Human capital: Linking behavior to rational choice via dual process theory

Abstract

This article begins with the observation that the cost of human capital is a direct measure of the importance of bounded rationality for human decision making. It outlines a simple model of human capital with a finite event space based upon dual process theory from cognitive psychology. The model integrates behavioral choice with rational choice via learning by doing, and implies a learning by doing curve that does a good job fitting the data in Jovanovic and Nyarko (1995). It is also shown that if the criteria for performance is deterministic — namely for each event there is a bright line optimal decision, then even if the event space is infinite, behavior converges to rational choice for a large class of similarity measures. The implications of this approach are illustrated with some evidence from the literature on short run versus long run labor supply in the context of unemployment insurance, and the hours choice of taxi drivers in New York City.