The Cognitive Basis of Institutions: A Synthesis of Behavioral and Institutional Economics (Perspectives in Behavioral Economics and the Economics of Behavior)

Societies display large differences in economic performance. The institu- tional characteristics of societies underlie these differences. From a cognitive viewpoint, this book asks: what are institutions and how do they evolve? The book highlights some basic mechanisms of interaction between mental phe- nomena and institutions. Understanding institutions is ultimately about understanding how we think. Institutions are a matter of the mind. The mind is not a completely exter- nal object of analysis. Behavioral decision theory can enhance the analysis of institutional features. Since institutions are composed of individuals who are subject to heuristics and biases, institutions and their decision-making rules can either magnify or mitigate the impact of heuristics and biases. Furthermore, in an institutional position, its decision-making rules and proce- dures may themselves lead to the emergence and reinforcement of heuristics and biases. Institutional structures are complex: individual elements are inter- dependent and self-organizing. Past experience is encapsulated in institu- tional rules. By following rules, individuals reduce their uncertainty about the possible outcomes that their social interactions can bring about. Institutions then become uncertainty-reducing devices. The Cognitive Basis Of Institutions: A Synthesis Of Behavioral And Institutional Economics Synthesizes Modern Research In Behavioral Economics With Traditional Institutional Economics. This Work Emphasizes That Institution And Agent Are Inextricably Linked, And That Both Cognitive And Institutional Processes Coalesce To Influence Human Decision-making. It Integrates Cognition And Institution Through The Behavioral Economics Theoretical Lens Of Bounded Rationality. Methodologically, It Develops Game-theoretical, Complexity And Neuroeconomic Solutions To Unite Study Of The Two Areas. The Work Concludes By Proposing General Implications For The Economic Study Of Decisions Using The Cognitive-institutional Approach, Also Providing Specific Recommendations For Public Policy. Front Cover; The Cognitive Basis Of Institutions; Copyright Page; Contents; Preface; 1 Introduction: What Are Institutions?; 1.1 Institutions And Rules; 1.2 Belief Systems; 1.3 Norms And Coordination; 1.4 Organizations; 1.5 Summary; References; 2 Institutions And The Economics Of Behavior I; 2.1 Introduction; 2.2 Old Institutional Economics; 2.3 New Institutional Economics; 2.4 Incentives And Efficiency; 2.5 Trust And Property Rights; 2.5.1 Overview Of The Model; 2.5.2 The Model; 2.5.3 Analysis; 2.6 Institutional Inequality; 2.6.1 Background; 2.6.2 The Model; 2.6.3 Analysis; 2.6.4 Discussion 2.7 Summaryreferences; Further Reading; 3 Institutions And The Economics Of Behavior Ii; 3.1 The Economics Of Behavior; 3.2 Nudges; 3.3 Discounting; 3.3.1 Hyperbolic Discounting; 3.3.2 Addiction; 3.4 Herds; 3.4.1 The Framework; 3.4.2 Behavior; 3.4.3 Collective Configurations Of Opinions; 3.4.4 Web Herd Behavior: An Example; 3.5 Culture; 3.6 Culture And Hierarchy; 3.6.1 The Setting; 3.6.2 The Framework; 3.6.3 Analysis; 3.7 Possible Selves; 3.7.1 The Setting; 3.7.2 The Framework; 3.7.3 Self-confidence And Economic Performance; 3.8 Summary; References; 4 Why Bounded Rationality? 4.1 Introduction4.2 Bounded Rationality; 4.3 Ecological Rationality; 4.4 Entrepreneurship; 4.5 Summary; References; 5 Emergence Of Prosocial Behavior; 5.1 Introduction; 5.2 Reputation; 5.3 Social Preferences; 5.4 Altruism And Envy; 5.4.1 The Model; 5.4.2 The Evolution Of Norms; 5.5 Altruistic Punishment; 5.6 Norm Compliance; 5.6.1 The Model; 5.6.2 Choice Of �a#x80;#x9c;x�a#x80;#x9d;; 5.6.3 Choice Of �a#x80;#x9c;p�a#x80;#x9d;; 5.6.4 Evolution Of �a#x80;#x9c;�aµ�a#x80;#x9d;; 5.7 Corporate Social Performance; 5.7.1 Overview; 5.7.2 The Model; 5.7.3 Discussion; 5.8 Conservation On The Commons; 5.8.1 The Model; 5.8.2 Equilibrium And Behavior 5.8.3 Identity And Resource Dynamics5.9 Summary; References; 6 Cognition And Order; 6.1 Introduction; 6.2 Sensory Order; 6.3 Mind And Institutions; 6.4 Complexity And Society; 6.5 Summary; References; Further Reading; 7 Society And Knowledge; 7.1 Introduction; 7.2 Dispersed Knowledge; A Note On Common Knowledge; 7.3 Rules Of Conduct; 7.4 Salience; 7.5 Culture As Information; 7.5.1 Culture And Social Learning; 7.5.2 Culture And Path Dependence; 7.6 Summary; References; 8 Understanding Institutional Evolution; 8.1 Introduction; 8.2 Institutions As Rules; 8.3 Institutions As Equilibria 8.4 Understanding Coevolution8.5 