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February 05, 2008

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wjd123

I don't understand where all this psychological talk about happiness is taking us in economics. I thought the economists posited the individual as the maximizer of utility. I thought this utility had more to do with profit than happiness.

I thought it was an axiom of economics that people act rationally to maximize their utility.

I was looking for this economic axiom which Dani has mentioned so often as one of the foundational presumptions of economics when I found this paper which shows a more practical application of utility due to psychological and sociological conditions.

Here is a definition of "the rational model advanced by the neoclassical economist" and the problems caused by the psychology and sociology that warp its strict application.


The Practice of Economic Action
Foreign Direct Investment Attempts in Central and Eastern Europe1
December 2003
Nina Bandelj
Department of Sociology
University of California, Irvine
nbandelj@uci.edu
1 Presented at 2003-04 Center for Organizational Research Working Paper Research Seminar. This is work in
progress. Any comments or suggestions are greatly appreciated.


Rational Action Model
The model of action advanced by neoclassical economic theory presupposes that economic actors
are independent in their decision-making, that they possess perfect information in conditions of perfect
competition, have fixed preferences and preference ordering which fulfils the condition of transitivity.
According to this model, the primary objective (or the end goal) of economic actors is to
maximize profits. To do so, actors gather information about all possible courses of action that would help
them achieve their goal. They determine the costs and revenues associated with each course of action and
decide on the one that maximizes profits.

Bounded Rationality
While rational action model is widely accepted as a theoretical framework, many scholars find
that actual business decision-making significantly deviates from the model’s assumptions, recognizing
that limited cognitive capacities prevent economic actors from synoptic rationality. These limitations
were first conceptualized in 1957 by Herbert Simon who proposed that economic actors are boundedly
rational.
“The limits of rationality have been seen to derive from the inability of the human mind to bring
to bear upon a single decision all the aspects of value, knowledge, and behavior that would be
relevant. The pattern of human choice is often more a stimulus-response pattern than a choice
among alternatives. Human rationality operates, then, within the limits of a psychological
environment” (Simon 1957: 108).

FDI Attempts in Eastern Europe as Socially Embedded Practical Action
“Foreign investment in Central and East European countries is based too much on emotional
prejudices and daily political needs and is far from rational economic considerations.” (Dunning
and Rojec 1993: 12)
This paper is motivated by an observation that the above quote captures the empirical reality of
FDI in Central and Eastern Europe and the task of an analyst is to provide an explanation that best
captures its complexities. I argue that we should understand foreign direct investment transactions in
Central and Eastern Europe as an economic process shaped by social forces: social networks, cultural
understandings, power distributions and macro institutional arrangements. This perspective shifts the
focus from a firm as a coherent isolated unit calculating profitability to the social embeddedness of
economic transactions, whereby a variety of substantive rationalities and a variety of procedural logics are
possible.
Any situation in which economic actors act is more or less structured by its network, cultural,
political and institutional characteristics. In making their decisions, organizational actors draw on their
business connections and personal ties. They rely on their cultural understandings and sympathies. They
use their political alliances and vie for power. And they do so in the context of institutional arrangements.
These social forces do not merely regulate economic activity by placing a constraint on rational action.
Rather, they inherently constitute actors’ understandings of economic strategies and goals and enable the
evaluation of alternatives that these actors conceive as plausible.
Such a framework doesn’t align well with the standard conception of rational action, which
presupposes profit maximization as the ultimate goal and only one objectively best set of means/straegies....

Because of the all-encompassing definition of rational action accepted today, all these means and
ends can be understood as rational as long as they are part of coherent means-ends calculations. Altruistic
behavior and morally good action are rational because they can have utility ascribed to them. Relying on
sympathies and notions of fairness are ways of maximizing individual utility. While such an expansive
definition of substantive rationality doesn’t have much explanatory power, it is logically solid.
Nevertheless, there is one aspect of the rational action framework that the present analysis
challenges directly: the procedural aspect of rationality, i.e. the consistency of means-ends schema, clarity
of goals and stability of preferences. I argue here that we should release the assumption that business
decisions necessarily abide by the coherent means-ends calculations. Rather, as FDI decision making

shows much of the economic activity in uncertain environments should be understood as a social practice

and economic actors as practical actors who make their decisions by interpreting and responding to the

particular situations in which they find themselves, relying on their cognitive but also habitual, affective

and evaluative dimensions of action. Economic processes involve complexities and uncertainties which

are a property of the environment and not only perceived by individuals because of their cognitive

limitations.

Thus, economic actors cannot always make decisions within a procedurally rational means-ends

framework, i.e. having a priori clear goals, defined, rank-ordered and stable preferences, deciding on

means a priori by weighing costs and benefits, ultimately selecting the alternative that will objectively

minimize transaction costs. The analysis of FDI transactions proposes that economic action is
procedurally variable....

http://www.cor.web.uci.edu/ufiles/working_papers/bandelj-cor-working-paper.pdf

Per Kurowski

Right! “No woman no cry” was not written to stop us from crying!

crack

I agree happiness is probably over valued but this:
"One hint that too much euphoria can be detrimental comes from studies finding that among people with late-stage illnesses, those with the greatest sense of well-being were more likely to die in any given period of time than the mildly content were."
seems silly. If it really is a late stage illness what's the matter with maximizing happiness for a short time?

John

Hi, Im from Melbourne Australia.
Please find some references which point out that the fundamental urge of ALL beings is to be happy. And that everything we do is an attempt to be happy, even if only momentariy.

1. http://www.dabase.org/dualsens.htm
2. http://www.dabase.org/freedom.htm

Plus 2 related references on the "culture" created in the image of unhappy people.

1. http://www.coteda.com/fundamentals/index.html

2. http://www.ispeace723.org/youthepeople4.html

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I say this because I am seeing a backlash against happiness not only in mainstream culture, but even among those in the positive psychology community.

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