Bounded rationality: the two cultures

Abstract

Research on bounded rationality has two cultures, which I call ‘idealistic’ and ‘pragmatic’. Technically, the cultures differ on whether they (1) build models based on normative axioms or empirical facts, (2) assume that people's goal is to optimize or to satisfice, (3) do not or do model psychological processes, (4) let parameters vary freely or fix them, (5) aim at explanation or prediction and (6) test models from one or both cultures. Each culture tells a story about people's rationality. The story of the idealistic culture is frustrating, with people in principle being able to know what they should do, but in practice systematically failing to do it. This story makes one hide in books for intellectual solace or surrender to the designs of someone smarter. The story of the pragmatic culture is empowering: If people are educated to use the right tool in the right situation, they do well.