Journal of Economic Behavior Organization Vol. 43 2000 1–34
Bounded rationality, social and cultural norms, and interdependence via reference groups
Hiroaki Hayakawa Professor
∗
Institute of Policy and Planning Sciences, University of Tsukuba, Tsukuba, Ibaraki 305-8573, Japan Received 27 April 1999; received in revised form 1 September 1999; accepted 1 September 1999
Abstract
This paper presents an axiomatic theory of preference orderings similar in abstraction to the stan- dard preference model, but developed for the analysis of bounded rationality where social norms
and reference groups serve as sources of low-cost heuristics that can absorb costly deliberation and other limits to rationality. A two-step choice process is proposed, in which physical wants are
satisfied sequentially with social want reducing choice indeterminacy. Social want is captured by emulation–avoidance of reference groups, and the serviceabilities of a commodity bundle to it are
imputed. The resulting norm-guided behavior is rationalizable in the traditional sense. © 2000 El- sevier Science B.V. All rights reserved.
JEL classification: D0; D1; D8; B4 Keywords: Bounded rationality; Reference groups; Social norms; Social want; Life styles
1. An overview
Whether individual decision makers are homo economicus guided by independent prefer- ences or homo sociologicus guided by social norms has been a matter of defining concerns
to both economists and sociologists. In broad terms, most economists have maintained that human behavior, whether in isolation or embedded in social situations, can be explained,
with proper modifications if necessary, within the rational choice framework where prefer- ences are treated as given data. Sociologists, on the other hand, have largely maintained that
it is social norms and order that shape preferences of individuals and give meaning to their actions. In recent years, the crossing between the two fields has intensified Coleman, 1990;
∗
Present address: Nara-Aoyama Danchi 17-101, Aoyama 3-1, Nara 630-8101, Japan. Tel.fax: +81-742-26-2687. E-mail address: hirohaytezukayama-u.ac.jp H. Hayakawa.
0167-268100 – see front matter © 2000 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 7 - 2 6 8 1 0 0 0 0 1 0 6 - 2
2 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
Baron and Hannan, 1994; Smelser and Swedberg, 1994; Bowles, 1998. Among many ques- tions that have been addressed by both camps is the fundamental one: why do individuals
allow their behaviors to be molded by social and cultural norms if they are assumed to be capable of making decisions without the help of such norms? In retrospect, the Lucas
critique that individuals’ decision rules are constantly altered to reflect the structure of the decision-making environment cannot have been aloof to this question, since human behav-
ior in a culturally and socially structured environment is of no exception to this critique Lucas, 1976.
In dealing with social interactions, economists normally start with preferences that are given and represented by a utility function. Adding social factors to the list of the arguments
of this function produces a variety of externalities that have been explored in various models. Thus, economists have been answering the fundamental question essentially by saying,
rather circularly, that individuals have preferences over social interactions. Most sociologists would defy such an approach for the very reason that the existence of a fixed mapping from
social and other factors into utility would imply that social norms are, after an infinite regress, reduced to preferences of individuals Hodgson, 1986. To many of them, social order is
something that cannot be reduced to self-interested or voluntary actions of individuals e.g., Smelser, 1990; Tilly, 1991, much less to fixed individualistic preferences, although
such a position has met serious challenges from the rational choice approach to sociology Coleman, 1990, 1994.
1
A very promising approach to the fundamental question has been suggested by the economics of bounded rationality à la Simon 1955, 1959 and by the recent develop-
ment of the economics of limited cognition that dates back to, e.g., Cyert and March 1963 see also Conlisk, 1988; Day and Pingle, 1991. The insight that decision makers economize
on economizing models is not new e.g., Schumpeter, 1934; Alchian, 1950, and the idea of habit was an important concept among Western social theorists Camic, 1986; see also Day,
1987 for the notion of habere. Now the profession recognizes: 1 the decision-making environment including the internal psychology and the cognitive capacity of a decision
maker may be significantly short of being perfect; 2 because the time endowment is fixed, every activity including cognition competes for the use of time; 3 information on which
decisions are based is almost always incomplete, but information gathering and processing is costly; and 4 many decision making situations are imbued with elements of risk and
uncertainty.
If these limitations are serious enough, a decision maker’s motivations would apply not only to choice objects but also to how to handle the limitations without sacrificing too much
of his resources. Therefore, what kind of a problem-solving procedure or mode is actually adopted to save cognitive efforts and to absorb bounded rationality in general becomes
a matter of no trivial importance. In Simon’s words, it is the procedural rationality that matters in understanding human behavior, not the substantive rationality that has pervaded
the orthodox economics Simon, 1978.
1
One movement which has been gaining momentum in the field of sociology is what is now called the rational choice sociology, which has been led by Coleman. This approach seeks to explain the nature, the origin, and the
reproduction of the social order as consequences of voluntary actions of rational individuals see Coleman, 1990, 1994.
