Bounded Rationality in Decision-making: How Cognitive Shortcuts and Professional Value May Interfere with Market-based Regulation

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Manchester University Press, 2009 - Business & Economics - 246 pages
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Challenging standard economic models, this book shows how farmers tend to use cognitive shortcuts and how professional pride frequently trumps profit considerations when farmers make decisions about fertilizers and other types of decisions. This indicates that environmental regulation based on economic incentives may not work as effectively as economic theory and ex ante policy analyses would have it.     Rather than assuming that regulations respond to incentive-based policies, this book examines the ways in which they do, which is rare in the policy-making literature. Furthermore, the book demonstrates in a real world setting how bounded rationality plays out, whereas bounded rationality in decision-making has typically been studied in a laboratory setting.   The book contains a comprehensive and comparative review of rational and bounded rationality models of behavior. It explores concepts developed in books such as Administrative Behaviour by Herbert Simon and, A Behavioural Theory of the Firm by Cyert and March, and it reviews their implications for economic theory and environmental policy. Empirically, the book examines the responses of farmers in Denmark to fertilizer regulation and the decision processes they go through regarding fertilizer levels. Fertilizer regulation builds on economically optimal levels and therefore offers a rational standard against which to compare actual decisions on fertilizer levels. This lends the study a significant methodological advantage, and it represents a novel approach to the study of rationality. It combines quantitative analysis of fertilizer practices among Danish farmers over more than 10 years with qualitative interviews. These are compared with analysis other types of decisions showing that decision processes and the weight assigned to economic considerations varies by type of decisions.

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Theoretical approaches to rational behaviour
Research design

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About the author (2009)

Helle Nielsen is a Social Scientist in policy analysis at the National Environmental Research Institute, Aarhus University

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