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  1. Commemorating the Centennial of the Birth of Herbert Simon
  2. In two minds: Dual processes and beyond - Oxford Scholarship
  3. In two minds: Dual processes and beyond

Economics, on the other hand, is quantitative, and if it is not a hard science, at least it is the "queen of the social sciences. The problem is, what is intuitively obvious is not always correct. And, there are two major reasons why intuition and economics are not like oil and water. First, economics concerns itself with decision making, and decisions are made in the brain. The human brain is the size of a grapefruit, weighing three pounds with approximately billion neurons, each physically independent but interacting with the other neurons. What we call intuition is, like decision making, a natural information processing function of the brain.

Second, despite the current emphasis on quantitative analysis and deductive logic there is a rich history of economists speaking about intuition. First, the human brain, specifically the neocortex, has a left and right hemisphere. The specialized analytical style of the left hemisphere and the specialized intuitive style of the right hemispheres complement each other. Shipping and handling.

Commemorating the Centennial of the Birth of Herbert Simon

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Email to friends Share on Facebook - opens in a new window or tab Share on Twitter - opens in a new window or tab Share on Pinterest - opens in a new window or tab Add to Watchlist. Opens image gallery Image not available Photos not available for this variation. Learn more - opens in new window or tab Seller information greatbookprices1 See all greatbookprices1 has no other items for sale. An error occurred, please try again. Like New: A book that looks new but has been read. The "Two Minds" noted economist Roger Frantz explores in this landmark book are, first, the analytical mind and, second, the intuitive mind.

In part one he presents the leading theories on intuition, discusses recent developments in cognitive science, and borrows from such non-economist intuitors as Albert Einstein, Jonas Salk, Henri Poincare, Ludwig von Beethoven, and Robert Louis Stevenson to explore the role of intuition in science and creativity.

In part two, Frantz considers the presumably analytic and logical nature of economics and then demonstrates the many ways in which economists from Adam Smith to Herbert Simon have relied on intuition as a fruitful mental activity. This book provides a rich complement and alternative perspective to some of the theoretical and mathematical models that have dominated the dismal science since the late s. Forms of rule-based reasoning are deliberation, formal analysis, and strategic memory. Sloman presents evidence from several studies showing that intuition and analysis often lead to similar judgments.

In addition, he points out that analytically based judgments become more intuitive commonsensical, or intuitively obvious to the casual observer over time. Others have classified the dual processing system as experiential and rational Epstein , intuition and analysis Hammond , narrative and logical-scientific Bruner , and mystic and savant Bergland Michael Polanyi refers to this duality as the intuitive and the formal Polanyi , Hayek describes himself as a puzzler.

Although he never uses the word intuition , Hayek seems to be describing someone who makes extensive use of it. The left hemisphere engages in step-by-step thinking. The right hemisphere is also where our overall worldview or vision is generated and changed if need be to account for anomalies. The left hemisphere is more of a follower and indifferent to discrepancies. The left hemisphere assembles facts, while the right integrates the individual facts into an overall worldview. When we communicate, the left hemisphere processes the text, while the right hemisphere puts it within a context to create understanding.

The right hemisphere holds various meanings of words, while the left hemisphere chooses the best. If you tell an individual with damage to the right hemisphere that he needs to ground himself, he is likely to place his feet on the ground. If you tell such a person to clear her mind before choosing, she may put her head under a water tap. The right hemisphere is essential in choosing rationally. We assume that individuals are rational, calculating costs and benefits. Why do we calculate costs and benefits?

We are motivated to do so. How do we know that humans are motivated, consciously or otherwise, to be rational? Keynes, in his book The Scope and Method of Economics , says that the basic principles of economics, including the principle of rational behavior, are a priori. That is, we know them both before and independent of observing human behavior. Economic laws, including the law of rational behavior, are thus derived from facts about human nature that are intuitive or obvious. Slutsky, Hicks, Allen, and Samuelson were among the group preaching economics as a science approach.

