Should we abandon optimization theory? The need for bounded rationality

Journal of Economic Methodology 7 (3):395-426 (2000)
This paper makes explicit the rhetoric of optimization. Various arguments are examined, in order to determine whether we should retain optimization theory or assume bounded rationality. Empirical evidence confounds optimization theory; in the face of experimental studies, an empirical dilemma emerges, according to which we should discard either the theory of expected utility or the criterion of empirical refutation. Methodological criticisms attack optimization theory's epistemological status; together, they give rise to a methodological trilemma, according to which optimization theory is indeterminate, unfalsifiable or tautological. Methodological defences seem to protect optimization theory against criticism; but a more careful examination shows that either they involve logical defects or they rest upon a conceptual gap. Theoretical difficulties plague optimization theory; though various extensions have been proposed, optimization theory entails a theoretical dilemma, according to which one must choose between unrealistic environment and unrealistic abilities. Should we abandon optimization theory? The leading question will be answered in the affirmative: optimization theory should be abandoned and bounded rationality should be assumed.
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