Analyse Heuristics As Expected Utility Maximising Strategies: Making Friends With Theoretical Economists

Abstract

During the last forty years, laboratory research on decision-making has repeatedly indicated that people do not make decisions by maximizing expected utility but instead use heuristics. These findings have led to sharp criticism of game theoretical models in economics, which assume utility maximization. This critique treats heuristic based decision-making and expected utility maximizing models as mutually exclusive. I show that this is not the case, but that game theory models are complements to heuristic theories. I outline the differing epistemological foundations of positivistic heuristic theories and non-positivistic game theory models and suggest that they serve different purposes. I exemplify how game theory is already helping biologists make sense of animal heuristics. I apply it to a previously published aspiration-level heuristic for price setting to illustrate how it can help psychologists too. I show that the game theoretical model accounts for the empirical characteristics which motivated the aspiration-level heuristic. I argue that this example illustrates how theoretical economic modelling can work in tandem with heuristic theories and help us make sense of the latter.