Cultural Evolution; 8.6 Summary; References; Index; Back Cover Shinji Teraji. Includes Bibliographical References And Index. Cover......Page 1 The Cognitive Basis of Institutions: A Synthesis of Behavioral and Institutional Economics ......Page 3 Copyright......Page 4 Preface......Page 5 1.1 Institutions and Rules......Page 10 1.2 Belief Systems......Page 15 1.3 Norms and Coordination......Page 21 1.4 Organizations......Page 26 References......Page 38 2.1 Introduction......Page 42 2.2 Old Institutional Economics......Page 43 2.3 New Institutional Economics......Page 46 2.4 Incentives and Efficiency......Page 51 2.5 Trust and Property Rights......Page 54 2.5.1 Overview of the Model......Page 57 2.5.2 The Model......Page 59 2.5.3 Analysis......Page 61 2.6 Institutional Inequality......Page 66 2.6.1 Background......Page 69 2.6.2 The Model......Page 72 2.6.3 Analysis......Page 74 2.6.4 Discussion......Page 78 2.7 Summary......Page 81 References......Page 82 Further Reading......Page 85 3.1 The Economics of Behavior......Page 86 3.2 Nudges......Page 90 3.3.1 Hyperbolic Discounting......Page 93 3.3.2 Addiction......Page 98 3.4 Herds......Page 100 3.4.1 The Framework......Page 104 3.4.2 Behavior......Page 106 3.4.3 Collective Configurations of Opinions......Page 108 3.4.4 Web Herd Behavior: An Example......Page 111 3.5 Culture......Page 113 3.6 Culture and Hierarchy......Page 117 3.6.1 The Setting......Page 120 3.6.2 The Framework......Page 122 3.6.3 Analysis......Page 124 3.7 Possible Selves......Page 128 3.7.1 The Setting......Page 131 3.7.2 The Framework......Page 134 3.7.3 Self-Confidence and Economic Performance......Page 137 3.8 Summary......Page 141 References......Page 142 4.1 Introduction......Page 146 4.2 Bounded Rationality......Page 150 4.3 Ecological Rationality......Page 159 4.4 Entrepreneurship......Page 163 4.5 Summary......Page 173 References......Page 175 5.1 Introduction......Page 178 5.2 Reputation......Page 180 5.3 Social Preferences......Page 183 5.4 Altruism and Envy......Page 186 5.4.1 The Model......Page 189 5.4.2 The Evolution of Norms......Page 190 5.5 Altruistic Punishment......Page 195 5.6 Norm Compliance......Page 199 5.6.1 The Model......Page 201 5.6.2 Choice of “x”......Page 204 5.6.3 Choice of “p”......Page 205 5.6.4 Evolution of “μ”......Page 206 5.7 Corporate Social Performance......Page 209 5.7.1 Overview......Page 214 5.7.2 The Model......Page 218 5.7.3 Discussion......Page 221 5.8 Conservation on the Commons......Page 226 5.8.1 The Model......Page 228 5.8.2 Equilibrium and Behavior......Page 229 5.8.3 Identity and Resource Dynamics......Page 231 References......Page 236 6.1 Introduction......Page 242 6.2 Sensory Order......Page 245 6.3 Mind and Institutions......Page 254 6.4 Complexity and Society......Page 262 6.5 Summary......Page 267 References......Page 268 Further Reading......Page 270 7.1 Introduction......Page 271 7.2 Dispersed Knowledge......Page 273 A Note on Common Knowledge......Page 279 7.3 Rules of Conduct......Page 282 7.4 Salience......Page 293 7.5.1 Culture and Social Learning......Page 301 7.5.2 Culture and Path Dependence......Page 306 7.6 Summary......Page 312 References......Page 313 8.1 Introduction......Page 317 8.2 Institutions as Rules......Page 321 8.3 Institutions as Equilibria......Page 325 8.4 Understanding Coevolution......Page 331 8.5 Cultural Evolution......Page 340 8.6 Summary......Page 349 References......Page 350 Index......Page 354 Back COver......Page 360 The Cognitive Basis of Institutions: A Synthesis of Behavioral and Institutional Economics synthesizes modern research in behavioral economics with traditional institutional economics. This work emphasizes that institution and agent are inextricably linked, and that both cognitive and institutional processes coalesce to influence human decision-making. It integrates cognition and institution through the behavioral economics theoretical lens of bounded rationality. Methodologically, it develops game-theoretical, complexity and neuroeconomic solutions to unite study of the two areas. The work concludes by proposing general implications for the economic study of decisions using the cognitive-institutional approach, also providing specific recommendations for public policy. Reveals how institutional structures and individual actions interact and coevolve cognitively Connects individual decision-making, decision-making processes and institutional formation Unites our understanding of cooperative ‘prosocial'behavior with the institutional dynamics that may create it Discusses the implications of the behavioral-institutional paradigm for paternalism and libertarianism in public policy