Habit, Decision-Making, and Rationality: Comparing Thorstein Veblen and Early Herbert Simon

Abstract:

The article aims to contribute to the convergence between institutional and neo-Schumpeterian evolutionary economics. It intends to help unify the behavioral foundations of these two strands of thought by returning to the original views of their main historical inspirations. It thus proposes a comparative analysis of the theory of human behavior developed by Thorstein Veblen and Herbert Simon, respectively. The article notably discusses how Simon’s early work links together the notions of habit, rationality, and the decision-making process, and explores the extent to which his views are consistent with, complementary to, or divergent from Veblen’s. The article highlights several commonalities between Simon and Veblen’s views on habits. However, Simon departs from Veblen in developing a dual model of human behavior which clearly differentiates habit-based from decision-based behaviors. The article argues that neo-Schumpeterian evolutionary economists should go beyond this binary model and build on the pragmatist-Veblenian approach, in which these two dimensions are intimately entangled. This process could allow the economists in question to take advantage of the most valuable insights of institutional economics regarding the interactions between individual choices and habits and institutions.

Keywords::

• decision
• habit
• rationality
• Simon
• Veblen

JEL Classification Codes::

• B15
• B25
• B31
• B52
• D03

Notes

¹ The third edition of Administrative Behavior (published in 1976) has two main parts (Simon [1947] 1976). The first part (chapters I-XI) is identical to the original 1947 edition. The second part contains six additional chapters (chapters XII-XVII), each based on an article Simon published between 1947 and 1976. Every reference we make in the current article to Simon ([1947] 1976) is from the first part. The fourth edition of the book (published in 1997) has a different structure, where commentaries are appended to each of the chapters of the 1947 edition. We only make a few references to this last edition in the current article to highlight Simon’s 1997 views, as contained in the additional commentaries.

² As we use it throughout the article, the term “institutional economics” primarily refers to the original American institutionalism and its contemporary followers (Hodgson 2004a; Rutherford 2011). The label “neo-Schumpeterian evolutionary economics” encompasses the various fields of evolutionary thinking in economics that have been inspired by Nelson and Winter’s (1982) seminal book. We use the adjective “neo-Schumpeterian” to conform to the current usage, without suggesting that Joseph Schumpeter is the sole major influence of this rich and diverse strand of thought.

³ According to Peirce (1878, 291), “[t]he essence of belief is the establishment of a habit, and different beliefs are distinguished by the different modes of action to which they give rise.” James’s theory of habit also intertwines with his theory of inquiry, even if his version of pragmatism differs to some extent from Peirce’s version (for a comprehensive analysis of these differences, which are interpreted in terms of complementarity rather than opposition, see Lawlor 2006).

⁴ Nonetheless, Cohen (2007) emphasizes that Simon’s training at the University of Chicago included a logic course from Rudolph Carnap, which may have played a role in his endorsement of the principles of logical positivism and his commitment to “empiricism.” In this regard, Cohen finds Simon’s references to the pragmatist philosopher and psychologist John Dewey in Administrative Behavior somewhat ambiguous, as he clearly discards Dewey’s fundamental view that fact and value are entangled.

⁵ In their historic addendum, Allen Newell and Herbert A. Simon (1972, 873–889) indeed consider those two authors as pioneers of modern cognitive psychology.

⁶ For readings of Simon’s works on rationality along these lines, see the classical works of Spiro J. Latsis (1976), Philippe Mongin (1984), and Richard N. Langlois (1986).

⁷ For further developments, see Hunter Crowther-Heyck (2006).

⁸ Newell and Simon (1972, 882) refer to the period from 1954 to 1958 as the “critical years.”

⁹ Actually, we can find this very same binary model of human behavior in George Katona’s works, which represent the other main founding source of behavioral economics (see Katona 1951, 1968, 1975, and 1980).

¹⁰ This question has obvious ontological dimensions. However, considering the magnitude of the subject, we decided, following the suggestion of a referee, to leave aside the ontological positions of Veblen and Simon and their relations to different ontologies in economics and philosophy. This should be the subject matter of a separate work.

¹¹ A very specific, but important psychological source of Simon’s works deserves to be mentioned here: the “levels of aspiration psychology” (see the seminal works of Lewin, Dembo, Festinger and Sears 1944).

¹² Such an approach has notably proved fruitful in studying energy consumption (Maréchal 2010) and urban transportation behaviors (Brette, Buhler, Lazaric and Maréchal 2014).

Additional information

Notes on contributors

Olivier Brette

Olivier Brette is an associate professor of economics at INSA, University of Lyon, and he is affiliated with the CNRS Research Unit TRIANGLE, UMR 5206 in Lyon (France).

Nathalie Lazaric

Nathalie Lazaric is a research professor in CNRS GREDEG, Université Côte d’Azur (France), and president of the European Association for Evolutionary Political Economy (EAEPE).

Victor Vieira da Silva

Victor Vieira da Silva is a professor of economics and sociology in Lycée Edouard Herriot of Lyon (France).