Ecological Rationality: A conceptual history Erwin Dekker & Blaž Remic Erasmus University Rotterdam Draft, May 2017 Introduction Ecological rationality is a term used by an increasing number of economists to refer to an alternative conception of rationality from behavioral economics. Behavioral economics of the Kahnemann and Tversky type, often referred to as the ‘heuristics and biases’ program, has become widely accepted as the way of integrating psychology and economics (Grüne- Yanoff, Marchionni, and Moscati 2014). The behavioral economics program presents itself as a serious challenge to the neoclassical picture of rational economic man, and argues that a serious reconsideration is necessary, since individuals are only boundedly rational (Tversky and Kahneman 1974; Kahneman 2003; Camerer, Loewenstein, and Rabin 2004; Mullainathan and Thaler 2000). The proponents of ecological rationality do not seek to challenge this claim of bounded rationality, in fact sometimes they go even further in emphasizing the cognitive limitations of individuals, but argue that in their interaction with their (social) environment individuals are nonetheless able to make reasonably good or even rational decisions. This is because they are able to use the environment to their advantage through cues or institutional features of that environment. The two main proponents of ecological rationality are Gerd Gigerenzer and Vernon Smith. On the surface they share the concept of ecological rationality. And both authors refer to each other’s work repeatedly to suggest that they are talking about the same thing (Smith 2003, 469; Gigerenzer 2015, 115–16). What is perhaps even more striking, they both point to Herbert Simon as an important influence on their work. In his most substantive work on rationality Vernon Smith argues that his distinction between constructivist and ecological rationality is in principle related to Herbert Simon’s distinction between objective and subjective rationality. The former meaning rationality from the experimenter’s point of view, and the latter rationality given the perceptual and evaluation premises of the subject. Hence, he argues that ecological rationality simply develops subjective rationality as Simon defined it. Gigerenzer, too, suggests that he is developing this neglected branch of Simon’s work, although he labels it slightly differently. He argues that the second component of Simon’s view on bounded rationality was the structure of the environment, which can help explain why simple heuristics work well, and when they work well. Despite these surface similarities we will demonstrate in this paper that Gigerenzer and Smith have developed distinct notions of ecological rationality, which are partially at odds with each other. Vernon Smith in his Nobel lecture describes ecological rationality as “an un-designed ecological system that emerges out of cultural and biological evolutionary processes: home grown principles of action, norms, traditions, and ‘morality’” (Smith, 2002). Gerd Gigerenzer argues that: “ecological rationality refers to the study of how cognitive strategies exploit the representation and structure of information in the environment to make reasonable judgments and decisions” (Gigerenzer 2000). From these two statements it should be fairly clear that they are talking about quite different research programs, which not only differ in what they study — Gigerenzer mostly heuristics, Smith mostly institutional environments — but also differ in what they seek to explain. Gigerenzer is much closer to psychology and modern decision sciences, which attempt to explain individual choices and decisions, whereas Smith is primarily interested in processes of social interaction and social systems. For Gigerenzer the central puzzle is how individuals manage to achieve their tasks given their limited cognitive abilities. For Vernon Smith the central puzzle is much closer to that of the other Smith, Adam — how can socially beneficial results emerge from actions which are self-centered and based on very limited knowledge. The second goal of our paper is to demonstrate that both types of ecological rationality present alternative combinations of psychology and economics. Especially Vernon Smith’s notion of ecological rationality seems prima facie devoid of psychology, a view recently reinforced by Don Ross (2014). In this paper we show, instead, that Gigerenzer’s and Vernon Smith’s concepts are much better understood as resulting from two rival perspectives in psychology. Gigerenzer’s is a functionalist psychology deeply indebted to the work of Egon Brunswik as he himself acknowledges. The psychology in Vernon Smith’s conception of ecological rationality is that of a situated and embodied cognition. This ‘embodied cognition’ perspective has recently challenged the cognitivist psychology, which has so influenced behavioral economics. This paper will proceed as follows, in the first section we outline what ecological rationality entails and how it is different from the bounded rationality conception in the behavioral economics program. In particular we will highlight how they give different interpretations of what is sometimes called Herbert Simon’s scissors: the cognitive abilities of the individual and the structure of the environment. This will set the stage for the different perspective on psychology we present in section two. In this section we will contrast the cognitive psychology of Simon and later Kahneman and Tversky with both the functionalist psychology of Brunswik and the modern perspective of ‘embodied’ cognition, which underlie the perspectives on ecological rationality. These different psychological perspectives will allow us to differentiate far more clearly between the two types of ecological rationality, and their differences with mainstream views on bounded rationality. In particular, we show that the mainstream perspective on bounded rationality results from a particular type of individualist economics with a particular type of cognitive and individualist psychology. An economics which places more emphasis on institutions and social interaction is in need of a different psychological underpinning. We conclude with implications for thinking about rationality in economics. 1. Economics and Psychology, or Simon’s scissors A recurring reference point for modern bounded rationality theories are the two blades of Herbert Simon’s scissors: “the structure of task environments and the computational capabilities of the actor” (Simon 1990, 7). Both the mainstream bounded rationality program and the alternative perspectives of ecological rationality seek to find a way to incorporate the environment and the capabilities of the actor. And all three research programs seek to trace back their lineage to Herbert Simon. Historically we might wonder what Herbert Simon really meant, and to what extent his research program came to fruition, as Petracca (2017) has recently done. We instead believe it is more helpful to examine how the different research programs have conceptualized the two blades of Simon’s scissors, especially since they all acknowledge the importance of both blades of the scissors. Let us first discuss the behavioural economics program. There has emerged something of a standard narrative in portraying the history of the relationship between economics and psychology (Hands 2010). A recent historical account by two practitioners of behavioral economics, Angner and Loewenstein (2012), present what can be labeled ‘the standard account’. They divide the history of the relationship in three periods corresponding to an appropriate prevalent approach to economics: classical and early neoclassical economics, post-war neoclassical theory, and the “new” behavioral economics. They then present the attitude of the economists towards psychology through each of those. The most characteristic attitude of the classical and early neoclassical era was one of embracing hedonic psychology, where human behavior is seen as being motivated by the pursuance of pleasure and avoidance of pain (Bruni and Sugden 2007). In other words, there is a direct link between pleasure and utility, and introspection is seen as the proper method to gather the necessary evidence. However, this view gets—according to the standard account—cast out of economics by the developments build on Pareto’s vision of non- psychological economics. The central figure in this development is Paul Samuelson with his “behaviorist” theory of preferences revealed through observable choices, instead of introspection. This apparent rejection of psychology makes the Samuelsonian, or post-war neo-classical economics, the target in this standard account, and the period is often portrayed as a sort of “dark ages” where the theory of revealed preferences plays a role of a grand inquisitor out to excommunicate anybody inclined toward psychological reasoning. According to the standard view, things get finally set straight by the “new” behavioral economics, which emerges as the culmination of the early less successful developments— with old institutionalism, through Keynes’ analysis of the animal spirits, to Herbert Simon’s bounded rationality. As a result of all that has happened before, this time proponents are “cautious not to repeat mistakes committed by early twentieth-century psychologists and identified by the behaviorists” (Angner and Loewenstein 2012, 659). The new synthesis is based on the view of cognitive science that “thinking can be best understood in terms