H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34 3
Thus, it has been suggested that bounded rationality may account for the adoption of simple modes of behavior that take advantage of social and cultural norms and readily
available heuristic solutions to complex problems. The implications of such possibilities are far reaching, and we shall explore some of them in this study, particularly ones that relate
to the formation of social norm-guided endogenous preferences. If decision makers resort to such modes, there will be non-negligible rigidities in human behavior. Such rigidities often
produce adaptive economizing behavior, which may become important sources of dynamic forces that drive the economic system as a whole Day, 1984, 1986; Conlisk, 1996.
In this regard, Day 1984, 1986 calls attention to the fact that adaptive economizing by way of simple computable steps analogous to optimizing algorithms in mathemat-
ics activates two types of mechanisms: 1 information, planning and control mecha- nisms in disequilibrium, and 2 inventory-order-price adjustment mechanisms that mediate
transactions in disequilibrium. In such modeling of behavior, economic units are seen to exercise only local rationality or local search within zones of flexible responses in a
sequence of recursively connected programs. In his view, agents’ behavior is governed by an information-planning-control system under mental-physiological structures of spe-
cialized functions. It is not difficult to understand why agents in such a system might turn to economization of economizing itself. According to Day 1984, 1987, seven basic modes
are capable of describing economizing choices: 1 obedience to an authority, 2 imita- tion of others’ modes, 3 habit unconscious repetition of past behavior, 4 unmotivated
search, 5 hunch, 6 experimentation trial and error, and 7 procedural optimizing see also Pingle and Day, 1996 for an explicit statement. The effectiveness of these modes has
been examined experimentally by Pingle 1992 and Pingle and Day 1996 see also Day, 1967; Day and Tinney, 1968; Shipley, 1974; Naish, 1993 on the near optimality and the
convergence of adaptive decisions; Conlisk, 1980 on the coexistence of costly optimizers and cheap imitators; Pingle, 1992 for an experiment of costly optimization. There is no
reason for some of these economizing modes not to draw on social and cultural norms as sources of low-cost heuristics to complex problems and as instruments by which to endow
human action with social meaning. The mode of imitating what significant others Miller, 1963 are doing is a good example. Such a mode is expedient because it saves cognitive
efforts; at the same time it is socially meaningful because the act of emulating and avoiding certain reference groups by watching what significant others are doing is driven by social
motives to seek upper status identification.
Bounded rationality and the ensuing adaptive behavior hold promises to answer Hodgson’s call for a new framework of thinking beyond the methodological individualism Hodg-
son, 1986. Examining the validity of this methodology and Hayek’s 1952 composite method that runs through much of contemporary economics, he argues that in understanding
human behavior there is no need to fall into the trap of complete voluntaristic individualism nor into the trap of the structural determinism. What is needed is a theoretical framework
that allows human behavior to be molded by social and cultural norms while retaining the autonomy of individual decision makers. If bounded-rationality motivates individuals to
orient themselves to social and cultural norms, their goals and preferences will be molded or guided by such norms, but the purposefulness of their actions will remain intact.
Simple modes of behavior suggested by Day above are similar to Beckert’s 1996 devices of uncertainty reduction. Expanding on Granovetter’s 1985 notion of the embeddedness
4 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
of economic action in situational structures and Simon’s 1976 intended and bounded rationality that underlies administrative behavior, Beckert has scrutinized the rationality
principle in economics and its limitations. He has asked: if the dominant feature of situational structures in which economic actions are embedded is uncertainty so that the means–end
relations on which economic calculations are based are lost, is it not the case that some mechanisms external to the decision maker be they social and cultural norms, institutions,
and social relations are called in to reduce the choice set of decision makers and to restore certainty in the means–end relations? Because uncertainty, as distinguished from risk by
Knight 1921, is not reducible to calculable probabilities, it imposes formidable limitations to the rationality of actions in situations characterized as such. If the means–end relations
are lost, agents simply cannot decide what is best to do. It is, therefore, argued that the rational choice theory of economics cannot be a reasonable theory about human behavior
in circumstances that are conditioned by uncertainty and that this rationality should be replaced with a more practical one that transcends the dichotomy between rational and
irrational behavior. Beckert’s argument is reminiscent of Radner’s 1975 point over two decades ago that rationality does not allow an easy definition once cognitive capacities are
recognized as limited.
As an alternative to the objective rationality, Beckert introduces the notion of intentional rationality as one that relies on simple devices as instruments of uncertainty reduction when
all means–end relationships break down. Such devices are comprised of 1 tradition, habit, and routines, 2 norms and institutions, 3 structural predispositions of decisions such
as social networks, organizational structures, and past decisions, and 4 power relations Beckert, 1996, pp. 827–829. The social devices build up rigidities in human behavior,
thereby causing it to be adaptive, and more importantly, to be predictable. Beckert’s argu- ment that making use of these devices narrows the choice set of decision makers and make
actions predictable shares much with Heiner’s 1983, 1989 insight that the boundedness of the decision-making environment is an important source of predictable behavior as decision
makers adopt more inflexible decision rules. It is analogous to Simon’s notion of intended and bounded rationality that takes the form of satisficing behavior, which, according to
him, forms the theoretical basis of administrative behavior Simon, 1976.
