Cognitive Economics
Cognitive economics is based on an interdisciplinary analysis of problem-solving, decision-making, and change processes. In explaining economic behaviours, and the nature and evolution of institutions and economic organizations, it acknowledges a great relevance to psychology, but also to all cognitive sciences (Rizzello 2004).
A detailed explanation of the notion of cognitive economics is provided by Walliser and Topol (2007). The term economics is related to the coordination of the exchanges among heterogeneous agents. It is called “cognitive” because the subjects are characterized by their capability to process information. The analysis of economic microfoundations is based on cognitive psychology, but also philosophy of mind and neurobiology. Cognitive economics refuses the conceptual instrument of homo oeco- nomicus, considered the principal source of the separation between theory and economic reality. The refutation is a consequence of the acknowledgement of the relevant differences between real man and economic man. Real man shows limitations, with respect to neoclassical assumptions, both in his rationality and in his capabilities of acquiring and using information. As regards the limits of rationality, Simon is the main reference. He introduced the concepts of bounded rationality, procedural rationality, and satisficing (Simon 1947). Each of these concepts is a critique and an alternative to the full rationality assumption of traditional economics. The analysis of the limits in information acquisition follows a different path, but it arrives at an analogous conclusion, equally connoted in a cognitive key. The main reference is to Friedrich August Hayek (Hayek 1937, 1945, 1952). Indeed, Hayek’s contribution plays a central role in the rise of cognitive perspective. In particular, Hayek’s work is based on the analysis of the similarities between the way the human mind works and the evolution of institutions (Rizzello 1997).
However, while cognitive characterization of Simon’s work has always been recognized, in the case of Hayek, the characterization as a cognitive key of its contribution emerged only later. His role in behavioural economics has been acknowledged later but not unanimously.The cognitive dimension of the new analytical instruments introduced by Simon and Hayek are referable, directly or indirectly, to the concept of cognitive feedback, borrowed from cybernetics, and it represents the environmental answer to the cognitive behaviours of a subject. The relevance acknowledged to environment shows how cognitive economics includes some central ideas coming from social psychology and social cognition; an example of this is the idea of knowledge as a social result.
As a consequence, cognitive agents belong to a specific context and their behaviours can be understood only by taking this context into account. Choices and, more generally, economic behaviours depend on the characteristics of the individual, but also on the surrounding environment. At the same time, agents can shape and influence their environment. Preferences are not considered stable, invariant, and revealed in a univocal way through the choices, but neither are they accidental or only conditioned by psychological mechanisms (Walliser and Topol 2007). They are conditioned also by perceptive mechanisms, the social and institutional framework, and past direct or indirect experience. Therefore, although preferences are individual, patterns among subjects can be found. These regularities are emphasized by exchange, meant not just as economic exchange but in a wider sense.
A consequence of this approach is that an understanding of the economic phenomena requires an analysis of the context. The context is structured from the presence of institutions, necessary for the interaction. Institutions are characterized by a continuous evolution. Consequently, cognitive economics shows a strong relation with institutionalism and evolutionary economics.