Gerd Gigerenzer and Vernon Smith: Ecological rationality of heuristics in psychology and economics

Abstract

Behavioral economists use psychological findings to evaluate and revise economic decision theory, to build models that correspond directly to observations of behavior, and to develop descriptive accounts for deviations from principles of neoclassical rationality. One of the main sources of psychological insight is the heuristics and biases research program. This chapter introduces another source of psychological insights, the ecological rationality of fast-and-frugal heuristics, and is organized as follows. First, the chapter juxtaposes psychological (a la Gigerenzer) with economic (a la Smith) views of ecological rationality, thereby connecting fast-and-frugal heuristics to a major source of inspiration and motivation for behavioral economists, namely experimental economics. Then, it briefly reviews a collection of articles illustrating how the successful use of heuristics in business decision making can be understood by using ecological rationality as an investigative framework. Finally, it locates the field of inquiry for behavioral economics on a continuum of scientific problem solving in the interval that Weaver (1948) called organized complexity. Simple heuristics deserve special attention from behavioral economists because they work best in this very interval where exact methods of optimization are structurally unfitting. Put together, these connections, examples, and arguments suggest that mainstream behavioral economics can gain from integrating this less-explored psychological framework. This integration starts by attempting to formulate effective decision rules as fast-and-frugal heuristics and exploring their ecological rationality.