Slutsky focused on observable utility as expressed in price and quantity. Hicks and Allen continued this by replacing marginal utility with the marginal rate of substitution. Samuelson continued with revealed preferences Schumpeter, Behavioral economics assumes that cognitive activity—information processing—precedes behavior, serving as an intermediary between changes in the environment and changes in behavior. Human behavior is thus not mechanical, at least in the sense that it is variable.

Understanding nonmechanical behavior—unpredictable, untaught, capricious, variable—makes verstehen, or intuition, more important. The fact is, human behavior comes in both mechanical and nonmechanical varieties. In addition, none of the components of nonmechanical behavior may be motivated by utility maximization or psychological hedonism.

The study of intuition may also yield significant payoffs because it is an ingredient in altruism. Collard and Ickes have also discussed altruism and its relationship with empathy, sympathy, and intuition. Rational people know what they want; their motives are known consciously and are stable and consistent. Their responses are deliberate, and they know the consequences of their actions. Second, there is perfect mobility and no costs of adjustment. Third, there is costless intercommunication among people. Fourth, people make decisions independent of all others. Fifth, all activity is free and voluntary.

These are the necessary conditions of perfect competition. In real life, perfect intercommunication and hence perfect knowledge do not exist. In real life there is uncertainty, inertia, indifference, and habit, and hence the possibility of profit. However, it is not change as such that creates profit, but ignorance of change, unpredictable change, or error.

In order to distinguish change from ignorance, or predictable change from change that is not predictable, Knight distinguishes risk from uncertainty. Risk refers to situations in which there is measurable randomness, while uncertainty refers to unknowable randomness—ignorance. We have consciousness and free will, feelings and emotions, and react to the same stimuli in various ways. We are motivated by love and hate, exhibit capriciousness, and are subject to persuasion. We are rational, deliberative, and purposive, but also emotional.

Humans do not remain the same through time. We have memory and we adjust to experience. Knight is not sure that the world is understandable to any great extent, but if it can be understood, this is done through logical processes. This mental rambling is called judgment, common sense, and intuition. In these ways he is similar to other economists, notably Mill see Frantz and Simon see Frantz Following rules, behavior becomes both predictable and more geared toward satisficing than maximizing.

Hence, maximizing behavior, made possible by the lack of uncertainty, leads to unpredictable behavior. The c — d gap is generated by two broad classes of variables: environmental and perceptual. The former determine the degree of complexity faced, while the latter determine competence for dealing with complexity. Uncertainty also increases the chance of making the wrong decision or the right decision at the wrong time. Being alert to information is a developed skill, and greater uncertainty and a desire for making choices require more of the being-alert-to-information skill.

What sets the stage is our emotional mechanism, while one function of reason is to explore the possible paths to get there. Emotions interact with reason rational thinking in at least two important ways: by limiting the number of options considered and by limiting the aspects of the environment considered.

This is contrasted with subjective expected utility SEU theory, which assumes that individuals make a thorough examination of all options and aspects of the environment until a probability about the future can be constructed. Being boundedly rational means having the ability to discriminate between different pieces or sets of information, focus on a subset of available information, produce alternative scenarios, gather facts about the environment, and draw inferences from these facts ibid. Emotions serve these functions. Emotions have been designed by evolution to assist us in being boundedly rational ibid.

Not all human decisions involve choosing and reasoning in the normal sense used by economists conscious evaluation of the costs and benefits of various options. First, there are automatic bodily processes by which the body moves to a state of equilibrium. For example, a drop in blood sugar triggers physical changes in the body, leading to a state of hunger.

In two minds: Dual processes and beyond - Oxford Scholarship

We are neither conscious of nor have any control over these physical changes. Second, we engage in survival strategies that are automatic or instinctive. For example, when we see an oncoming car we automatically move away from it. We know that an oncoming car is dangerous and that the appropriate response or choice is to move.

While we are conscious of what is going on, the movement away from the car is automatic. Third, there are many choices we make in our life—concerning career, family, friendships, recreation, vacations, saving, voting—that require us to reason and choose in the usual sense of the terms. These choices involve short- and long-run costs and benefits, all of which are shrouded by complexity and uncertainty.

