A behavioral approach to the rational choice analysis of the limits of state action

Originally published in Journal of European Public Policy

Some economists argue that ignorance, real-world complexities and market failures undermine the ability of self-regulating markets to operate in a way that approximates an efficient process. In more recent discussions, cognitive processes, in the form of various biases, have become the primary focus of analytical attention. This paper counters these claims. Instead of responding with a doubling down on the commitment to rational choice models, we argue that the individuals that populate our model are highly imperfect, as is the world in which they live. Economic agents are human actors, not computers. They possess beliefs and expectations, hopes and fears and formulate their purposes and plans accordingly. They strive to achieve their desired ends and do the best they can give the constraints they face. In the process of striving, people rely on institutions to cope with their ignorance, to manage uncertainty and risk and to figure out response strategies to achieve their goals. Our analysis emphasizes the filtering processes of alternative institutional arrangements that allow imperfect people to navigate the world.

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