Do economists satisfice?


Jason Collins


September 1, 2011

In Herbert Simon’s 1978 Swedish Bank prize lecture (pdf), he stated the following:

Milton Friedman sums up his celebrated polemic against realism in theory (1953, p. 41, italics supplied):

Complete “realism” is clearly unattainable, and the question whether a theory is realistic “enough” can be settled only be seeing whether it yields predictions that are good enough for the purpose in hand or that are better than predictions from alternative theories.

….. This is sometimes even interpreted to mean that economic theories of decision making are not falsified in any interesting or relevant sense when their empirical predictions of microphenomena are found to be grossly incompatible with the observed data. Such theories, we are told, are still realistic “enough” provided that they do not contradict aggregate observations of concern to political economy. Thus economists who are zealous in insisting that economic actors maximize turn around and become satisficers when the evaluation of their own theories is concerned. They believe that businessmen maximize, but they know that economic theorists satisfice.

As I read this quote, I pictured Friedman’s response (I am not aware whether he did respond). Friedman might say that it does not matter whether the assumption about the behaviour of economists is accurate. If we wanted to predict economists’ behaviour, would these predictions be any different based on whether they are satisficers or maximisers? If not, the assumption does not matter either way.

On this dimension, I would argue that this assumption matters. If economists were maximisers and not satisficers in the way they built their models and made predictions, economics courses might have changed since the 1960s. Moribund theories would be more readily discarded. And we’d more readily tear down the house that we built.

Of course, this is probably looking at the wrong dimension. Economists may be satisficers in their models as they are maximisers in other dimensions - career, status, prestige. To achieve those things, it may not matter whether you have made an economic model that accurately reflects the world.