The difficulty with rational decision making is that calculating costs and benefits so as to maximize subjective expected utility will take too much time and is subject to too much error. Two reasons are offered: the human attention span is too short, and the capacity of our working memory is too small. In other words, the economic theory of rational decision making is best illustrated by brain-damaged individuals. The real-world decision-making process of individuals with normal brain functioning involves intuition. Depending upon the circumstances surrounding the decision, a subset of the available images will be automatically activated.

Even before reasoning takes place, when the mind considers an option with a bad outcome, the individual experiences an unpleasant gut feeling in the body. If the option contains a positive outcome, the gut feeling is pleasant. Feelings and emotions are not identical. An emotion is a physical phenomenon with bodily correlates that are often automatic and prompted within the subconscious. Emotions are often automatic and prompted by the subconscious.

Somatic markers, having screened alternatives, allow any subsequent cost-benefit calculations to be more accurate, and allow the decision-making process to be more efficient. There are two important implications. First, somatic markers make use of both attention and working memory, but it is our values that drive the process. After all, pleasant and unpleasant gut feelings imply values or preferences. Second, there is an optimal level of emotion because emotions can be either beneficial or costly in the process of decision making.

Third, emotion and logic or intuition and analysis are complements rather than substitutes. We are not always conscious of somatic markers. Somatic markers also act subconsciously, affecting those parts of the brain that control our appetites. Thus, for no apparent reason we would feel drawn to or away from some particular behavior. Damasio reports the results of gambling experiments illustrating his somatic marker hypothesis.

The experiment involves players turning over cards from four decks of cards. Players without frontal lobe brain damage began by sampling cards from all four decks. Seeing high rewards from decks A and B, they showed a preference for these decks. As the game continued and they were forced to pay large sums by cards in decks A and B, they switched to decks C and D. Players with frontal lobe brain damage began by sampling cards from all four decks, then showed a preference for the high-reward decks, A and B.

However, having lost large sums of money, they returned to their preference for decks A and B, lost all their money, and were forced to borrow more. They act, therefore, as if they have an inappropriate preference for the present at the expense of the future. It is as if they do not retain what they learned through education or experience; they do not have a theory of their own mind.

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Four neuroscientists from the University of Iowa College of Medicine studied patients with damage to their ventromedial prefrontal cortex. People with damage to this part of the brain score high on IQ tests and memory tests as often as non-brain-damaged persons. However, they tend to be more indecisive and make poor choices in real-life situations. In the long run, choosing from the bad deck led to net losses, while the good deck led to net gains. The brain-damaged patients showed no emotion measured by no physiological changes that accompany nervousness as their net losses continued to increase and did not tend to switch to the good deck.

Members of the control group showed signs of nervousness after a series of losses and switched to the good decks. They also began switching to the good decks even before they could articulate to the researchers that the good decks were a better longterm strategy. In other words, members of the control group had a hunch about which deck to choose from even before their conscious mind could formulate a reason. An explanation for the result is that the ventromedial prefrontal cortex is the part of the brain that stores memories of past rewards and punishments and creates an unconscious response to current rewards and punishments, which we call a hunch or an intuition.

The brain-damaged patients lack this intuitive ability and hence make poor decisions. Intuition can be an expression or form of a heuristic because both usually bypass all conscious thinking processes. Why use a heuristic or intuition? Because in a world that contains much risk and uncertainty, objective measures of probability are not always available. Human cognition processes may be divided into two broad groups: intuition and reason.

Humans use both because human cognition is a dual process. Adjectives used to describe the intuitive process include automatic, effortless, rapid, parallel, affective, nonverbal , and experiential. Adjectives used to describe reason include analytical, deliberative, verbal, rational , and rule-based Slovic , 4. First, the intuitive process produces results faster than the analytical system. Second, under conditions of uncertainty, when objective measures of probability are not available, intuition becomes the best method for subjectively evaluating the probability of events.

