Rationality in Economics: Constructivist and Ecological Forms

Rationality in Economics: Constructivist and Ecological Forms

by Vernon L. Smith
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Cambridge University Press
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Rationality in Economics: Constructivist and Ecological Forms

The principal findings of experimental economics are that impersonal exchange in markets converges in repeated interaction to the equilibrium states implied by economic theory, under information conditions far weaker than specified in the theory. In personal, social, and economic exchange, as studied in two-person games, cooperation exceeds the prediction of traditional game theory. This book relates these two findings to field studies and applications and integrates them with the main themes of the Scottish Enlightenment and with the thoughts of F. A. Hayek.

Product Details

ISBN-13: 9780521133388
Publisher: Cambridge University Press
Publication date: 10/12/2009
Edition description: New Edition
Pages: 386
Product dimensions: 6.10(w) x 9.00(h) x 1.10(d)

Table of Contents

Preface     xiii
Acknowledgments     xix
Introduction     1
Rationality, Markets, and Institutions     13
Rediscovering the Scottish Philosophers     15
Exchange in Social and Economic Order     15
Lessons from Scotland     18
On Two Forms of Rationality     24
Introduction     24
Constructivist Rationality     26
Limitations and Distractions of Constructivist Rationality     32
Ecological Rationality     36
Implications     41
Impersonal Exchange: The Extended Order of the Market     43
Relating the Two Concepts of a Rational Order     45
Introduction     45
Airline Route Deregulation     47
The California Energy Crisis     50
Economic Systems Design     53
Constructivism as Rational Reconstruction of Emergent Order     57
Market Institutions and Performance     61
Knowledge, Institutions, and Markets     61
The Iowa Electronic Market     68
Strategy Proof-ness: Theory and Behavior     70
Did Gresham Have a Law?     74
Market Power and the Efficacy of Markets     75
Equilibrium with a Dominant Firm?     75
The Ethyl Case and Antitrust Policy     77
Gasoline Market Behavior and Competition Policy     81
Predatory Pricing     83
Entry Cost and Competition: Contestable Markets Theory     86
Asymmetric Information and Equilibrium without Process     94
Rationality in Asymmetric Information Markets     94
The Neoclassical Synthesis     101
Hayek and the Hurwicz Program     104
Experimental Markets with Asymmetric Information     108
Markets for Quality     109
Labor Markets and Efficiency Wages     111
FCC Spectrum Auctions and Combinatorial Designs: Theory and Experiment     115
Introduction     115
Auctions: Modeling Institutions     116
Economics of English Auctions     117
Independent Private Values     118
Common Values     121
Review of Relevant Experimental Results     125
Single Object Auctions     126
Common Value Auctions     126
A "Winner's Curse" in Private Value English Auctions for Gambles?     127
Jump Bidding and the Class of Badly Performing Multiple-Unit English Auctions     127
The English Clock Corrects Bad Performance     130
Combinatorial Auctions     131
Tests of SMR and a Proposed Alternative     133
The FCC Auction Design Process     137
Auction Design for Complex Environments     140
The Combo Clock: Simple Solutions for Complex Auctions     141
Implications for the Design of Spectrum Auctions     144
Psychology and Markets     149
Psychology's Challenge to Constructivist Rationality     149
Psychology, Economics, and the Two Forms of Rationality     156
What Is Fairness?     161
Examples of Fairness     163
Fairness: An Experimental Market Test     166
What Is Rationality?     168
Economic Survival versus Maximizing Utility     169
Maximizing the Probability of Survival     169
Maximizing Expected "Profit," or Discounted Withdrawals     172
Is It Rational to Be "Rational"?     173
Literature Background     176
Modeling Net Subjective Value     177
Examples from Experiments     179
Monetary Incentives: Further Discussion     180
Rationality in Collectives and the Sense of Number     182
Market Rationality: Capital versus Commodity and Service Flow Markets      186
Personal Exchange: The External Order of Social Exchange     189
Emergent Order without the Law     192
Rules and Order     192
Ellickson Out-Coases Coase     196
The Effects of Context on Behavior     199
Introduction and Elementary Theoretical Background     199
Perspectives on Interpreting Results     200
How Does Context Matter?     202
Anonymity as a Treatment Procedure     204
Perception, Context, and the Internal Order of the Mind     206
The Significance of Experimental Procedures     209
Overview of Experimental Procedures     211
The Ultimatum Game Example     212
Dictator Games     220
Behavioral Deviation from Prediction: Error, Confusion, or Evidence of Brain Function?     227
Investment Trust Games: Effects of Gains from Exchange in Dictator Giving     234
A Celebrated Two-Stage Dictator Game     234
Reciprocity or Other-Regarding Preferences?     237
Reciprocity in Trust Games     245
Introduction     245
Trust Games without a Punishment Option     250
Why So Much Cooperation?     253
Is It the Subjects? Undergraduates versus Graduates      253
Machiavelli, Trust, and Cooperation: Mandeville's Knaves?     254
Is It Utility for Other Payoff?     257
Reciprocity versus Preferences: Does Own Opportunity Cost Influence Other Choice?     260
Extensive versus Normal (Strategic) Form Games     264
Trust Games with Punishment Options     267
Self-Regarding Cooperation in Repeat Play? Protocols with and without Direct Punishment     272
Effect of Matching Protocol on Frequency of Cooperation in Trust Games with and without Punishment     274
Comparison of Behavior in the Repeated Play of Extensive and Normal Form Games     274
A Matching Protocol Based on Sorting for Cooperative Behavior     275
Order and Rationality in Method and Mind     281
Rationality in Science     283
Introduction     283
Rational Constructivism in Method     285
Can We Derive Theory Directly from Observation?     285
Economics: Is It an Experimental Science?     290
What Is the Scientists' qua Experimentalists' Image of What They Do?     296
Auxiliaries and the Ambiguity of Rejecting the "Test" Hypothesis     297
A D-Q Example from Physics     298
A Proposition and Some Economics Examples     300
The Methodology of Positive Economics     304
In View of Proposition 2, What Are Experimentalists and Theorists to Do?     304
Experimental Knowledge Drives Experimental Method     305
The Machine Builders     308
Technology and Science     308
Technology and Experimental Economics     309
In Conclusion     311
Neuroeconomics: The Internal Order of the Mind     312
Introduction     312
Individual Decision Making     314
Rewards and the Brain     316
Strategic Interaction: Moves, Intentions, and Mind Reading     316
What Are the Neuroeconomic Questions?     317
A Summary     322
References     329
Index     353

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