Basic Research Project J1-6828
Bounded Rationality and Economic Performance

The standard models of economic behaviour assume selfish and rational choice. Traditionally these assumptions were seen sufficient to explain market dynamics. Recent experimental research as well as the empirical evidence from financial markets have not supported of the standard economic model, however. This has now led to the relaxation of the selfishness assumption in the economic theory. The model of rational choice has remained rather unchallenged, however, despite the extreme conditions it assumes from human cognition. One reason for its persistence is the lack of empirical evidence about its limits in economic environments.

Here we propose to empirically test the idea that in complex economic environments humans resort to simple heuristics to make decisions. In particular, a sequence of laboratory experiments with human subjects will be developed with the aim to detect (i) when do people use simple rules of thumb rather than rational optimization, (ii) the distribution of these rules in different populations, and (iii) whether simple rules spread by means of learning, imitation or best response. The focus will be on environments in which trust, cooperation and reputation are necessary to achieve efficiency, attending the classic economic problems of asymmetric information and incomplete contracts.

Using our empirical method, we will achieve the following objectives:
1. Determine the conditions behind the shift from rational to heuristic decision making.
2. Determine the roles of institutions and culture on the use of heuristics.
3. Use empirical evidence to develop models of behavioural adaptation in market environments.

We will conduct economic laboratory experiments with human subjects, which will enable a candid insight into the details of (boundedly) rational decision making. In order to investigate the institutional and cultural determinants of behavioural rules we will replicate baseline experiments in Slovenia, Netherlands and Serbia, which have or used to have a similar institutional environment. We will use the methodology of evolutionary game theory to investigate the dynamics of behavioural rules and how they adapt to institutional change. The novelty of our research is to base the dynamic models on the actual strategies detected in our experiments, rather than on abstract assumptions.

The main applicant, dr. Aljaž Ule, has a proven research record in both experimental economics and in game theoretic modelling, based on his tenure at the major economic laboratory at the University of Amsterdam. His expertise will be complemented by two teams, one at the Faculty of Mathematics, Natural Sciences and Informatics (Famnit) at the University of Primorska and another at the Institute of Anthropological and Spatial Studies at ZRC SAZU in Ljubljana. The Famnit team will contribute experts in data analysis and evolutionary modelling. The ZRC team will contribute experts in cultural research in the Balkans. The main experiments will be conducted in collaboration with the CJM center at the Faculty of Social Sciences at the University in Ljubljana.

Basic Research Project J1-6828Bounded Rationality and Economic Performance

Basic Research Project J1-6828
Bounded Rationality and Economic Performance