Embrace your inner bureaucrat
A short read and thought about how our cognitive bureaucracy has been one of the biggest drivers in economic decision-making
Herbert Simon might very well have been one of those rare breed of thinkers that seemingly has no bounds when it comes to fields of expertise. How insatiable he was in knowledge! He was a political scientist first, but he pioneered in artificial intelligence, taught computer science and psychology, did research in cognitive psychology, philosophy, and applied mathematics. He received the Bank of Sweden Prize for Economics in honor of Alfred Nobel. How diverse is that! Interestingly, he was the first to figure out that the human brain has limited processing capacity, and may be unable to operate without using some sort of shortcuts. He introduced the concept of bounded rationality which explains how humans are limited in their decision making process by lack of information and availability of too many options. We end up making decisions that satisfice a particular criterion instead of making a decision that maximizes utility value.
Injecting the concept of pacificing in economic theory
Our bounded rationality is essential for our survival. At any moment, humans have different computational processes happening that prevent them from standing still while pondering their options for weeks on end, deciding what to eat for lunch. That is why, in the 1950s, Herbert Simon was clearly inspired by his background in computer science to introduce 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 problem whose solution 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 are not only imperfect, due to boundedness, but severely flawed altogether. That way, they generated mounting empirical evidence that breaks away from the optimization machine analogy of Simon, and introduce more qualitive differences compared to the previously held rational beliefs. While the notion of heuristics still holds, the processes surrounding them seem to be deeply flawed. The Israeli research later became the foundation of behavioral economics that shook the orthodoxy on financial and economic views to their core. I will cover the findings of Daniel Kahneman and Amos Tversky in my upcoming essays with much detail, as they are two non-economists that have exerted the most influence on economic thinking over the past two centuries.
There is a bureaucrat living in our brains
One side-effect of our misplaced belief that we are endowed with a beautiful thinking and reasoning machine our skulls is that we tend to develop illusions. Some illusions can be very problematic in nature and expensive in glucose. Thinking consumes a lot of energy by the way; therefore, the less thinking we 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 Europe’s most socialist-influenced 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. 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 that 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! We are happy for him to have a long and prosperous career of mind-numbing work, like stamping documents for forty to forty-five years straight with a mild touch of rudeness. Let’s not forget the clock-gazing routine at 4:59 pm sharp before he ferociously heads home to his beloved couch, beer in hand, and dream 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. Likewise, the brain follows a set of heuristics to make fast decisions, not because we are seeking to make the best decisions, but because we want to make useful decisions 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 become the tiger’s lunch for the day. However, those who run away with the slightest presumption and are not slowed down by the smallest amount of thinking will definitely have a head start in their survival compared to their cognitively preoccupied cousins.
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…