors hold true beliefs aboutthe world.

    The rationality principle by itself cannot serve as the fundamentalbehavioral conjecture of an explanatory, empirically contentful theory. Itmakes no claim that could be potentially refuted, since there is no conceiv-able event within its explanatory domain, i.e. purposeful human action, thatit rules out as factually impossible. A reader who doubts this may try oimagine a potentially falsifying case.5 Note that to say that the rationalitypriniciple is empirically empty is not to say that it is meaningless or useless.There are two meaningful ways in which it can be interpreted. Either as adefinition, specifying what we mean when we speak of purposeful humanaction. Or as a heuristic principle that tells us what we should look for whenwe seek to explain human action.

    In L. von Mises (1949) praxeological approach to economics, forinstance, the rationality principle is interpreted as a mere definitionalstatement. To say that human action is rational is, according to Mises,the same as saying that it is subjectively meaningful, purposeful or goal-directed. He therefore concludes: Human action is necessarily alwaysrational. The term rational action is therefore pleonastic and must berejected as such (ibid.: 18). As long as human behavioral responses qualifyas purposeful actions they qualify, by definition, as rational actions, nomatter how stupid the beliefs may be on which they are based (ibid.: 20).There can be no irrational purposeful actions. Behavioral responses thatdo not qualify as purposeful actions, such as accidental body movements orpurely mechanical reflexes, simply fall outside the explanatory domain ofrational choice theory (ibid.: 11, 20).

    Interpreted as a heuristic principle, the rationality principle tells us howwe should go about explaining purposeful human action. It suggests that weought to explain such action in terms of the actors purposes and beliefs,and that we should do so under the presumption that the actors purposesand beliefs are consistent (at the moment of choice). It instructs us, in otherwords, to ignore the possibility of inconsistent actions and to concentrateour attention on identifying purposes and beliefs that make sense of theactions that are to be explained.6

    To be sure, as a definitional statement or as a heuristic device the ratio-nality principle may serve useful purposes, but it does not qualify as anempirically contentful, refutable conjecture. Only by adding additional,

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    refutable assumptions can one turn the rationality principle into an empiri-cally contentful hypothesis. And only if stated as a rationality hypothesis canthe rationality postulate serve as the nomological basis of an explanatorysocial science.7

    As noted, empirically contentful, refutable rationality hypotheses gobeyond the rationality principle by claiming more about agents preferencesand beliefs than mere local consistency. They do so by including one orboth of two types of claims, namely, on the one hand, claims about overall,not just local consistency of agents preferences and beliefs and, on theother hand, claims about the factual adequacy of agents beliefs.

    Rationality hypotheses that include the first kind of claim assert thathuman action is rational, given the actors entire system of preferences(or purposes) and beliefs. By contrast to the notion of local consistencyimplied in the rationality principle, rationality hypotheses of this kindcan be said to be about global consistency of purposes and beliefs. Toillustrate the difference, an action that is carried out, for instance, in anemotional response to situational stimuli is rational in the rationalityprinciples sense of local consistency, but it may well not be rational inthe sense of global consistency, because it is inconsistent with the agentsoverall system of preferences and beliefs or, in simple terms, with hiswell-considered judgement.

    Rationality hypotheses that include the second claim assert that humanaction is rational, given the factual nature and state of the world. Implied inthis claim is that purposes or preferences and beliefs are not merely inter-nally consistent but that humans act on objectively adequate (preferencesand) beliefs about the world, i.e., (preferences and) beliefs that allow themsuccessfully to operate in the world as it is.8 Rationality hypotheses of thiskind are about the instrumental adaptedness (Zweckmaessigkeit) of beliefsto the objective environment in which the agent operates.

    By contrast to the rationality principle, rationality hypotheses are empiri-cally refutable statements about facts. They may come in many varieties,and it is not always immediately obvious, but may have to be judged interms of the respective context, whether a particular statement qualifies as arefutable rationality hypothesis or is, in fact, nothing but a more elaboraterestatement of the rationality principle. In economics the concept of ratio-nality may seem to be mostly used in ways that imply the (refutable) claimof factual adequacy of agents beliefs.9 Yet, closer examination shows thateven the seemingly strong maximization hypothesis in economics is, in thisregard, open to interpretation. In its most extreme interpretation, one thatclaims perfect global consistency of preferences and beliefs as well as theirperfect adaptedness to the agents problem environment, it is clearly a mostdemanding and refutable conjecture.10 In fact, it is in such apparent conflictwith behavioral reality that it is rarely ever claimed to be descriptiveof actual human behavior.11 Yet, the maximization hypothesis can also

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    be, and often is, interpreted in ways that make it compatible with everyconceivable behavior thus turning it into the non-refutable rationalityprinciple. All that is needed for such transformation is to leave the contentof the objective function or utility function unspecified, to be filledby any substantive assumption that the analyst may find convenient inapplying the maximization hypothesis.12

    3 GARY S. BECKERS ECONOMIC APPROACH TOHUMAN BEHAVIOR: RATIONALITY PRINCIPLE ORRATIONALITY HYPOTHESIS?

    Gary S. Beckers economic approach to human behavior may serve here toillustrate the fact that it is not always easy to tell whether particular versionsof rational choice theory do, in fact, entail refutable hypotheses or whetherthey imply in essence no more than the purely heuristic rationality principle.Beckers approach would seem to be a particularly suitable test case becauseit is not only meant to represent a most rigorous version of rational choicetheory but is also claimed to be

    applicable to all human behavior, be it behavior involving money pricesor imputed shadow prices, repeated or infrequent decisions, emotionalor mechanical ends, rich or poor persons, men or women, adults orchildren, brilliant or stupid persons, patients or therapists, businessmenor politicians, teachers or students.

    (Becker 1976: 8)

    As I shall argue, even though it is intended and widely perceived asa particularly hard-nosed version of the economic model of man, uponcloser examination Beckers rationality concept can be shown ultimatelyto entail no more but a refined version of the non-refutable rationalityprinciple.

    In order to avoid weaknesses in the received theory of choice (Becker1976: 133) that, in his view, result from its reliance on changes in tastesin interpreting observed behavior (ibid.), Becker proposes a new approachto the theory of consumer behavior that puts greater emphasis on incomeand price effects (ibid.: 144). Beckers apparent ambition is to reducethe role that subjective tastes (or preferences) are allowed to play in behav-ioral explanations and to rely, instead, as much as possible on objectiveconstraints (income- and price-constraints) as explanatory variables.

    The central point of Beckers new approach is a re-interpretation ofconsumer behavior as productive activity, as household production thatuses ordinary market goods as inputs for the production of ultimate goodsor pleasures (Becker 1996: 5). These ultimate goods are considered asthe only direct objects of utility, and preferences for these ultimate goodsare assumed to be human constants, identical across persons and stable

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    over time. Observable demand for ordinary (market) goods and, infact, the demand for any kind of behavior is interpreted as deriveddemand, derived from such intra- and inter-personally constant preferencesfor ultimate goods, and intra- and inter-personally variable capacities forproducing these goods.

    The critical link between ultimate preferences and derived demand isprovided by the consumers (households) production function for ultimategoods:

    Zi= zi (xi; ti; E).