Third, because intuition is the product of a subconscious process, the conscious mind remains free to undertake other tasks and hence is more flexible. Fourth, in a complex environment, speed and flexibility are advantageous. In some sense, therefore, our intuitive system is more efficient than reason. Evaluating intuitively based judgments implies a standard of comparison. One standard often used is how well intuitive judgments compare to those made by analytical methods such as the rules of probability.

For example, are there more seven-letter words ending in -ing A or seven-letter words whose sixth letter is n B? Comparing actual intuitions to rules of probability creates a bias against intuitive judgments. In fact, rules of probability are statements of logic. Since nothing can be more logical than logic, intuitions can never be superior to the rules of probability.

The Tversky and Kahneman research agenda on biases and errors in judgment from using heuristics intuition shows that intuition is at best only as good as logic. And the emphasis is on the shortcomings of intuition. Hence, intuitive judgments are not made by listing possibilities and evaluating compound probabilities.

In each case, people are attempting to turn a difficult question into an easier one. In the example of - ing and - n - words, people can more easily remember the former, and thus they tend to believe that there are more of the former. During a hiring seminar a tenured faculty member is really trying to answer a difficult question: whether a candidate will remain intellectually active and is good enough to receive tenure. In attempting to answer the difficult question of whether a particular person is a librarian or a salesperson, people answer an easier question: are the known characteristics of that person more similar to those of a librarian or those of a salesperson?

Explorations of the Mind: Intuition with Daniel Kahneman

People make intuitive judgments by creating mental images of their environment in which relationships and rules are obvious, even if less detailed. This means that intuition is the result of mental model building. The mental model and the form of the intuition are dependent upon the question being answered. This is known as the availability heuristic. If we are asked to choose an occupation for someone we do not know based only on a sketch of their personality, we look for similarities between the personality sketch and the representative personality of a person in a particular occupation.

This is called the representative heuristic. If we are asked to make an assessment of something we know nothing about, such as the number of countries in the United Nations, we draw upon whatever data we are given. This is known as anchoring. Intuitions are a natural assessment or judgment mechanism of the human brain, and may be the best choice when no other means of judgment is available. No one expects models to be accurate and full of detail. In fact, the model-as-map analogy states that the power of a map or a model is that it does not have too much detail. In turning difficult questions into simpler ones and in building a generalized mental map of the environment, people would seem to be rational in using their intuition.

Unfortunately, our mental images of the world and the real world are not always consistent with each other. At the same time, when people attempt to think logically they often fail. It seems intuitive, therefore, that the true comparison should be between intuitive judgments and actual judgments when people are trying to be logical. At the very least, intuition may be a second-best way of making decisions. In other words, intuition can be accurate, often complementing analysis, but is subject to systematic error.

At the same time, the series of experiments by psychologists Amos Tversky and Daniel Kahneman have been acknowledged by economists as demonstrating that human decision making deviates significantly from the predictions of economic theory. At the same time, what seems intuitively obvious to the casual observer today often turns out to be just plain wrong tomorrow. Once upon a time it was common sense that the earth was at the center of the universe. Once upon a time it was common sense that nature could not contain a vacuum.

Once upon a time it was common sense that heavier objects fall faster than lighter objects. Once upon a time Newtonian physics was common sense among physicists. From Aristotle and the Greeks to Galileo, Newton, and Einstein is a movement from one commonsense idea to another Miller In one respect, it is common sense that common sense changes as we evolve and gain understanding of the world.

While it may seem counterintuitive that what we consider to be common sense changes, it actually is intuitively obvious that common sense changes! Kahneman and Tversky emphasized the representative, availability, an anchoring heuristics. The intuitive system is affective in nature and is faster than the analytical system. The intuitive system is, therefore, also believed to be a more efficient way to interact with an uncertain, complex environment.

In comparison, the analytical system relies on cognitions such as probabilities. There is a large body of research supporting the importance of affect in decision making. For example, we may have a positive feeling about strawberry Jell-O, but a negative feeling when hearing the name Bowl Championship Series. Visceral factors, or passions, include anger, fear, hunger, thirst, sexual desire, emotions, pain, and drug cravings. Unlike preferences, which are assumed to be stable and consistent in the short run, visceral states change quickly and are affected by the external environment and the condition of the body.

