Explaining Economic Change:The Interplay Between Cognition and Institutions

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Abstract
Economic theory is built on assumptions about human behavior—assumptions embodied in rational-choice theory. Underlying these assumptions are implicit notions about how we think and learn. These implicit notions are fundamentally important to social explanation. The very plausibility of the explanations that we develop out of rational-choice theory rests crucially on the accuracy of these notions about cognition and rationality. But there is a basic problem: There is often very little relationship between the assumptions that rational-choice theorists make and the way that humans actually act and learn in everyday life. This has significant implications for economic theory and practice. It leads to bad theories and inadequate explanations; it produces bad predictions and, thus, supports ineffective social policies.

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