The Cognitive Illusion Controversy: a Methodological Debate in Disguise That Matters to Economists

How do we make decisions? According to subjective expected utility (SEU) theory, which still holds sway throughout much of the social sciences, “decision makers behave as if utilities were assigned to outcomes, probabilities were attached states of nature, and decisions were made by taking expected utilities” (Mas-Collel, Whinston, & Green, 1995, p. 205, their emphasis). Although this is an elegant and often useful way to model decision outcomes, it imposes heroic knowledge and rationality requirements, and it clearly does not reflect the way people make decisions most of the time. Herbert Simon (1956) was the most outspoken critic of the assumption that SEU theory can be applied in any literal way to human choices. In his view, “the SEU model is a beautiful object deserving a prominent place in Plato’s heaven of ideas” (1990a, p. 194); real humans, however, “have neither the facts nor the consistent structure of values nor the reasoning power at their disposal that would be required . . . to apply SEU principles” (p. 197). Simon did not limit himself to criticizing the “Olympian model” of SEU theory (Simon, 1990a, p. 198); he also proposed an alternative way to think about decision making, which he called bounded rationality. Simon’s vision of bounded rationality has two interlocking components: the limitations of the human mind and the informational structures of the environment in which the mind operates. Simon captured the interplay between these two components thus: “Human rational behavior . . . is shaped by a scissors whose two blades are the structure of task environments and the computational capabilities of the actor” (Simon, 1990b, p. 7). What Simon in effect argued was that rational behavior can only be understood in terms of both scissor blades: the mind and the environment. The cognitive blade requires that models of human judgment and decision-making rest on realistic assumptions about the mind’s capacities rather than on idealized