Rational expectation theory and bounded rationality were developed at the same nest and the same time. The pioneers of wee at Carnegie-Mellon University in the 1960s and they included Keynesian, Simon, Muth, as well as Lucas. The atmosphere among these adversaries was amiable. They focused on dynamic programing techniques and demonstrated the applications to managerial decisions (Sent 324). The method was applicable in factory-warehouse. Simon asserted that making assumption on costs it is possible to solve without computation a minimization problem. Herbert Simon pushed for the idea that was against economic believes. Despite the differences between the individuals, they maintained their friendly interaction. The relationship between the scholars began to soar. Simon began to feel dismayed and alienated. The relationship between operation research specialist and neoclassical economics began to grow. The escalating conflicts among the individuals led to Simon leaving GSIA for the psychology department (Sent 325). In fact, Simon asserted the Muth was guilty of driving him away. The idea of rational expectation was published in 1961, when Simon team was the graduate students. The rational expectations inspired Muth.
Simon argued that theories of bounded rationality received directed challenge form theory of rational expectations. Jack claimed that a rational expectation was a reply to doctrine of bounded rationality, but it did not receive much attention, Sargent and Lucas brought international and national prominence of the theory (Sent 326). Despite the conflicts bounded rationality, and rational expectation are related since it originated from the same individuals. The difference in interest between Sargent and Simon led to the difference in interpretation of artificial intelligence and bounded rationality. Sargent focuses on the method and the conceptual integrity of bounded rationality theory. Simon focused on a formal foundation of rationality, especially on the decision-making process. Simon and Sargent disagreed on the interpretation of artificial intelligence and bounded rationality.
Sargent asserts that the relationship between time-series and theories guided his focus on artificial intelligence and bounded rationality. He sought to find the conceptual integrity through combination of artificial intelligence and bounded rationality. Sargent focused on the flow and placed his attention on restricting vector autoregression (Sent 326). Based on the economic theory, Sargent focused on general equilibrium theory. In the theory, Lucas pointed out that the agents decision rules were predicted through economic theory. This view made Sargent focus on the impacts of a single principle from the general equilibrium theory. Single principle asserts that individual observed behaviors will change due to changes in individual constraints. Evidently, Lucas utilized Lucas-Chicago approach to analyzing economic theory (Sent 327). In order to create a link between general equilibrium and vector auto regressions, Sargent availed the rational expectation. The model was to strengthen the link between estimation and theory.
The rational expectation modeling led to vector auto regressions. These assumptions are attractive because chosen variables can reveal cross-serial correlation and serial correlation. The expectations tend to be rations if they depend on. The econometrics in the interpretation could be used to estimate vector autoregressions. The agents and economists should be on equal footing. These imply that the agents in the model need to forecast utility and profit maximization. Sargent focused on the fact that individuals should be alike (Sent 328). The attractive properties of rational expectations were the symmetry among econometricians, economists, and agents. In the long run, Sargent concluded that there is asymmetry relationship between econometricians and agents. The rationale behind the asymmetry is that econometricians use devices to convert equations leading to stochastic functions while agents’ decision rules are non-stochastic functions (Sent 339). Another difficulty was the issue of convenience in engineering metaphors. Sargent reduced everything to weak pragmatic to justify what he had done. The dead end faced by Sargent made him focus on restoring symmetry among economists, agents, and econometricians. He incorporated learning in the process of restoring symmetry (Sent 330). In fact, Sargent thought of eliminating agents and replacing them with artificial intelligence.
Simon sought refuge in the department of psychology. He asserted that the disputes on rational agents led to conflict among professions. The interpretation of Simon on bounded rationality differed from that of Sargent (Sent 331). Various interests shaped the interpretation. Simon asserted that culminating in the Computer Science Department and sequence of organization provided a dais for artificial intelligence. Simon embraces the aspect of logical positivism. In fact, he asserted that through positivist conviction rationality need to be practical, which made him link to decision-making, problem-solving, and economics. Economics and artificial intelligence elaborated in how individuals made satisfactory decisions. Simon focused on the process and put minimally emphasized on the outcome.
Simon claimed that being concerned with the limits lead to a search on how the organizations are affected by the limits. An awareness of the various limits made people use satisfice and heuristics. The application of heuristics is based on the past success and outcomes. According to Simon, decision making among organizations or individual is driven by selection and discovery of satisfactory alternatives (Sent 332). Simon satisfied his interest by finding how individually made decisions by constructing a theory.
In the general perspective, Sargent t focused on vector autoregressions, rational expectations and general equilibrium theory. One of the dead ends that Sargent faced is the asymmetry between econometricians and agents. He tried to restore conceptual integrity of the theory through adoption of bounded rationality and artificial intelligence. Simon was focused on rationality and human decision-making (Sent 335). Simon revealed the structural similarities between bounded alternatives and serial symbol processing program.
Work cited
Sent, Esther-Mirjam. Sargent Versus Simon: Bounded rationality Unbound. Cambridge Journal of Economics 1997, 21, 323-338