Thus, the recognition that human behavior is boundedly rational and that it is embedded in social norms and order has brought to light possible linkages between the adoption of
simple modes of behavior and persistent orientation to such norms. Such linkages have made it an important agendum to look into the possibility that human behavior may be
better modeled by considering not only the need for simple modes of behavior that can absorb bounded rationality but also the non-functional benefits from orientation to social
and cultural norms.
Many views have been put forth on such linkages. For our purposes, the following views are particularly important: 1 The society takes on a bigger meaning than a mere aggregation
of the parts, and it should serve as reliable sources of meaningful simplification devices or heuristics to otherwise complex problems. 2 Decision makers will resort to simple modes
of behavior and look for heuristic solutions in order to save their cognitive efforts and to absorb other limiting elements of the decision-making environment. 3 If preferences are
composite of various needs which are not necessarily commensurate, they may be prioritized and satisfied sequentially with switching from one need to the next being effectuated as soon
H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34 5
as the aspiration level is reached. 4 There are social and cultural norms social institutions, customs, sanctions, cultural values, etc. which motivate individuals to behave in ways that
endow their actions with social and cultural meaning. To the extent that preferences beyond physical needs are closely related to social and cultural norms, such norms may account for
the origin of norm-influenced preferences for social interdependence. 5 More strongly, the formation of ends or preferences itself reflects the desire to act in a socially meaningful
fashion when there are serious limits to the objective rationality. Social and cultural norms are, therefore, not just sources of external influences on human behavior, but rather they
endow the decision-making environment with a social and cultural structure under which socially meaningful preferences and actions are actively formed and planned to reproduce
the structure itself. 6 In acting under a socially structured environment, individuals will be able to exercise only local rationality within their social zones of flexible responses in
Day’s terms, which are determined to a large extent by the history of their past emulation and avoidance efforts and on which social, psychological, economic, communicational, and
other principles are working.
In this paper, we propose a theory of choice behavior that takes into account these views, answering by so doing Simon’s call for procedural rationality as well as Hodgson’s call
for norm-oriented purposeful behavior. If individual decision makers are in need of simple devices to solve complex problems, such heuristics must be readily available in the society,
and there must be, at the same time, a process by which they are continually sustained and renewed. The view we expound is that low-cost heuristics to complex choice problems
are sought and found in life styles of social groups. These life styles constitute a form of social capital that is accumulated collectively by members of social groups through their
error-learning processes. If the cost of problem solving is too excessive for individuals to bear, it makes sense to invest in this capital collectively with all parties sharing the cost
of the required investment. The benefits of the accumulated consumption know-how are then shared by members of social groups. Thus, with accumulation of such capital, the task
of selecting the best from the set of feasible alternatives is reduced to an expedient act of referring to what has been tested and approved by members of social groups.
What is so distinctly important about the life styles of social groups is that they are, in Granovetter’s terms, embedded in a cultural-value system so that the act of orienting
to them becomes a socially meaningful cultural behavior. It is doubtful that these life styles would ever be developed if identifying with them had no social and cultural value
to begin with. The society, therefore, can be viewed as a culturally directed social field analogous to a magnetic field in physics in which the life styles of social groups exist
as norms of consumption behavior and in which individuals sense the direction for higher status identification. This social field gives rise to social want as a culturally directed social
predisposition to orient oneself to relevant social groups and their life styles in the process of seeking higher social status levels. Viewed as such, social want is crucially dependent on
one’s location in the social field and on his zone of flexible responses, however this zone may be determined.
The rest of the paper is organized as follows: in Section 2, we discuss the nature of bounded rationality and argue that there are genuine needs for simple devices or low-cost
heuristics to complex problems. In Section 3, we identify those social and cultural arrange- ments that shape decision makers’ orientation to social groups. These arrangements will be
6 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
abstracted by way of interdependence via reference groups, in which social status ranking of such groups gives direction to the emulation–avoidance motives. In Section 4, holding
that physical and social wants are not commensurate generally, we consider a sequential satisficing decision rule over physical wants as an alternative to the usual utility theory. In
Section 5, we discuss properties of a preference relational system that follows from this sequential rule and propose a two-step procedural model of consumer choice where social
want appears in the second step as an instrument of indeterminacy reduction. In Section 6, we present a formal model of interdependence via reference groups and define what
social want constitutes. We show that a reaction function over relevant social groups and information on the whereabouts of social norms together make it possible to quantify the
social want-satisfying property; this quantification eliminates or substantially reduces the indeterminacy of choice that remains in the first step. We show that a norm-oriented choice
behavior can be rationalized by a norm-guided ordering of choice objects. In Section 7, we relate our model of interdependence to the work of Duesenberry 1949 and Leibenstein
1950, and Section 8 concludes the paper.
2. Bounded rationality and the need for low-cost heuristics
