Prices and knowledge: A market-process perspective

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‘Bounded rationality’ and the price system 67goal’. A more detailed analysis becomes necessary ‘as the complexityof the environment increases, or its speed of change’ (Simon1959:313). The traditional approach seems acceptable to Simon insimple, unchanging situations ‘where it might be assumed thatadditional computational time or power could not change theoutcome’ (1978b:457; emphasis added). For him,classical economics was highly successful in handling small-mazeproblems without depending on psychology. Labor relations,imperfect competition, uncertainty, and long-run dynamics encasethe decision maker in a much larger maze than those considered inclassical short-run static theory.(Simon 1963:343)The same emphasis appears in his criticism of search theory as aremedy for the deficiencies of neoclassical man:…the new theories do nothing to alleviate the computationalcomplexities facing the decision maker…but simply magnify andmultiply them. Now he needs to compute not merely the shapes ofhis supply and demand curves, but, in addition, the costs andbenefits of computing these shapes to greater accuracy as well.(Simon 1979:485)Simon uses the example of chess to illustrate the type of limitationhumans face. It is known that chess has at least one optimal (i.e.winning) strategy. However, to find it, it would be necessary to considera huge set of possible strategies. The number of strategies in this set,although finite, is unmanageably large even for the most powerfulcomputers. Therefore, Simon argues, it has not (yet) been possible tofind the optimal one. And this is also what happens in reality: the largenumber of variables to be taken into account makes it computationallyimpossible for individuals to achieve optimality (Simon 1972:417). 10The ‘information-rich’ worldIn Simon’s view, human beings in a complex world are always indanger of being saturated by the many variables that are there to beknown. 11 Information ‘consumes the attention of its recipients’(Simon 1971:173). Therefore, he describes this as an ‘information-
68 Prices and knowledgerich’ world (Simon 1970:167). In such a world ‘a wealth ofinformation creates a poverty of attention’ for individuals withbounded rationality (Simon 1971:173). The problem for individuals isnot the acquisition of information. Instead, it is to possessarrangements that will act as ‘buffers’ against irrelevant informationthat would distract their scarce attention. 12 (These arrangements, it canbe added, need not be deliberately designed.) The problem becomesone of conserving and effectively allocating this scarce element(Simon 1971:174). (As will be seen, this allocation, in Simon’sperspective, cannot be put in the usual terms of equating the marginalcosts and benefits of directing attention to a specific area.) Simon’sidea of an ‘information-rich’ world is not without problems, but itprovides another example of the difficulties he believes are faced byindividuals with bounded rationality. 13The consequences of bounded rationalitySimon argues that in reality it is generally not possible for humanbeings to optimize as neoclassical theory assumes they do. Given thecomplexity of man’s environment and his limited informationprocessingcapabilities, ‘no procedure that he can carry out with hisinformation processing equipment will enable him to discover theoptimal solution’ (Simon 1976:430). Simon’s point is not merely thatagents do not seem to be optimizing. He says that, because of theirknown computational limitations, they cannot be doing so in mostreal-world situations. Without this last argument his position would beopen to the suggestion that individuals may be making what Baumoland Quandt (1964) have called ‘optimally imperfect’ decisions. 14Although modern computers have, in Simon’s (1976:430) view,enlarged the area within which man’s computational capacity matchesthe complexity of the world, this area is still very small. 15 Therefore,Simon (1959:259–60) argues, human beings, who act quite reasonably(or successfully) in reality, must be engaging in something else than(neoclassical) optimizing. Simon’s (1955:243) suggestion is that oneshould observe how human actors actually proceed in reality to obtainan alternative explanation of their reasonable behaviour in a complexworld. (This is the ‘behavioural’ element in his work.)A sensible way in which bounded-rationality individuals coulddeal with a complex world, Simon suggests, is through the adoptionof simplifying devices. In his observations, for example, he finds that
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Prices and knowledge
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ContentsAcknowledgmentsvii1 Introdu
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Chapter 1IntroductionIn recent deca
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Introduction 3to changes, and not a
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6 Prices and knowledgeOUTLINE OF TH
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Chapter 2A theory of the market pro
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10 Prices and knowledgeexistence of
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12 Prices and knowledgebehavior of
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14 Prices and knowledgedisequilibri
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Page 27 and 28: 18 Prices and knowledgeproduce, bet
Page 29 and 30: 20 Prices and knowledgeimportant in
Page 31 and 32: 22 Prices and knowledgeauxiliary’
Page 33 and 34: 24 Prices and knowledgeSome writers
Page 35 and 36: 26 Prices and knowledgeall practica
Page 37 and 38: 28 Prices and knowledgemarket parti
Page 39 and 40: 30 Prices and knowledgeprices fully
Page 41 and 42: 32 Prices and knowledgeoptimal allo
Page 43 and 44: 34 Prices and knowledgeAn example.
Page 45 and 46: 36 Prices and knowledgeIn this case
Page 47 and 48: 38 Prices and knowledgeequilibrium.
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Page 51 and 52: 42 Prices and knowledgeprices in th
Page 53 and 54: 44 Prices and knowledgeThe informat
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Page 59 and 60: 50 Prices and knowledgeIt is probab
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Page 125 and 126: 116 Prices and knowledgemain virtue
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118 Prices and knowledgechapter 3 t
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120 Prices and knowledgenoticed, wo
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122 Prices and knowledgeAs a by-pro
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124 Notesmoney, the behavior of arb
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126 Notes14 It is not clear why the
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128 Notes39 See also Hahn (1984a:11
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130 Notestheories of cognition held
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132 Notes3 Economists, Nelson and W
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ReferencesAkerlof, G.A. (1970) ‘T
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136 ReferencesGilad, B. (1981) ‘A
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138 ReferencesKihlstrom, R.E. and M
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140 ReferencesOsana, H. (1978) ‘O
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142 Referencesfrontiers of analytic
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144 IndexCercone, N. 79change: and
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146 Index61, 118; on costless infor
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148 Indexmisinformation 55, 57mista
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150 IndexVeljanowski, C.G. 43voting
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