    In this equation, xi denotes inputs in the form of ordinary goods, ti denotesthe consumers own time input, and E refers to so-called environmentalvariables including, in particular, the production technology that consum-ers employ in producing ultimate pleasures. The name environmental vari-able would seem to suggest, that E is not meant to refer to intra-personal,subjective variables but to objective constraints, to observable aspects ofthe environment in which the production takes place (Becker 1976: 135).In actual fact, however, the main component of the E-variable, namelyproduction technology, is interpreted by Becker in a way that does verylittle to restrict the range of admissible explanatory arguments. As Beckerexplains (ibid.: 145, Stigler and Becker 1977: 82, 84), production technol-ogy is meant to include not only such things as personal skills and humancapital but also peoples knowledge whether real or fancied (Stigler andBecker 1977: 84). If, however, peoples (necessarily subjective) knowledge including their fancied views of the world is allowed to inform peopleschoices, if their production technology includes what they correctly orincorrectly (ibid.) believe about the world, Beckers rationality conjectureboils down, ultimately, to no more than the non-refutable rationality prin-ciple, the claim that human choices are (locally) consistent. The seeminglyrigorous chain of arguments, from invariable ultimate preferences via pro-duction technologies, income- and price-constraints to behavioral choicescannot be stronger than its weakest link, the subjective beliefs that peoplehold correctly or incorrectly about the world.

    In a further development of his approach to utility-maximizingforward-looking behavior (Becker 1996: 140) Becker has put specialemphasis on the human capital perspective (ibid.), drawing attention tohow peoples current choices impact on their future human capital, i.e., ontheir future capacity for producing ultimate goods and their future (derived)preferences for ordinary goods (ibid.: 7). The purpose of this extensionof the utility-maximizing approach is, on the one hand, to endogenizepreferences and, on the other hand to extend the definition of individualpreferences to include personal habits and addictions, peer pressure, paren-tal influences on the tastes of children, advertising, love and sympathy, andother neglected behavior (ibid.: 4).13

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    The new extension may enrich Beckers conceptual and analyticalapparatus, it does not alter the fact, however, that his economic or rationalchoice approach to behavior (ibid.) rests, as far as its nomological foun-dations are concerned, on no more than the purely heuristic rationalityprinciple. To be sure, specific applications of his approach may wellhave empirical content. Such content can, however, not be due to the irre-futable, but empirically empty, notion that individuals maximize welfareas they conceive it (ibid.: 139, emphasis in the original). It must have beenimported, implicitly or explicitly, by additional assumptions.

    In his Nobel Lecture The economic way of looking at life Beckernoted that in his work he had intentionally chosen certain topics such asaddiction to probe the boundaries of rational choice theory (ibid.: 155).Yet, it can hardly be considered much of a challenge to show that evenaddictive behavior is covered by the rationality principle, i.e., to show thatit is rational in terms of the addicts preferences and beliefs at the momentof choice, in particular if addictions are acknowledged to decrease thecapacity to anticipate future consequences (ibid.: 11), or to reduce theattention to future consequences (ibid.: 120). And it sounds, in fact, likea rather moderate claim when Becker insists that addictions, habits orother forms of seemingly irrational conduct are rational in the sense thatthey are forward-looking, responsive to changes in prices and wealth(ibid.: 123), and do not imply a reluctance to calculate (ibid.).

    While Becker insists that his approach maintains the assumption ofthe utility-maximizing choice (ibid.: 22f.),14 he notes that his type ofrationality. . .is quite different. . .than that found in standard models (ibid.:23). It is, as he explains (ibid.: 9), not meant to imply perfect foresight, oreven accurate calculation of the probabilities of future events, but impliesonly that individuals try as best they can to anticipate the future conse-quences of their present behavior. He even acknowledges the relevanceof habitual behavior, pointing to its evolutionary advantages (ibid.: 9),and notes that cooperation can be sustained more easily. . .when individualbehavior is habitual (ibid.: 17).15

    Once all qualifications are taken into account that Becker attaches to hisonw version of the assumption of utility-maximizing behavior not muchmore is left than a rather permissive formula, that can accommodateall conceivable kinds of behavior. It allows for the fact that, in their effortsto try as best as they can, individuals may have imperfect memories. . .maydiscount the future excessively. . .may make erroneous calculations (ibid.:22), or may act under the influence of habits. . .and culture (ibid.: 23). Thegenerality that Becker claims for his approach (ibid.: 155) is not an indica-tion of its superb explanatory power but, to the contrary, of the fact that itscore principle, the assumption of individual rationality (ibid.: 156), isspecified in a way that makes it undistinguishable from the empiricallyempty rationality principle.

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    4 THE ECONOMIC APPROACH BETWEEN RATIONALITYPRINCIPLE AND RATIONALITY HYPOTHESES

    In response to criticism of the economic or rational choice approach tohuman behavior economists often seem to feel called upon to defend therationality principle (Laville 2000: 417). Yet, the rationality principle is notin need of any defense. It cannot be disputed. For every conceivable action,including the most bizarre, there are purposes and beliefs (also very bizarre)conceivable that make it consistent.16 Often economists, when they defendthe rational choice model, argue for what one may call soft rationalityhypotheses, such as the claim that people respond to incentives. Whilesuch soft rationality hypotheses may be disputable, as a matter of factthey rarely are. Hardly any serious student of human behavior outside ofeconomics would, for instance, be prepared to take issue with the claim thathumans take advantage of obvious opportunities.17

    What is typically under dispute is not the unquestionable rationalityprinciple or uncontroversial soft versions of the rationality postulate butsuch strong versions of the rationality hypothesis as, in particular, themaximization hypothesis of orthodox neoclassical economics, i.e., theassumption of perfect rationality.18 This assumption is, however, in suchblatant conflict with empirical reality (Nelson and Winter 2002: 29)19 thateven its proponents rarely defend it on the grounds that it adequatelydepicts how real human beings behave (Arrow 1986: 213). Indeed, as R.J.Aumann (1997: 2) has noted, economists have long expressed dissatisfac-tion with the complex models of strict rationality that are so pervasive ineconomic theory. Jean Tirole, for instance, frankly declared in his 2001Presidential Address to the European Economic Association that econo-mists have of course long been aware of the crudeness (Tirole 2002: 634) ofthe rational maximization hypothesis and its deliberately simple-mindeddescription of human preferences and behavior (ibid.).20

    There are essentially three ways in which economists have tended torespond to the issue of the empirical inadequacy of the maximizationhypothesis. One common response has been to argue that, even thoughit may not be fully descriptive of human behavior, it represents a goodapproximation of human behavior in the kind of social environments thateconomists focus on, namely markets. I shall return to this argument below(Section 7). Another not uncommon response has been to simply deny theadequacy of a falsificationist methodology for economic theory. Accordingto this interpretation, the purpose of economic theory is not to state refut-able conjectures about how the world is, but to explicate how the worldwould function if it were populated by completely rational individuals, i.e.,individuals who have the ability to foresee everything that might happenand to evaluate and optimally choose among available courses of action(Kreps 1990: 745).21 The (internal) validity of such a theory is, obviously,totally independent on whether or not real human agents come even close to

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    being completely rational. It is an axiomatic exercise that, per se, does nottell us anything about the real world, i.e., the world populated by people asthey de facto are.

