Simon’s Grand Theme and the Economics of Organization

Although the economics of organization may have been one of the first areas where the notion of bounded rationality was systematically applied in theorizing, later developments do not seem to have gone significantly beyond Simon (1951), Cyert and March (1963), Marschak and Radner (1972) and Williamson (1975). If anything, the use, or at least invocation, of the notion of bounded rationality appears to have declined, as theorists have discovered that asymmetric information (a precise concept) can often do the job that they intended BR (an imprecise concept) to do for them. Moreover, at least some parts of the economics of…..

Introduction: In a series of methodologically oriented papers, Herbert Simon (e.g., 1976, 1978, 1979) tried to convince economists to take seriously his Grand Theme of bounded rationality (henceforth, “BR”). His examples of bounded rationality and its implications quite often involved the business firm. Indeed, he sometimes took the notion of “administrative man” to be synonymous with a boundedly rational agent. Of course, Simon himself published prolifically on firms and other organizations (e.g., Simon, 1949, 1951, 1991; March and Simon, 1958). Given all this, it is surprising that  so I shall argue economists of organization have made little use of the notion of BR, and that the arguably most successful contemporary economics research that explicitly builds on BR takes place in fields such as behavioral finance and behavioral law and economics. In the following, I argue organization particularly contract theory (Hart, 1990)  have developed into a highly formal and axiomatic enterprise, and BR is notoriously hard to formalize to the satisfaction of high theorists.

Author: Nicolai J. Foss

Source: Copenhagen Business School

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