The Problem With Bounded Rationality: On Behavioral Assumptions in the Theory of the Firm

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    I discuss and compare alternative approaches to integrating bounded rationality with the theory of economic organization, concentrating on the organizational capabilities approach, which is strongly influenced by the works of Nelson and Winter, organizational economics, particularly transaction cost economics, and, finally, a small subset of the literature on biases to judgment and cognition. I argue that, contrary to the conventional view, both the organizational
    capabilities approach and transaction cost economics treat bounded rationality rather “thinly,” the former being in actuality more taken up with organizational routines than individual boundedly rational behavior, the latter only invoking bounded rationality to the extent that it helps explaining incompleteness of contracting. The rich literature on cognitive biases, etc. suggests a “thick” approach to bounded rationality that may be helpful with respect to furthering
    the theory of economic organization. Examples pertaining to the internal organization of firms are provided
    Original languageEnglish
    Place of PublicationFrederiksberg
    PublisherDRUID - Danish Research Unit for Industrial Dynamics
    Number of pages35
    ISBN (Print)8778731143
    Publication statusPublished - 2001
    SeriesDRUID Working Paper

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