    A third strategy economists employ in response to the empirical inad-equacy of the maximization hypothesis is to seek to add realism to theirbehavioral model by enriching the utility function (i.e., the assumptionsabout agents goals) in ways that accommodate observations that areincompatible with more standard interpretations of the maximizationhypothesis. The problem with such rescue attempts is that they tend to relyon ad hoc assumptions, for the reason that they are designed in order toaccount for the latest empirical violations (Laville 2000: 404). That suchunprincipled, ad hoc adjustments of the maximization hypothesis are notwithout problems has, of course, not escaped the attention of economists.22

    One field in which economists have been most sensitive to this issue isexperimental game theory. Authors in this field, like R. Selten (1998) andW. Gueth (1995), have explicitly argued that, instead of ad hoc modifi-cations, a principled alternative to the rationality postulate is needed ifone is to provide a satisfactory explanatory account of well documentedexperimental findings.

    Selten draws a distinction between two kinds of game theory, normativegame theory and descriptive game theory (Selten 1998: 22f.). The nor-mative branch is concerned with working out the implications of theassumption of ideal full rationality in interactive decision situations (ibid.:28). According to Selten, normative game theory represents the kind ofinquiry that has prevailed in economics for a long time and. . .is still a verystrongly held position (ibid.: 11). It is not concerned with empirical ques-tions of human behavior but simply deduces behavior from the principle ofrationality (ibid.). By contrast, descriptive game theory aims at explainingobserved behavior (ibid.). The requirement to develop a descriptive gametheory about human players (ibid.: 23) is, as Selten notes, evidenced byexperimental findings with human game players which refutes the assump-tion of ideal full rationality. His own search for such a theory has led Seltenin the direction of a theory of bounded rationality, a learning-directiontheory (ibid.: 24) that is based on a principle of ex-post rationality (ibid.),a theory which is not merely a modified version of the model of ideal fullrationality but exhibits a different structure (ibid.: 25, 31).

    Gueths extensive research with ultimatum bargaining experiments hasled him to insist, like Selten, on the need to supplement normative gametheory by a behavioral theory of game playing (Gueth 1995: 338), a theorythat, by contrast to models of perfect rationality pays attention to thecognitive limitations of human decision makers (ibid.). To respond, aseconomists often do, to the kind of anomalies that ultimatum bargainingexperiments23 (or other sources of empirical evidence) present by including

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    additional arguments, such as a preference for fairness in the utility func-tion, is, in Gueths (ibid.: 342) view, not a viable strategy. As he puts it:Very often this type of research resembles. . .a neoclassical repair shop inthe sense that one first observes behavior. . .and then defines a suitableoptimization or game model which can account for what has been observed(ibid.). As Gueth suggests, what is needed is a behavioral theory of actualhuman decision-making that can replace the perfect rationality model ofnormative game theory.24

    What authors like Selten and Gueth in essence are looking or callingfor is a principled alternative to the received rational choice paradigm, analternative that accommodates the empirical evidence of real world humanbehavior not by ad hoc adjustments of the contents of a utility functionthat rational agents supposedly maximize, but by a systematic theoreticalaccount. Another author who has made a similar plea is Dennis C. Muellerwho, in his 1986 Presidential Address to the Public Choice Society (Mueller1986), suggested to his colleagues to replace their overly simplistic modelof rational egoism by a behavioral model of adaptive egoism. What,according to Mueller, distinguishes the kind of behavioral approach that hehas in mind from the usual application of rational actor models is the factthat it forces the investigator to examine the past histories of the peoplewhose behavior he wishes to explain. . . .Human behavior is viewed as beingadaptive and only approximates the purely forward-looking behaviordepicted in rational choice models (Mueller 2003: 667).

    5 AN EVOLUTIONARY ALTERNATIVE TO THE RATIONALCHOICE PARADIGM

    In spite of mounting criticisms and notwithstanding their own doubtseconomists have been extremely reluctant to even consider the possibility ofparting with their accustomed rational choice model of human behaviorand adopting a more psychological approach. There seem to be twoprincipal reasons for their unshakable loyalty to the rational choiceparadigm.25 One apparent reason is the intuitive plausibility of the notion ofrational choice. It obviously captures what, as introspection and everydayexperience tell us, are essential features of human behavior: Its intentional,purposeful, goal-seeking or forward-looking nature and its instrumentaladaptedness to the problem-environment in which actors operate. The otherreason is that economists seem to fear that allowing the complexities ofhuman psychology to play an explanatory role would require them togive up on the ambition to explain human action in terms of one unifyingtheory (Tirole 2002: 652). Even if they are not entirely happy with their ownrationality model, to them there is no really attractive alternative in sight(ibid.: 641).26

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    My purpose in the remainder of this paper is to argue against theroutinely repeated claim that there is no alternative. As I shall seek toshow, there does exist a paradigmatic alternative, an outlook at humanbehavior that captures the intentionality and adaptedness of human behav-ior no less than the rational choice paradigm, and that provides an equallygeneral theoretical framework, but that avoids the ambiguities of the ratio-nality postulate that I have discussed above. This alternative, evolutionaryoutlook at human behavior is, more or less explicitly, implied in a numberof explanatory approaches that have been advanced in economics and inother social and behavioral sciences (Vanberg 2002). The, to my knowledge,most succinct statement of the principal assumptions of this alternativeoutlook at purposeful human action can be found in biologist E. Mayrsoutline of, what one may call, the paradigm of program-based behavior.27

    The central argument of Mayrs approach is that intentional, goal- orpurpose-seeking behavior can be viewed as guided by programs or instruc-tions encoded in the agent for what to do (or not to do) in certain types ofsituation. These programs incorporate knowledge of the contingencies ofthe agents problem environment, allowing the agent to anticipate conse-quences of potential actions. Such knowledge is seen as the product ofprocesses of evolution and learning through which action-guiding programsgradually become more adapted to relevant characteristics of the problemenvironment due to the fact that by trial and error-elimination less adequateprograms are replaced by more adequate ones.

    A major advantage of Mayrs paradigm of program-based behavior isthat it shows how, from an evolutionary perspective, a naturalistic accountcan be provided for the very capacity that rational choice theory simplydefinitionally ascribes to rational actors, namely the capacity to anticipateconsequences and, thereby, to be guided in ones problem-solving behaviorby expected consequences. In rational choice accounts the instrumentaladaptedness that we find in purposeful human action is simply attributedto an unexamined capacity rationality.28 By contrast, the paradigm ofprogram-based behavior seeks to provide an explanation for this verycapacity by attributing it to the adaptedness of the programs or rules ofaction that guide human behavior.

    More specifically, what distinguishes the two paradigms is a shift ofexplanatory focus from the adaptedness of single actions to the adaptednessof programs or rules for action. The rational choice paradigm is focused onthe explanation of single actions. Its ambition is to explain the adaptednessof particular actions as a direct product of rationality. By contrast, theparadigm of program-based behavior seeks to explain the adaptedness ofsingle human actions indirectly, as a consequence of and contingent on the adaptedness of the programs that guide humans in their situationalchoices. And it explains, in turn, the adaptedness of programs as a productof evolution and learning. One of its important implications is that it allows

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    for the possibility that specific actions may not be rational in terms of theincentive structure of the particular situation in which they are exhibited,even though the programs that guide them may be well adapted to thegeneral features of the problem-environment in which the agent normallyoperates.29 The paradigm of program-based behavior may, therefore, allowone to provide a systematic account of observed behaviors that, from arational choice perspective, tend to be classified as unexplainable anomalies(Campbell 1986: 174).

