6 September 2008 Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 1

IAREP/SABE World Meeting 2008

Procedural Rationality And Habit Formation - How Far Does The Habit Reach?

Pavel StikaInstitute of Economic Studies

Charles University, Prague, Czech Republic

6 September 2008 Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 2

Why methodological realism?

Part 1

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Why methodological realism?

Methodological instrumentalism dominates current economic thought(Friedman 1953: A billiard player parallel)

Characteristics:

Methodological individualism and substantial rationality

Limits:

Explanation of pro-social behaviour (see e.g. Zamagni 2005)

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Why methodological realism?

Theory of science:

Thomas KuhnUnexplained anomaly calls for new paradigm

Imre LakatosDegenerative research programme needs modifications to explain known facts

Niels BohrDiscontinuous vs. cumulative evolution of science

…

Karl PopperFalsification approach neglects methodological instrumentalism at all

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Methodological realism and rationality

Reasoning

Part 2

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Rationality and methodological realism

When taking decisions people face► external limitations (budget, time)► and also internal limitations (cognitive, computational)

Fundamental uncertainty► Unknown probability► Unknown value of outcomes► Unknown number outcomes

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Rationality and methodological realism

When taking decisions people face► external limitations (budget, time)► and also internal limitations (cognitive, computational)

Fundamental uncertainty► Unknown probability► Unknown value of outcomes► Unknown number outcomes

Optimization impossible !!!

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Rationality and methodological realism

Herbert Simon (1976) introduces

Procedural rationality► Heuristics leading to a satisfying outcome

1. When a satisfactory solution has been reached, stop searching

2. Take the present and the recent past as guides for the future

3. Assume that the present evaluation of the future is correct

4. Follow the opinion of majority

5. Look for alternative actions when existing ones are too uncertain

6. Take actions that reduce the amount of uncertainty

7. When uncertainty is too large, postpone decision

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Rationality and methodological realism

How does it all work in brief?

Lavoie 1992:

“When people take decisions, or even when they set their preferences, they rely on habits, customs, conventions and norms”

“When the old routines cannot provide a satisfactory answer they have to be replaced”

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Rationality and methodological realism

How does it all work in brief?

Lavoie 1992:

“When people take decisions, or even when they set their preferences, they rely on habits, customs, conventions and norms”

“When the old routines cannot provide a satisfactory answer they have to be replaced”

This is a great challenge for economics..

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Habits from the point of view of the cognitive science

Basis for reasoning

Part 3

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Habits from the point of view of the cognitive science

Inspiration from philosophy:Rene DescartesWe can not rely on objective existence of phenomenon

John LockeSubstance problem – naming of both simple and complex notions with simple names – people oversimplify

David HumeHabit is the only basis for judgment and prediction

Charles Peirce (founder of pragmaticism)Reasoning is a system which establishes belief and the essence of belief is habit

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Habits from the point of view of the cognitive science

Inspiration from psychologySigmund Freud, Karl Jung - …

Robert Ornstein Jerry Fodor

Actual world

Cognitive map of world

Activity • Encapsulated information

• Fixation of belief

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Habits from the point of view of the cognitive science

Perception vs. endoceptionEndocepts (Ariety 1976)

► Mental representation of world, our tool for orientation

► Created by habituation during ontogenetic development

► Reinforcement and stabilization during time

Since pubescence

► Endoception precedes perception

► Awareness attracted only by new or pain/pleasure evoking phenomenon

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Conclusions

► Economists are well aware of realistic reasoning -procedural rationality

► They should however be aware also of the basis for reasoning – mental representation of world described by the endoception approach

There is a common denominator for both:

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Conclusions

► Economists are well aware of realistic reasoning - procedural rationality

► They should however be aware also of the basis for reasoning – mental representation of world described by the endoception approach

There is a common denominator for both:

h a b i t

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IAREP/SABE World Meeting 2008

Thank you for attention

Procedural Rationality And Habit Formation - How Far Does The Habit Reach?

Pavel Stika

Institute of Economic Studies

Charles University, Prague, Czech Republic