Integrated nature of decision making: a cognitive and behavioral analysis: "optimization" and "institutional decision making"

Abstract

In conventional microeconomics, modeling economic decision makings is based on constrained optimization; but in the real world, decisions are hybrid and more "institutional" than based on "optimization" and they are based on a set of pre-defined (institutionalized) "habits", "rules" and "frameworks". This article has tried to provide a microeconomic analysis of the combined nature of decisions with analytical and descriptive methods and grounded on a neurological approach. Based on cognitive and behavioral findings, continuous optimization, even in its simplest form, has very high mental costs and this makes economic agents more inclined to institutional decisions to save these mental costs, along with occasional optimizations. In the conceptual field of transaction costs, Coase and Williamson argue that the existence of "transaction costs" could pave the way for the replacement of "hierarchy instead of market exchange". In a different field, ie in the conceptual field of decision making, it can be argued that the existence of "decision costs" can pave the way for replacing "institutional decision making instead of direct optimization". The existence of very high benefits and returns in social exchanges and the importance of institutional acting to achieve these benefits intensify this economic tendency in an evolutionary process. Religious behavior is a kind of institutional behavior (following religious rules and habits) and considering this view that institutional decision making and direct optimization both are important and have distinctive roles in decision making process can influence microfoundations of Islamic economics.

Keywords

• institutional economics
• institutional decision making
• optimization
• dual thinking system
• cognitive and behavioral economics