Adaptive Behavior and Economic Theory

Abstract

The relationship between psychological and economic views of behavior, once a subject of heavy dispute, is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences. In general terms, we view or model an individual as a collection of decision rules (rules that dictate the action to be taken in given situations) and a set of preferences used to evaluate the outcomes arising from particular situation-action combinations. These decision rules are continuously under review and revision; new decision rules are tried and tested against experience, and rules that produce desirable outcomes supplant those that do not. I use the term to refer to this trial-anderror process through which our modes of behavior are determined. If one is interested in modeling particular decisions in any very explicit way, it is obviously necessary to think about rather narrow aspects of an individual's entire set of decision rules: his or her personality. Experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others. In this tradition, the influence of the subject's (or, as an economist says, the agent's) preferences This essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory. It is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models. An experiment is proposed to test this idea.