Visceral states have long been assumed to be destructive of behavior, but they are essential to humans. They affect survival and reproduction and hence quality of life. They are essential in decision making, yet we tend to underestimate them, preferring instead to see our decisions as rationally formulated. Visceral factors are powerful enough to create an internal conflict in us between what we want to do and what we otherwise believe is the rational course of action.

One example is that a visceral state such as fear can neutralize a rational evaluation of uncertainty risk. Affect affects our perception of risk. For example, the perception of risk from various hazards is positively correlated with feelings of danger about that hazard. That is, if people feel that the benefits of nuclear power or pesticide use in farming are high, then they tend to judge the risks as being low.

And where the risks are said to be low, the benefits are perceived to be high Slovic et al. Studies also show that people overpay for insurance when the object is beloved, regardless of its condition. Affective responses are part of almost every response or perception we have Zajonc That is, we see a lovely sky, not a sky; a pretty face, not a face; an attractive house, not a house.

In two minds: Dual processes and beyond

Affect, therefore, affects preferences. In addition, the affective may be more important than is usually suggested when looking at the world through a cognitive or rational framework. But this is probably seldom the actual case. The affective is considered part of our experiential system of thinking or information processing, as opposed to our analytical system.

The experiential also includes intuition. For example, are there more homeless people per million population in New York or Chicago? To answer this without researching the answer, you look for cues, such as the existence of rent control and public housing; unemployment, vacancy, and poverty rates; and average temperature. This is a classic way of making decisions intuitively. In a review of fast and frugal heuristics, Gigerenzer, Czerlinski, and Martignon find that their performance is comparable with multiple regression and Bayesian networks.

If the answer to question 1 is no, then you begin analyzing what the real need is. When you get through with question 3, then you have made a better choice than you otherwise would. Errors in judgment due to the use of intuition or heuristics are not limited to, say, undergraduates.

Individuals of all levels of education and skill make such errors. Under- and overoptimism occur in predictions made by doctors, weather forecasters, lawyers, sports commentators, professional gamblers, economists, and stockbrokers Koehler, Brenner, and Griffin Werner DeBondt and Richard Thaler studied the one- and two-year earnings-per-share forecasts by a group of professional forecasters.

The result of their statistical analysis is that forecasters overreact and that earnings-per-share forecasts are unrealistically optimistic. The same overreaction has been reported in the literature for exchange rate and macroeconomic forecasts. Forecasted changes are simply too extreme to be considered rational. In a study of decision making among physicists, Simon and Simon studied the protocols of two people solving a physics problem by recording them verbalizing what they were thinking while solving the problem. One of the persons was a novice at this type of problem solving, the other an expert.

The expert solved the problem in less time, did not follow the reason-only steps, required fewer steps to solve the problem, spent less time per step, did not write down as many relevant facts or equations to solve, and expressed more confidence. In essence, the skilled person took a series of appropriate shortcuts. These shortcuts imply that the expert used what Simon calls physical intuition—intuition used by physicists. That is, the expert read the problem, created a mental representation, and created a set of equations based on that mental representation to solve the problem.

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Taken separately, the importance of both behavioral economics and intuition should be intuitively obvious to the casual observer. Behavioral economics developed as a response to anomalies, empirical tests at odds with standard economic models of behavior. Behavioral economics has advanced our understanding of human behavior and increased the predictive power of our models. Intuition is a normal brain function, and by operating at a subconscious level, intuition leaves our conscious mind free for other uses. In other words, intuition is an efficient form of allocating our scarce mental resources, and major economists have discussed intuition as a tool in economics Frantz In this essay I have tried to argue that intuition is part of several topics of interest to behavioral economists: understanding human nature, decision making under uncertainty, the role of emotion in decision making, and intuition as a heuristic.

The role of intuition in decision making is also highlighted in the new field of neuroeconomics Glimcher Behavioral economics and intuition as a tool of economic decision making will continue to gain importance within our profession.

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