    Mayrs paradigm of program-based behavior constitutes, I submit, apowerful alternative to the rational choice paradigm, and one that directsour research efforts in productive avenues. It draws our attention to theissue of how the adaptedness of the programs themselves can be explained,and of how programs are applied to guide action in particular choicesituations. In other words, it draws attention to the questions of how theencoding and the decoding of programs can be understood, where encodingmeans the processes that have shaped and continue to shape the programson which agents act, and decoding means the mechanisms by whichprograms as general instructions are applied to ever new specific choicesituations. It is by incorporating specific theories about the processes ofencoding and decoding that the general notion of program-based behaviorcan be given specific explanatory content.

    Surely, the paradigm of program-based behavior cannot offer the decep-tive simplicity that economists like to praise as the trademark of rationalchoice theory. Yet, simplicity alone should certainly not be allowed todetermine our choice among alternative theories, independent of theircapacity to account for the complexities of the subject area they are sup-posed to illuminate.30 What the paradigm of program-based behavior offersinstead is an analytical framework that is compatible with, and supportedby, numerous other general theoretical approaches in the behavioral andcognitive sciences. It is a paradigm that invites theoretical integration bycontrast to the self-imposed theoretical isolation that has shielded theeconomists rational choice model far too long from research developmentsin other fields. It allows one to integrate, and to relate to each other, anumber of established theories that deal in more detail with the variousaspects of the encoding and decoding of action-guiding programs. One suchtheory is J.H. Hollands theory of adaptive agents.

    6 J.H. HOLLANDS THEORY OF RULE-BASED ADAPTIVEAGENTS

    How does an organism use its experience to modify its behavior in bene-ficial ways (i.e., how does it learn to adapt under sensory guidance)(Holland 1992a: 1)? How can a cognitive system use experience to increaseits problem-solving capabilities (ibid.). These are the questions that

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    J.H. Hollands theory of adaptive agents is meant to answer. It looks atadaptation as a fundamental process, appearing in a variety of guises butsubject to unified study (ibid.: 2), and its ambition is to provide a unifiedtheory of adaptation (ibid.: 3).

    At the heart of Hollands theory, as well as of his efforts to designcomputer simulations that model the relevant processes, is the concept ofadaptive agents as rule-based systems or classifier systems (1988: 121),31 i.e.,as systems that classify problem-situations they encounter, and that respondto types of situations based on repertoires of rules that could be verballystated as if. . .then. . . instructions (1986: 14). From this perspective anadaptive agent can be described in terms of rules (1995: 10) or, more pre-cisely, in terms of the cluster of rules. . .that generates its behavior (ibid.:49). In terms similar to E. Mayrs notion of program-based behavior,Holland notes that rules so defined act as much as instructions in acomputer, . . . as a program that determines the agents behavior (ibid.).

    Holland explicitly notes the difference between the evolutionaryapproach to learning (1996: 282) implied in his own theory and an econo-mics that is built around agents of perfect rationality agents that perfectlyforesee the consequences of their actions, including the reactions of otheragents (1995: 85). He stresses, though, that to take an evolutionary outlookdoes not mean at all to deny that economic agents anticipate (1996: 282).It means to insist, that the capacity to anticipate should not be simplypostulated but must be explained in a backward looking manner, as basedon past experience.32

    Adaptive agents owe their ability to anticipate (1992: 20) to the rules onwhich they operate, rules that anticipate the consequences of certainresponses (ibid.). These rules can be viewed as hypotheses that are under-going testing and confirmation (1995: 53). They allow agents to copewith the impossibility of considering all things in their behavioral choicesby focusing attention on selected aspects of the torrent of information itsenvironment produces (ibid.: 44), namely aspects that are relevant tothe attainment of goal-satisfying states (Holland et al. 1986: 39). In anever-changing environment in which every situation they encounter is insome way novel and unique, adaptive agents combine rules into clustersthat model the environment (1996: 283). Rules serve as building blocksof internal models that can be used to generate predictions about theoutcomes of potential solution attempts (Holland et al. 1986: 14).33

    The internal models on which actions are based may, in Hollands termi-nology, be tacit or overt. A tacit internal model simply prescribes a currentaction, under an implicit prediction of some desired future state (ibid.: 33),without any conscious deliberation on part of the agent. A most basicexample would be a bacterium that moves in the direction of a chemicalgradient, implicitly predicting that food lies in that direction (ibid.: 32). Bycontrast, an overt internal model is used as a basis for explicit, but internal

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    exploration of alternatives, a process often called look ahead (ibid.: 33).Overt internal models inform the kind of deliberative choices on whichrational choice accounts tend to focus.

    The use of building blocks to generate internal models is, as Holland(1995: 37) emphasizes, a pervasive feature of complex adaptive systems.Since we cannot have a prepared list of rules for all possible situations wedraw on a repertoire of everyday building blocks when we encounter anew situation.34 We combine relevant, tested building blocks to model thesituation in a way that suggests appropriate actions and consequences(ibid.).35 What allows rule-based agents to form internal models is theircapacity, as classifier systems,36 to activate many rules simultaneously orconcurrently (Holland et al. 1986: 29). In this capacity Holland sees the cluefor understanding an agents ability to handle a perpetually novel world(1995: 51). With simultaneously active rules, the agent can combine testedrules to describe a novel situation (ibid.).

    The principal focus of Hollands theory and simulation models is onthe process by which adaptive agents or systems manage to improve theirrepertoire of rules, and thereby to increase their capability to deal success-fully with the kinds of problems they are confronted with. Holland usesthe term induction to describe the learning process in which the feedbackfrom (direct and indirect) experience allows an agent to improve its internalmodels, noting that the study of induction then, is the study of how know-ledge is modified through its use (Holland et al. 1986: 5). Induction in thesense Holland uses the term is a process in which experience induces agentsto modify or refine the rules or hypotheses on which they act. It is a processin which rules or conjectures come first and are subject to ex-post selectionby consequences.37 Hollands adaptive agents are equipped from the outsetwith a repertoire of rules, and they adapt to the contingencies of theirenvironment by changing their rules as experience accumulates (1995: 10).

