Bounded rationality and decomposability: The basis for integrating cognitive and evolutionary economics

This paper explores the interconnections between two of Herbert Simon's key concepts, bounded rationality and decomposability, and show how this unity provides the starting point for merging cognitively focused approaches to behavioral economics with evolutionary/institutional economics into a coherent single framework. It does this by showing how the authors' ways of looking at the world were influenced by Simon's thinking: in the case of Earl, this led initially to a check-list view of choice that helped to make sense of the role of non-price factors in international trade and the de-industrialization problem in the UK in the 1970s, while the notion that resilient systems tend to be structurally decomposable helped make sense of why sharp rises in prices of 'basic' products can produce crises. Potts came to see the economic system as a multi-level system of partially decomposable systems that agents developed as a means of coping with bounded rationality. The paper ends by reflecting on potential for instability as the world economy becomes increasingly globalized and its web of connections potentially more intricate.