Mr. Spock vs. Homer Simpson

I recently finished reading Herbert A. Simon’s autobiography, Models of My Life. Simon was the 1978 Nobel Prize winner in economics and the father of artificial intelligence. Among economists, he’s best known for his theories of bounded rationality and satisificing.

Mr. Spock vs. Homer Simpson

Rather than man being a completely rational calculator always trying to maximize his utility, similar to Mr. Spock of Star Trek fame, it seems in many areas of life we act more like Homer Simpson of The Simpsons. It’s doubtful a Mr. Spock would need Alcoholics or Gambling Anonymous, or the idea of a self-control credit card that, in advance, voluntarily limits one’s spending in various categories automatically.

Not all economists are convinced by the research that man is not rational, let alone willing to forego their useful assumption of rationality. Ludwig von Mises refused to call bad decision making “irrational.” He stated:

Error, inefficiency, and failure must not be confused with irrationality. He who shoots wants, as a rule, to hit the mark. If he misses, he is not ‘irrational,’ he is a poor marksman.

David Friedman, in his book Hidden Order (highly recommended by the way), explains the assumption of rationality this way:

…the assumption describes our actions, not our thoughts. If you had to understand something intellectually in order to do it, none of us would be able to walk.

Economics is based on the assumption that people have reasonably simple objectives and choose the correct means to achieve them. Both assumptions are false—but useful.

Suppose someone is rational only half the time. Since there is generally one right way of doing things and many wrong ways, the rational behavior can be predicted but the irrational cannot. If we assume he is rational, we predict his behavior correctly about half the time—far from perfect, but a lot better than nothing. If I could do that well at the racetrack I would be a very rich man.

…rationality is an assumption I make about other people. I know myself well enough to allow for the consequences of my own irrationality. But for the vast mass of my fellow humans, about whom I know very little, rationality is the best predictive assumption available.

In short, I find both assumptions of rationality and irrationality useful. If Friedman is right, then we can predict 50% of human behavior with rationality, and perhaps some portion of the other 50% with irrationality.

And this is where I find Herbert Simon’s bounded rationality and satisficing concepts extremely explanatory. Bounded rationality posits that both elements of irrational and nonrational behavior bound the area of rational behavior.

Coupling the concept of satisficing to bounded rationality is how Simon explains how people really make decisions. Rather than attempting to maximize or optimize, people search for “good enough” actions. Simon writes:

Since my world picture approximates reality only crudely, I cannot aspire to optimize anything; at most, I can aim at satisficing. Searching for the best can only dissipate scarce cognitive resources; the best is the enemy of the good.

[Even Darwin's] natural selection only predicts that survivors will be fit enough, that is, fitter than their losing competitors; it postulates satisficing, not optimizing.

Could Simon’s satisficing concept explain why so many professional knowledge firms cling to their billable hours and timesheets?

It’s simply good enough, and certainly neither require much cognitive resources. Like driving, it’s an unconscious competence we don’t have to think too hard about.

If satisficing does explain it, then how do you overcome it?

What do you think?

Comments

  1. Yes, I think Simon’s ideas are right on. The billable hour is good enough to allow for unconscious competence, but perhaps that is changing. The buzz stirred in the legal world over the New York Times article and Dan Morris’ being cited in the Wall Street Journal are signs that some are waking from their coma.

    I will say that my appeals lately have tended toward the moral and ethical arguments rather than the pure business by the numbers approach. This is mostly because the numbers are easily dismissed. Moral and ethical grounds while harder to explain are also harder to dismiss.

  2. What a great post. It seems the minority of people in the world are those not satisfied with “good enough”, and their efforts for change are often resisted as unnecessary, inefficient, or ineffective.

    So as you asked: how do we overcome it? How do we overcome the tendency of the majority to cling to what works? I’m still working on figuring that one out.

  3. Hi Monica,

    Thanks for the comment. If you ever figure it out, let me know. We here at VeraSage are never satisfied with “good enough,” because we abhor the mediocrity of the majority.

    Btw, I like your blog, and if you liked the non-rival characteristic of knowledge, check out these 2 posts, which are derived from my latest book, Mind Over Matter:

    http://www.verasage.com/636/

    http://www.verasage.com/blog/ideas_are_more_valuable_than_their_execution_part_ii/

    I look forward to hearing from you more often.

  4. Eric Fetterolf says:

    Unconscious competence is what we all strive for in undertaking any project or new endeavour. Once achieved, we then focus our consciousness toward those tasks and lessons we have not yet achieved unconscious competance.

    The focus becomes persuading a person to take “scarce cognitive resources” and use those resources to learn new process: a process entirely different from the actual functional work of the firm. Pricing, like marketing, is not practicing law or accounting or providing IT work or plumbing.

    Like any other “sales” process, you must uncover enough value in the “buyers” mind to undergo the cost of acquiring the skill. Your blogs and books clearly show the cost is steep. Pricing skills are not easily nor cheaply acquired. You not only have the value gap to fight, you have the initial “barrier to entry” costs to fight as well.

    If a great opportunity is presented to me to make $10M in 6 months and I only need to put down $250k in cash today to do so, I would have to pass as I don’t have $250k in cash. I clearly see the value. I just cannot afford the entry fee.

    How can VeraSage show that the “entry fee” of Pricing, while steep, is affordable to all?

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