    The rules and internal models that guide agents problem-solving effortsare subject to selection and progressive adaptation (1995: 34). There isalways a population of rules as alternative, competing hypotheses (ibid.:53) present upon which selection can operate, and new rules are continu-ously generated, mainly through re-combination of components of existingrules. In order for systematic selection to reinforce successful, problem-solving rules and to work against inferior ones a feedback mechanismmust be in place that attributes success in action appropriately to therelevant rules (Holland et al. 1986: 16), a problem that Holland calls creditassignment.38 As he notes:

    Credit assignment is not particularly difficult when the system receivespayoffs from the environment for a particular action the system simplystrengthens all the rules active at that time (a kind of conditioning).Credit assignment becomes difficult when credit must be assigned to

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    early-acting rules that set the stage for a sequence of actions leading topayoff

    (Holland 1996: 285)

    It is a significant achievement of Hollands approach that it specifiesa model of how such credit assignment operates, called bucket brigadealgorithm (1995: 56; 1992a: 176ff.), a model the general thrust of which canbe captured by the metaphor of a market in which not only the final sellersof products are rewarded by the price paid by their customers, but in whichthe revenue raised in the final product market is transferred back to theproducers of inputs for these products, to the producers of inputs forthe production of inputs, and so on. Thus, productive activities that set thestage for success in the final product market are encouraged, while failurein the final stage translates into inability to reward suppliers of inputs.In similar ways the bucket brigade algorithm models the ways in whichadaptive agents carry on a calculus of advantage at the level of rulesof action that assigns credit to and thus strengthens rules according totheir respective contribution to the agents overall success in solving theproblems they encounter in their environments (1996: 285f.). As Holland(ibid.) emphasizes, the bucket brigade algorithm makes a task manageablethat otherwise would surely be beyond the capacity of boundedly rationalagents, namely the task of keeping track of the success record of acomplex repertoire of rules that are activated, in varying combinations, ascomponents of internal models of current problem-situations.

    The prospects for adaptive agents to improve their problem-solvingcapacity critically depend on their ability to generate new and superior rulesor hypotheses from their original repertoire. There are two ways in whichHollands theory of adaptive agents allows such generation of new rules tooccur, namely the recombination of components of existing rules (cross-over) and the random alteration of rules (mutation). Crossover is a processof generating plausible new rules (ibid.: 286) by recombining componentsof rules that have proven to be successful in the past similar to the processof genetic recombination in biological reproduction (1995: 65f.). It is madepossible by the fact that if. . .then. . . rules may be decomposable, bothon their if -side as well as on their then-side into components that can berecombined in various ways to create new rules. Crossover is a processin which experience biases the generation of new rules (ibid.) because itallows the components of existing rules to be represented in new rules inproportion to the previous success and thus strength of the parent-rules.It biases the rule generation process so that above-average building blocksare favored in the construction of new rules (ibid.).39

    By contrast to experience-guided crossover, the generation of new rulesthrough random mutation (e.g., by simple errors in the copying of success-ful rules) cannot be but blind in the sense that it ventures into genuinelynew territory. It is a history-independent operation that does not make use

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    of the systems knowledge or past history (1996: 291). Quite obviously,exploration into the inexhaustible space of possible hypotheses (Hollandet al. 1986: 9) promises to be more successful if it relies on rule-discoveryby experience-guided crossover rather than on rule-discovery by randommutation (1995: 60f.; 1988: 122f.).

    As Holland points out, looking at economic men as rule-based, adaptiveagents would lead one to a conception of the market, and of economicprocesses more generally, that is significantly different from that suggestedby the neoclassical model of perfect rationality (1996: 293, 295f.). Bycontrast to the neoclassical focus on average or representative economicagents (households or firms) and on equilibrium endpoints, the theory ofadaptive agents emphasizes the diversity of individuals and the evolution-ary, open-ended nature of processes of interaction among adaptive agents.Markets are, in Hollands terminology, a special case of complex adaptivesystems, i.e., of systems that are composed of interacting adaptive agentswho follow rules and who adapt the rules on which they operate to thecontingencies of their environment an environment that is largely made upof other adaptive agents (1995: 10). It is the diversity of the agents formingthe system and the fact that their interactions are governed by adaptableanticipations that make for the complexity of the system (ibid.: 93).

    For complex adaptive systems in general and, in particular, for marketsthat are composed of intelligent, learning human beings there is no wayto predict the overall behavior by looking at the behavior of an averageindividual (1998: 118), because the actions of each individual are con-ditioned by an environment of other adaptive agents who learn and conti-nuously adapt to changing circumstances.40 The trademark of such systemsis creativity and perpetual novelty (ibid.: 42), a fact that does not exemptthem, though, from systematic analysis.41 Even though the complexities thatresult from the co-evolution of the agents strategic repertoires makes itimpossible to predict specific outcomes that emerge in such systems, theyallow for what Hayek (1967) has called pattern prediction and explana-tion of the principle.42 There are no pre-determinable end-points or equi-libria towards which such systems converge. They continue to evolve, andthey steadily exhibit new forms of emergent behavior (1992b: 20).43 Takingthis insight serious we must, as Holland argues, conclude that it is theprocess of becoming, rather than the never-reached end points, that wemust study if we are to gain insight (ibid.).44

    7 RATIONALITY AND MARKETS

    A principal implication of adopting the paradigm of program-basedbehavior instead of a rational choice perspective in explaining human actionis that it forces one to deal with the complexities that arise from the factthat characteristics of the actors, namely their program-repertoires, provide

  • The rationality postulate in economics 17

    a critical link between the characteristics of the situations they encounterand their behavioral responses. Their program repertoires condition, asintervening variables, how agents will respond to the choice-situationsthey face. As far as their genetically encoded program repertoires (orG.S. Beckers ultimate preferences) are concerned, we may be allowed toassume that humans are more or less alike, due to their common evolution-ary history. Yet, in their learned program repertoires they surely differ. Ofcourse, to the extent that they grew up in similar socio-cultural environ-ments individuals will share significant parts of their learned repertoire.But parts of their repertoire will always be different from person to person,because of idiosyncracies in their respective learning histories.

    Thus, persons may behave quite differently in what, from an observersperspective, appear to be similar problem-situations. And to the extent thatsuch differences in persons behavioral repertoires matter for explanationsof their current behavior, one may need to look for clues in persons learn-ing histories that can provide plausible foundations for conjectures aboutthe nature of their respective program repertoires. By adopting a theory ofperfect rationality economists have afforded themselves the luxury of avoid-ing the need to examine the past histories of the people whose behaviorthey wish to explain (Mueller 2003: 667). In a world of perfect rationalityone can exclusively focus on the characteristics of the situation, becausethere is only one objectively optimal response to the situation presented(Simon 1986: 267).

    One of the arguments that economists like to employ in defense of theirrationality model, the one that I postponed in my earlier discussion of thisissue (Section 4), is that the assumption of perfect rationality is reasonablyadequate for the particular kind of social arrangement that economicsconcentrates on, namely markets. According to this argument economistscan afford to ignore the particularities of personal histories and can,instead, operate on the presumption that there is only one type of actors,namely the perfectly rational type, because that is what the forces of marketcompetition select for. The assumption of perfect rationality is, from thisperspective, not so much a conjecture about the cognitive and calculativecapabilities of human beings per se, but a conjecture about the workingproperties of markets as social arrangements. This argument seems to beimplied, for instance, when K.J. Arrow (1987: 69) notes that, instead ofbeing a property of the individual alone, rationality gathers not only itsforce but also its very meaning from the social context in which it is embed-ded. To the extent that one moves away from the context of competitivemarkets, Arrow suggests, the rationality assumptions become strained andpossibly even self-contradictory (ibid.). He even adds, we need not merelypure but perfect competition before the rationality hypotheses have theirfull power (ibid.: 70).

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    The argument that the rationality postulate should be understood as aclaim about the working attributes of markets may seem quite straightfor-ward. On closer examination, however, it turns out to be somewhat ambi-guous. At least three critically different interpretations of this claim can beidentified. There is, first and least interesting, the claim that pure economicsis about the working properties of perfect markets, i.e., markets in whichadjustments to changing opportunity costs take place without any frictionwhatsoever, and that perfect rationality is just one of the defining character-istics of a perfect market.45 This is not a particularly interesting claim,because it turns the whole issue into a purely definitional matter. Economicsis defined from the outset not as an empirical science, but as a purelyanalytical enterprise that explores the implications of a set of assumptionsthat define an imagined, hypothetical world.

