Environments through Economics A summary of chapter two of Simon’s The Sciences of the Artificial Brandon Wirick, 10 Jan 2004

Types of Rationality Substantive Rationality –How one should behave given reliable data about the behavior of an outer environment –Computationally trivial Procedural Rationality –How one should behave without reliable data –Computationally extremely difficult

Procedural Computation Solutions from many fields of science –Operations Research –Linear Programming (simplex method) –Queuing theory Heuristic Search –Humans use it –Produces “good enough” results –Computationally pragmatic

The Invisible Hand Works without central planning –Like a particle system –Often works better than economies that do use central planning (capitalism vs. socialism) “Rules of substantive rationality that are not backed by executable algorithms are a worthless currency.”

Uncertainty and Expectations Difficult to calculate into a rationality function Profit maximization usually requires correct expectations Prediction of rational competitive actions is very difficult (R,C)Coop.Defect Coop.(2, 2)(0, 3) Defect(3, 0)(1, 1)

Organizations vs. Markets Sometimes viewed as opposites Not antithetical, Simon argues –Large corporations obey market-like functions Allocation of funds to divisions Selection and evaluation of personnel Long-range planning for capital funds –Formal hierarchic organization != complete centralization of decision-making

Evolution and Optimization Evolution in no way guarantees global fitness Winter and Nelson compare firms’ standard operating procedures to genes Economic vs. biological evolution –Adoption of new ideas/traits –Transfer to other firms/organisms

Problems with Human Utility Classical view fails due to simplicity No psychophysical scale of happiness Introduction of “aspirations”

Conclusions No simplification possible