Herbert Simon. He might very well have been one of those rare breeds of thinkers that seemingly has no bounds when it comes to fields of expertise. How insatiable he was in knowledge, ironically he was the first to figure out that our brain must have limited processing capacity, and would not be able to operate without the usage of some sort of shortcuts. Pioneering in artificial intelligence, Herbert, also taught computer science and psychology, did research in cognitive science, philosophy, applied mathematics, and received the Bank of Sweden Prize for Economics in honor of Alfred Nobel. He introduced the concept of bounded rationality as to indicate how humans are limited in spending computational resources in making their decisions to pick the item or activity with the maximum utility value, simply because there are too many options, and information about these options are not evenly distributed to the point where there are also hidden options present.

Injecting the concept of Pacificing in economic theory

In other words, there have to be different computational processes happening that would prevent humans from standing still, pondering their options for weeks on end, deciding what to eat for lunch. Our bounded rationality is essential for our survival. Clearly inspired on his background in computer science, he introduced the concept of heuristics as cognitive shortcuts to quickly find a good enough solution, and introduced the economic notion of satisficing (a clever combination of satisfy and suffice). Simon explained his concept as follows: “The alternative approach employed in these papers is based on what I shall call the principle of bounded rationality: The capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solutions is required for objectively rational behavior in the real world – or even for a reasonable approximation to such objective rationality”. He believed that if our brain was a large computational and optimizing machine without any built-in rules that would be used to optimize every step in life, we would end up spending an infinite amount of time and energy. Clearly that’s not the case, so he therefore introduced the concept of these built-in rules, making us capable of rational reasoning, but in a limited way.

The foundation of Behavioral Economics

Later, two Isreali behavioral researchers would discover how our reasoning processes or not only imperfect, due to its boundedness, but severly flawed altogether hereby generating mounting empirical evidence that breaks away from the optimization machine analogy of Simon, and introduce more qualitive differences compared to the previously helt rational beliefs. While the notion of heuristics still hold, the processes surrounding them seem to be deeply flawed. Their research will become the foundation of behavioral economics, that would shake the orthodoxy on financial and economic views to their core. I will cover the findings of Daniel Kahneman and Amos Tversky throughout my upcoming essay with much detail, as they are two noneconomists that have exerted the most influence on economic thinking over the past two centuries.

There is a bureaucrat living in our brain

One side effect of our misplaced belief that we are endowed with this beautiful thinking and reasoning machine sitting in our skull, is that we are prone to develop illusions. Some can be even very problematic in nature as well as expensive in glucose. Thinking consumes a lot of energy, you see. So less thinking we need to do, the better. That’s exactly what the architects of bureaucratic systems seemed to believe, when German sociologist Max Weber first described bureaucracy. In Belgium, one of the world’s most socialist countries, bureaucrats are held to be what respectable people do for a living. Approximately 55% to 56% of the GDP is spent on keeping the largest bureaucratic government worldwide alive. Let there be no wonder why Brussels is the capital of Europe.

Imagine you have to export some lovely Belgian chocolates to parts of Southern Asia. The bureaucrat will not care what you are doing, even if you were shipping rice to China. His job is not to ponder the economics of your transaction. He is simply there to verify if you have all the required signatures from twenty other departments so that he can add another signature. His only job is to execute a simple if-then-else statement, often with a Boolean true/false outcome. Actually, you are lucky this bureaucrat doesn’t meditate on general economic theory or try to solve balance of trade equations for every visitor who is seeking to add another signature. Trade would simply come crashing to a halt! Nope, we want this bureaucrat to have a long and prosperous career of mind-numbing work, like stamping documents for forty to forty-five years straight. Let’s not forget, a mild touch of rudeness and the clock-gazing routine at 4:59 pm sharp before he ferociously heads home to his beloved couch, beer in hand, and dreams of a slow and steady approach to retirement.

But wait a minute… Am I postulating the merits of bureaucracy, or overthinking the merit of heuristics?

It depends, but a rulebook does serve a purpose as it saves time and effort. Rules have their value. The bureaucrat simply follows the rules to be efficient, much like our brain follows a set of heuristics to make fast decisions. Not because we are seeking to make the best decision, but want to make a useful decision with a minimum of effort as fast as possible. Consider a group of people in the Savannah, theorizing upon seeing a tiger on whether the tiger belongs to this or that taxonomy, making risk assessments, and calculating the average speed to outrun the tiger. This group will be served as the tiger’s lunch for the day, unlike those who ran away with the slightest presumption and were not slowed down by the smallest amount of thinking. They definitely had a head start in their survival compared to their cognitively preoccupied cousin.

Remember how our survival depends on fast decision making, not necessarily the best decision making. Embrace your inner cognitive bureaucrat. How repulsive of a realization that might be for an entrepreneur…