    To be distinguished from such purely definitional claim is the second,factual claim that real world markets, due to the forces of competition,approximate the properties of perfect markets in the sense that they tendto select against non-rational and in favor of rational behavior, justifyingthe use of the rationality postulate as a simplifying assumption. Thisclaim is at the heart of the well known evolutionary arguments by A.A.Alchian (1950) and M. Friedman (1953), according to which the rationalityhypothesis can justly be used as an as-if assumption,46 because under theselection-constraints of a competitive market environment it summarizesappropriately the conditions of survival (Friedman 1953: 22). It isessentially a restatement of the AlchianFriedman argument when R.M.Hogarth and M.W. Reder (1986: 6) note:

    The economic paradigm focuses on actions taken in competitive circum-stances. The underlying assumption is that through competition theactions of individual agents are subject to feedback that forces themeither to become effective or to withdraw from such action. . . . Econo-mists have little interest in modeling agents who do not behave accordingto rational principles since they believe that these agents will not survivein the market. 47

    The as-if argument can be interpreted in two ways (Laville 2000: 411,416). It can be meant as an argument about learning effects, namely as theclaim that market competition conditions individuals into acting rationally,and it can be meant as an argument about selection effects, namely asthe claim that by selecting against non-rational agents competition tendsto bring about a population of rational, maximizing agents. Both versionsof the as-if argument are intrinsically problematic. They both ignore thevery fact that characterizes markets as complex adaptive systems, namelythat the interaction and co-evolution of adaptive agents work as constantgenerators of novelty. A conditioning of human actors into perfectlyrational maximizers might be conceivable in problem-environments that

  • The rationality postulate in economics 19

    are sufficiently stable over long periods of time, long enough to allowthe actors involved to learn everything that is to be learned. Yet, markets apart, perhaps, from their most elementary incarnations hardly qualifyas problem-environments of such a kind. Likewise, the selective weeding outof inefficient agents may, conceivably, in such environments eventuallyproduce a population of optimally adapted agents. But, again, in marketsthe interaction and co-evolution of intelligent and inventive agents areunlikely to permit competitive selection ever to settle with a population ofoptimal problem-solvers.

    It is the third version of the notion of rationality as a property of marketsthat seems to be the most reasonable and defensible. This is the factual and compared to the as-if construct much more modest claim that marketswork as conditioning environments that teach agents not to be perfectlyrational, but to be more economically rational than they would other-wise be. The reason is that competitive markets make agents realize theopportunity costs of their choices more directly and effectively than othersocial arrangements do, allowing for more immediate and effective feedbackbetween choices and consequences. The rationality that, according to thisview, markets induce is a matter of degree, though. In the case of economicactivities where the feedback between choices and outcomes is relativelyshort-term, experience can quickly work to eliminate ineffective strategies.This is, for instance, very likely in regular, everyday economic activities,such as shopping for ones groceries. It is unlikely that a person continues tobuy from the same supplier if a more attractive source is available aroundthe corner. By contrast, where the feedback loop from choices to eventualconsequences is more indirect and less transparent, the error-eliminatingselective pressure on alternative problem-solving strategies is much lessstringent, and a broad range of competing conjectures about potentiallypromising strategies may persist without convergence towards optimalsolutions. This is the case, for instance, with genuinely entrepreneurialchoices among alternative investment projects with long time horizons. Andit is no accident that standard economic theory has very little to say aboutthe entrepreneurial dimension of market processes.

    That markets work, in the manner indicated, as social environments thatenable agents of limited cognitive abilities and with limited foresight to actmore rationally than would otherwise be the case is the central message ofF.A. Hayeks critique of the bogey of rational economic man (Hayek1948: 11) and of his theory of the market as a system of communication thatspeedily signals changes in relative scarcities throughout the entire exchangenexus.48 And it is a message that V.L. Smith endorses when, summarizingthe experience of decades of experimental research, he notes that far fromhaving perfect information, subjects (in experiments, V.V.) know only theirown circumstances (Smith 1991: 880). What, according to Smith, mattersis the manner in which institutions serve as social tools that reinforce,

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    even induce, individual rationality (ibid.: 881). As he (ibid.: 894) puts it:On the basis of cognition alone, without the language of the marketand ongoing social interaction with other agents, rational decision isfrustratingly illusive.

    The claim that the competitive nature of markets works as an error-eliminating force appears not only to be the most defensible version ofthe notion of rationality as an attribute of markets, it is also a claim thatcan be readily accommodated by the paradigm of program-based behavior.If the behavioral programs on which people operate can be looked at asconjectures about what are suitable problem-solving strategies, then anelimination of unsuitable programs and a convergence towards efficientprograms can be expected to occur more rapidly in environments in which,as is true for markets, conjectures are rigorously tested against competingalternatives. Looked at from this perspective, the rational choice paradigmmight be thought of not as an alternative to, but as a special case of theparadigm of program-based behavior, namely as the latters application tostable environments in which the actors involved have learned their lessonand have settled on their optimal program repertoires.

    That may, indeed, be the role that a proponent of rational expectationstheory like R.A. Lucas wants to assign to the economic model of man. Indiscussing the issue of the relationship between psychological and economicviews of behavior, Lucas (1986: 217) argues:

    In general terms, we view or model an individual as a collection ofdecision rules (rules that dictate the actions to be taken in given situa-tions) and a set of preferences used to evaluate the outcomes arisingfrom particular situation-action combinations. These decision rules arecontinuously under review and revision; new decision rules are triedand tested against experience, and rules that produce desired outcomessupplant those that do not. I use the term adaptive to refer to thistrial-and-error process through which our modes of behavior aredetermined.

    While one might expect such a statement to be followed by a plea foradopting a theory of rule- or program-based behavior, this is not at all theconclusion that Lucas arrives at. Instead, he argues:

    Economics has tended to focus on situations in which the agent canbe expected to know or to have learned the consequences of differentactions so that his observed choices reveal stable features of his underly-ing preferences. We use economic theory to calculate how certainvariations in the situation are predicted to affect behavior, but thesecalculations obviously do not reflect or usefully model the adaptiveprocess by which subjects have themselves arrived at the decision rulesthey use. Technically, I think of economics as studying decision rulesthat are steady states of some adaptive process, decision rules that are

  • The rationality postulate in economics 21

    found to work over a range of situations and hence are no longer revisedappreciably as more experience accumulates.

    (Ibid.: 218)

    Economists may, of course, justify their continued adherence to the ratio-nality postulate by choosing to limit their explanatory ambitions in theway Lucas suggests. Yet, such self-limitation would clearly be in conflictnot only with the ambition of modern approaches in economics that likepublic choice, the new institutional economics, law and economics andothers seek to extend the economic approach beyond the study of marketbehavior, it would also be in conflict with ambitions to understand theinnovative and creative dynamics of market processes.

