1. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 1 IAREP/SABE World Meeting 2008 Procedural Rationality And Habit Formation - How Far Does The Habit Reach? Pavel Stika Institute of Economic Studies Charles University, Prague, Czech Republic

2. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 2 Why methodological realism? Part 1

3. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 3 Why methodological realism? Methodological instrumentalism dominates current economic thought (Friedman 1953: A billiard player parallel) Characteristics: Methodological individualism and substantial rationality Limits: Explanation of pro-social behaviour (see e.g. Zamagni 2005)

4. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 4 Why methodological realism? Theory of science: Thomas Kuhn Unexplained anomaly calls for new paradigm Imre Lakatos Degenerative research programme needs modifications to explain known facts Niels Bohr Discontinuous vs. cumulative evolution of science … Karl Popper Falsification approach neglects methodological instrumentalism at all

5. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 5 Methodological realism and rationality Reasoning Part 2

6. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 6 Rationality and methodological realism When taking decisions people face ► external limitations (budget, time) ► and also internal limitations (cognitive, computational) Fundamental uncertainty ► Unknown probability ► Unknown value of outcomes ► Unknown number outcomes

7. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 7 Rationality and methodological realism When taking decisions people face ► external limitations (budget, time) ► and also internal limitations (cognitive, computational) Fundamental uncertainty ► Unknown probability ► Unknown value of outcomes ► Unknown number outcomes Optimization impossible !!!

8. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 8 Rationality and methodological realism Herbert Simon (1976) introduces Procedural rationality ► Heuristics leading to a satisfying outcome 1. When a satisfactory solution has been reached, stop searching 2. Take the present and the recent past as guides for the future 3. Assume that the present evaluation of the future is correct 4. Follow the opinion of majority 5. Look for alternative actions when existing ones are too uncertain 6. Take actions that reduce the amount of uncertainty 7. When uncertainty is too large, postpone decision

9. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 9 Rationality and methodological realism How does it all work in brief? Lavoie 1992: “When people take decisions, or even when they set their preferences, they rely on habits, customs, conventions and norms” “When the old routines cannot provide a satisfactory answer they have to be replaced”

10. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 10 Rationality and methodological realism How does it all work in brief? Lavoie 1992: “When people take decisions, or even when they set their preferences, they rely on habits, customs, conventions and norms” “When the old routines cannot provide a satisfactory answer they have to be replaced” This is a great challenge for economics..

11. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 11 Habits from the point of view of the cognitive science Basis for reasoning Part 3

12. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 12 Habits from the point of view of the cognitive science Inspiration from philosophy: Rene Descartes We can not rely on objective existence of phenomenon John Locke Substance problem – naming of both simple and complex notions with simple names – people oversimplify David Hume Habit is the only basis for judgment and prediction Charles Peirce (founder of pragmaticism) Reasoning is a system which establishes belief and the essence of belief is habit

13. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 13 Habits from the point of view of the cognitive science Inspiration from psychology Sigmund Freud, Karl Jung - … Robert Ornstein Jerry Fodor Actual world Cognitive map of world Activity Encapsulated information Fixation of belief

14. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 14 Habits from the point of view of the cognitive science Perception vs. endoception Endocepts (Ariety 1976) ► Mental representation of world, our tool for orientation ► Created by habituation during ontogenetic development ► Reinforcement and stabilization during time Since pubescence ► Endoception precedes perception ► Awareness attracted only by new or pain/pleasure evoking phenomenon

15. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 15 Conclusions ► Economists are well aware of realistic reasoning - procedural rationality ► They should however be aware also of the basis for reasoning – mental representation of world described by the endoception approach There is a common denominator for both:

16. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 16 Conclusions ► Economists are well aware of realistic reasoning - procedural rationality ► They should however be aware also of the basis for reasoning – mental representation of world described by the endoception approach There is a common denominator for both: h a b i t

17. 6 September 2008Procedural Rationality And Habit Formation - How Far Does The Habit Reach?Page 17 IAREP/SABE World Meeting 2008 Thank you for attention Procedural Rationality And Habit Formation - How Far Does The Habit Reach? Pavel Stika Institute of Economic Studies Charles University, Prague, Czech Republic