    8 CONCLUSION

    Their focus on the study of markets is surely one of the reasons why econo-mists have been relatively satisfied with the rationality hypothesis as theirbehavioral model despite its recognized shortcomings. And indeed, theworld depicted by the standard textbook models of demand and supplyanalysis is one in which there seems to be little benefit from applyingthe paradigm of program-based behavior. It is a world that leaves littlescope for variation in the program repertoires on which people act. Theeasy testability of the effectiveness of alternative programs and the imme-diacy of feedback in the kinds of environments that these models depictlends plausibility to the assumption that the agents involved act on pro-grams that the observing analyst can identify as the rational or objectivelyappropriate. Yet the more we move into dimensions of market activitiesand into non-market social realms in which the conditions of easy testabilityand immediacy of feedback are not met, this assumption becomes moreand more strained.49 As economics is developing into a general socialscience, applicable to the non-market as well as to the market realm, andas it aims at explaining political and institutional phenomena no lessthan market behavior, it can no longer avoid to face the challenges thatcome with adopting a more complex behavioral paradigm. The paradigm ofprogram-based behavior would seem to be an attractive candidate.

    Viktor J. VanbergUniversity of Freiburg

    [email protected]

    NOTES

    A version of this paper has been written during my visits to the School ofEconomics at the University of Queensland and the Research School of Social

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    Sciences at the Australian National University, AugustDecember of 2002. I wouldlike to thank both institutions, in particular John Foster and Geoffrey Brennan, fortheir support and hospitality as well as for the stimulating intellectual environmentsthey provided. An anonymous referees helpful comments on an earlier version aregratefully acknowledged.

    1 On the noted ambiguity see e.g., A. Sen (1987), R. Sugden (1991: 751f.), K. J.Arrow (1996: xiii), Laville (2000: 407), Lindenberg (2001: 635f.). A. Viskovatoff(2001) discusses methodological issues and the philosophical origins of theconcept of rationality as optimal choice.

    2 R. Boyd and P.J. Richerson (1993: 133): Everyone must acquire beliefs aboutthe world before they can optimize.

    3 The distinction I want to draw attention to is similar to, but not identicalwith, distinctions drawn by other authors, such as e.g. K.D. Opps (1999: 172)contrast between a narrow and a wide version of rational choice theory, orJ. Ferejohns (1991: 282) distinction between a thin and a thick version.

    4 In order to simplify matters, the terms purpose and preference are usedhere in parallel even though their meaning is, of course, not identical. Theyare considered here as synonyms only insofar as both refer to the evaluativecomponent in human choice, to the criteria by which agents evaluate the(expected) outcomes of their actions.

    5 In order to qualify as an empirically contentful conjecture a statement mustexclude as factually impossible conceivable events, i.e., events that the humanmind can imagine. One can imagine, and in fairy tales this happens, thathumans can fly if they move their arms like birds move their wings. The theoryof gravity is empirically contentful, and therefore has explanatory power,because it rules this out as factually impossible. If the rationality principle wereto exclude, in a similar fashion, conceivable events it would qualify, of course,as an empirically contentful conjecture. My claim is that it does not.

    6 K.R. Popper (1994: 181) notes as an advantage of the rationality principle thatit reduces considerably the arbitrariness of our models, an arbitrariness whichbecomes capricious indeed if we try to do without this principle. For a criticaldiscussion of Poppers arguments on the methodological status of the rational-ity principle see Vanberg (2002: 18ff.).

    7 The issue of the refutability of the rationality principle should not be confusedwith the issue of whether singular statements such as Person A did X becauseshe sought to achieve purpose Y and held the belief Z are refutable. Thespecific claims about factual matters of time and place implied in such state-ments may, of course, be empirically true or false. This does, however, notmean at all that the rationality principle as such makes any refutable claims.

    8 A persons ability to successfully operate in the world as it is, in the sense ofachieving her long-term enlightened interests, depends, of course, not only onthe adequacy of her beliefs about the factual nature of the world but also on theprudence of the immediate goals she pursues or on her immediate preferences.The discussion here will focus, though, on the issue of the factual adequacy ofa persons beliefs about the world. This issue of the suitability of a personspreferences does not pose any separate problems that could not be discussedin terms of the overall consistency of preferences or in terms of the factualadequacy of beliefs.

    9 D.K. Foley (1998: 66) Social theory based on the rational choice paradigmseeks to explain agents representations of their social world as more or lessaccurate reflections of its true nature.

  • The rationality postulate in economics 23

    10 In this interpretation the maximization hypothesis meets the requirementsthat, according to J. Elster (1986: 16) a rational-choice explanation of anaction would ideally satisfy: The action is the best way for the agent tosatisfy his desire, given his belief; the belief is the best he could form,given the evidence. . . . Both the belief and the desire must be free of internalcontradictions.

    11 I shall return to this issue below.12 D.K. Foley (1998: 23) The hypothesis of rationality puts no observational

    restrictions on an agents actions. We can always rationalize behavior bypositing an appropriate objective function.

    13 On the relation between the extended and the previous version of hiseconomic approach Becker (1996: 5) notes: In a more fundamental approach,utility does not depend directly on goods and consumer capital stocks, but onlyon household-produced commodities, such as health, social standing andreputation, and pleasures of the senses. The production of these commoditiesin turn depends on goods, consumer capital, abilities, and other variables.

    14 Becker (1996: 11) I believe that even extreme forms of addictive behavior,such as heavy smoking or drinking, involve forward-looking, consistentutility-maximization.

    15 Becker (1996: 17) For if individuals are habitual, and if they were cooperativein the past, they might continue to be cooperative even if they could gain anadvantage from uncooperative behavior.

    16 Lucas (1977: 15) Even psychotic behavior can be (and today, is) understood asrational given a sufficiently abnormal view of relevant possibilities.

    17 Krugman (1998: 120) Economic actors are intelligent in the sense that theytake advantage of obvious opportunities.

    18 In answer to the question of why economic analyses come in for so muchcriticism both from within and outside the profession Krugman (1998: 120)notes, that it is because of extreme formulations such as the assumption thatintelligent behavior goes all the way to strict maximization of some objectivefunction.

    19 See e.g. the extensive literature on anomalies observed in behavioralexperiments (D. McFadden 1999; Laville 2000: 399f.).

    20 Among the critics of the empirical inadequacy of the perfect rationalityassumption H.A. Simon is, of course, the one who since decades and innumerous contributions has admonished economists to replace their model ofOlympian rationality with a concept of rationality that is more in line with thelimited cognitive and analytical powers of real human beings. See Vanberg(2002: 29ff.).

    21 D.M. Kreps (1990: 746) Most economic theory concerns completely rationalindividuals. . . . Completely rational individuals. . . populate the economies ofgeneral equilibrium.

    22 Tirole (2002: 636) Clearly, we, as a profession, should not impulsively adda new element into the utility function every time we cannot readily explain abehavior or an apparent concern.

    23 In ultimatum game experiments a fixed amount of money is to be dividedbetween two players. One player is assigned the right to propose a divisionbetween himself and the second player. If the second player accepts theproposal, the amount is divided as proposed. If he rejects the proposal bothplayers receive nothing. In experiments proposers typically offer larger amountsto the second player than the standard rationality postulate would lead oneto expect, a fact that, as Gueth (1995: 329f.) notes, inspired a lively and still

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    ongoing debate about the predictive role of game theory and, more specifically,about how fairness considerations influence behavior.

    24 In a more recent paper Gueth (2000) advances a general theoretical outlook atboundedly rational decision making that is, in many regards, similar to andcompatible with the evolutionary alternative that I shall discuss below.

    25 M. Blaug (1992: 230) So strong and persuasive has been the hold of the ration-ality postulate on modern economics that some have seriously denied that it ispossible to construct any economic theory not based on utility maximization.

    26 A. Sen (1987: 72) The inadequacy of the traditional assumption of rationalbehavior standardly used in economic theory has become hard to deny. Itwill not be an easy task to find replacements for the standard assumptions ofrational behavior. . . . (T)here is little hope of finding an alternative assumptionstructure that will be as simple and usable as the traditional assumptions ofself-interest maximization, or of consistency of choice. One of the standardobjections against H.A. Simons concept of bounded rationality has beenthat there is no unified theory of bounded rationality (R.J. Aumann 1997: 3;see also M. Blaug 1992: 159; F. Hahn 1996: 298; D.K. Foley 1998: 68;F. Laville 2000: 413).

    27 E. Mayr (1988: 30ff.; 1992). For a more detailed discussion of Mayrs approachthan will be presented here see Vanberg (2002: 15ff.).

    28 P.S. Albin (1998: xxvii): Economics is the study of rational choice and theconsequences of choice. . . . By and large the technology of rationality hasremained unexamined. G.M Hodgson (2002: 269) It is (in economics, V.V.)still taken for granted that the existence of human intentionality is sufficientto explain human action, without probing the causes behind intentionsthemselves.

    29 The distinction that Aumann (1997: 7) draws between Rule Rationality andAct Rationality points in the same direction as the distinction that I want toemphasize here.

    30 In response to complaints about the complexity of alternatives to classicalrationality H.A. Simon (2000: 252) notes: Such complexity does not implythat . . . economics should ignore the facts and go back to phantasmoagoriathat lack substance. . . . Even when we attain a tolerable level of realism, eco-nomics will not have the (relative) invariance of some other sciences. . . . Even ifthis is true, the empirical study of decision making will allow us to treat eco-nomics as a science: a historical science, like geology, evolutionary biology, andeven astronomy. We should not find this an unattractive prospect (ibid.: 252).

    31 If not otherwise noted, all references in this section are to Hollands writings.32 As both authors recognize (Arthur 1991: 355, Holland 1995: 85), there is a

    close affinity between Hollands theory of adaptive agents and W.B. Arthursbehavioral approach to bounded rationality. Noting that economists havelong been uneasy with the assumption of perfect, deductive rationality (Arthur1994: 411), Arthur argues that what is at issue is not whether perfect rationalityworks, but rather what to put in its place (ibid.: 406). The essence of hisalternative outlook Arthur (ibid.: 407) summarizes as follows: Humans . . .form mental models, or hypotheses, or subjective beliefs. . . . Each agentwill normally keep track of the performance of a private collection of suchbelief-models. When it comes time to make choices he acts upon his currentlymost credible . . . one. . . . Once actions are taken . . . agents update the trackrecord of their hypotheses.

    33 Holland (1998: 26): This use of models . . . comes into play in everything fromthe mundane task of finding an alternative route when roadwork blocks theusual way home, to the generation of sophisticated hypotheses in science.

  • The rationality postulate in economics 25

    34 Holland (1995: 34): We gain experience through repeated use of the buildingblocks, even though they may never appear in exactly the same combination.

    35 Holland (1998: 25): It is our ability to discern and use building blocksthat makes the perpetual novelty of our world understandable, and evenpredictable.

    36 Holland et al. (1986: 3) Classifier systems are a kind of rule-based system withgeneral mechanisms for processing rules in parallel, for adaptive generation ofnew rules, and for testing the effectiveness of existing rules.

    37 Hollands induction is perfectly compatible with K.R. Poppers views on thegrowth of knowledge (see Vanberg 2002: 22ff.), and is not subject to Popperscritical arguments on the logical problem of induction (Popper 1989: 52ff.).

    38 Holland (1995: 53): We want to assign each rule a strength that, overtime, comes to reflect the rules usefulness to the system. The procedure formodifying strength on the basis of experience is often called credit assignment.

    39 In order to capture the nature of crossover as an experience-guided process ofrule discovery Holland uses genetic algorithms in modeling the rule-generatingalgorithms for classifier systems (Holland 1988: 122; 1996: 287).

    40 As B. Arthur (1994: 408) summarizes the outlook that he shares with J.H.Holland: Agents differ, and each uses several subjective models . . . alwaysleading to new hypotheses. . . . It is also a world that is evolutionary, ormore accurately, coevolutionary. . . . In this world hypotheses . . . must provethemselves by competing and being adapted within an environment created byother agents hypotheses. The set of ideas or hypotheses ... coevolves.

    41 Holland (1998: 122): Under these conditions, the whole is indeed more thanthe sum of its parts. However, we can reduce the behavior of the whole to thelawful behavior of its parts, if we take the nonlinear interactions into account.

    42 As Holland (1998: 43) notes: Though prediction is difficult in these circum-stances, it is not a hopeless task. Everything depends on the level of detail werequire of the prediction.

    43 Holland (1992a: 184f.) Standard theories in physics, economics, and elsewhereare of little help because they typically concentrate on end points, whereascomplex adaptive systems never get there.

    44 Holland (1992b: 29) They (complex adaptive systems, V.V.) do not yield toclassic, equilibrium-based mathematical approaches, that rely on linearity,attractors, fixed points, and the like. A new kind of mathematical frameworkis required, one that emphasizes continuing adaptation through recombinationof building blocks.

    45 Exploring the properties of a perfect market, populated by perfectly rationalagents, is the research program that L. Walras chose for his pure economics(see Vanberg 2001), a research program that has been adopted by the neoclas-sical tradition in economics. Stanley Jevons, the second principal founder ofthe neoclassical tradition, defined a perfect market as one in which alltraders have perfect knowledge of the conditions of supply and demand(Jevons 1871: 87).

    46 According to Friedman (1953: 21), under competitive conditions individualsbehave as-if they were seeking rationally to maximize their expected returns . . .and had full knowledge of the data needed to succeed in this attempt. Fora discussion of the Alchian-Friedman as-if argument see e.g. J. Vromen (1995:33, 53).

    47 R.H. Day (1993: 61) summarizes, in similar terms, the reasoning of the newclassical school.

    48 Referring to Hayeks 1945 AER article The Use of Knowledge in Society H.A.Simon (1992: 27) applauds Hayek for arguing that the real importance of

  • 26 Articles

    the market mechanism is . . . that it conserves information for all of theeconomic actors, and allows them to behave rationally with relatively simplecomputations and on the basis of relatively little information. This is an ideathat advocates of bounded rationality can accept with enthusiasm, and it is apity that mainstream economics didnt take this proposal of von Hayek withthe seriousness it deserves.

    49 A. Clark (1997: 274f.) In sum, traditional economic theory (invoking thesubstantive rationality paradigm) succeeds wherever individual choice isstrongly constrained by social and institutional scaffolding that has itselfevolved subject to selective pressure to maximize rewards. Outside such highlyconstrained settings, genuine individual thought plays a greater role, and thepsychological irrealism of the substantive rationality model takes its toll.

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