Facing Uncertainty: Norms and Formal Institutions as Shared Mental Models
Revised 25 June 2019
This paper presents a theoretical argument focused on how social norms and formal institutions operate as cognitive coping mechanisms among groupings of boundedly rational actors who face fundamental uncertainty concerning their political and economic environments. Broadly speaking, informal and formal institutions facilitate strategic decision making by coordinating agents’ understandings of their social environments and their conceptions of how myriad actions of involved participants (including themselves) may affect such environments along with their positions and well being. Yet institutions, and the associated cognitive processes, are subject to periods of rapid transformation that sometimes exhibit properties of cascading imitation across individuals and groups.
After addressing background concepts this paper makes four related assertions. First, heuristics and, by extension, mental models respond to shared narratives in a fashion that often generates conformity of belief and action. Second, mental models follow the dynamics of punctuated equilibrium processes. Third, institutions are a type of shared mental model that convey basic understandings across uncertain environments. Fourth, by enabling boundedly rational actors to manage uncertainty, institutions effectively choreograph social activity. Discussion includes reference to classical, evolutionary and epistemic game-theoretic modeling. Social choreography thus follows punctuated equilibrium dynamics that offer relative predictability during stable phases and stark uncertainty during rapid phases of punctuation. The paper closes with a few political economy implications.
Keywords: mental models, institutions, uncertainty, bounded rationality
The Political Economy of Collective Action and Radical Reform: A Proposed Conceptual Framework
Revised 21 June 2019
Radical reform displaces social equilibria. It reorients key institutions and underlying mechanisms of coordination and enforcement. This paper presents a broad framework for analyzing radical reform in terms of a large set of collective-action problems faced by potential reformers. It merges concepts that often appear separately, including social preferences, power relationships, policy subsystems, institutional stability, types of institutional change, and types of agents. Relatively simple game-theoretic models offer a platform for depicting key interactions. Over time, these interactions follow a punctuated-equilibrium dynamic, within which incremental reforms sometimes sow the seeds for punctuation via radical reform. Punctuation unfolds as an information cascade of rapidly shifting perceptions and activity within a social network. Ultimately, this paper offers conceptual foundations for examining how activists occasionally succeed in instigating or facilitating radical reform—and why they so often fail. This framework can then spawn a host of more targeted models and multiple empirical hypotheses.
Social Networks and Collective Action
(available on request)
Social networks underlie social capital; they are the grid upon or through which all manners of social, economic, and political exchanges occur. We may even think of institutions as networks of information flows and shared understandings, or as complex conduits of cognition, information, and motivation. Networks thus constitute the social foundation for both the existence and resolution of collective action problems (CAPs). Certain CAPs, such as traffic congestion, are fundamentally network problems. For all CAPs, networks influence agents’ understandings of problems and solutions, available information, and their motivation. Network architecture and relationships may underlie CAPs, exacerbate them, and affect possibilities and motivation for resolution. As an underpinning of social capital, social networks can foster trusting relationships—themselves foundations of trade and other exchanges. Moreover, network positions affect the ability of specific individuals, to influence opinions, ideas, and organizational policies: network positions confer power.
Discussion in this paper is necessarily limited. The field of social networks is both complex and rapidly evolving. The paper offers essential background with three basic application to political economy and CAPs. Section 1 discusses basic network concepts, such as density. Section 2 addresses the impact of localized network structure—the configuration of nodes and links—on the ability of agents to exert power. In particular, this section draws relationships between network positions, as represented by measures of “betweenness” and the ability of specific agents to influence flows of information and/or resources. Section 3 addresses networks as searchable conduits of information. Agents can use local knowledge of network attributes to uncover information about distant individuals and groups. Section 4 discusses information cascades across networks—sequences of rapid adoption of ideas or practices associated with phenomena like fads, financial contagion, or revolution. Section 5 concludes.
Seizing Advantage: Strategic Moves and Power in Exchange
(available on request)
This paper uses game-theoretic reasoning to formalize a concept of power and relate power to exchange and other economic activity. With reference to the literature, the paper offers a precise definition of power, followed by discussion of basic sources of power—access to resources, institutionally designated positions, and an ability to resolve organizational collective-action problems—with a few illustration. It then develops and formalizes a three-dimensional (or three-face) approach to power. The first face of power—bargaining strength in well-defined and well-understood contexts—can be represented with a Nash cooperative bargaining model. The second face—an ability to alter rules of engagement to one’s own advantage prior to an encounter—can be formalized by with the concept of strategic moves in game theory. Several applications generate a variety of implications. A second approach to such formalization appears in a triadic (or three-party) concept of power relations. The triadic concept allows for more precise specification of asymmetrical power relations, and facilitates explaining types of coercion and exploitation (with a formal definition). Moreover, the triadic model offers foundation for conceptualizing the third face of power: an ability to manipulate others’ beliefs concerning the presence or nature of conflict to one’s advantage. This concept of power, however, is considerably harder to formalize. The paper suggests several initial approaches, again with illustrations and implications. Finally, this paper applies the three dimensions of power to a variety of economic transactions, most notably to relationships between contract enforcement, power, and exchange. Overall, this paper offers a conceptual approach to important microfoundations of political economy. JEL Codes: C7, D01, D7,
Game Theory as an Analytical Foundation for Social Scientific Analysis
Game theory provides a set of modeling tools, conceptual relationships, and terminology that can serve as an analytical foundation and common vocabulary for social scientific discourse. Game-theoretic models provide rigorous and flexible conceptual tools that permit sophisticated analysis of causal relationships, processes, and outcomes in social, political, and economic interactions. such as bargaining or exchanges related to goods, services, information, position, favors, respect, revenge, and even theories or understandings. Game theory thus offers foundation for sophisticated social scientific discourse that is compatible with multiple theoretical and methodological perspectives. Likewise, one can approach game theory at simple or complex levels. Its ability to integrate social scientific perspectives makes it an ideal candidate for inclusion in an interdisciplinary undergraduate social science curriculum. This paper addresses these issues beginning with classical game theoretic two-player and multiplayer models, using both material and social preferences, with complete and incomplete information. After discussing applications to institutions and approaches to modeling rationality, discussion turns to evolutionary representation of dynamic learning processes and the development of behavioral patterns, social norms, and formal institutions. Finally, epistemic game theory can model both limits to cognition and shared understandings among members of groups or communities and offers foundations for modeling the social construction of shared understandings and behavioral responses.
Financial Instability as a Collective-Action Problem
This paper develops a bounded-rationality model of Minsky’s financial instability hypothesis along with related ideas from Keynes and others. It proceeds to link financial instability to game-theoretic representations of collective-action problems. Minsky argues that three types of finance regimes can exist in an economy: 1) hedge finance where lenders and borrowers follow standard conservative financial principles; 2) speculative finance, where a borrower’s current income sufficient to cover interest payments on loans but insufficient to cover principal payments due on maturation of a loan, and 3) Ponzi finance, where a borrower’s current income is not sufficient to cover either interest or principal on a loan. With this foundation, he presents two key propositions: i) the finance regime, which consists of portions of each type of finance, influences economic stability, and ii) extended prosperity generates inherent tendencies to move the economy in the direction of more unstable financial regimes. This paper models Minsky’s approach to the business cycle as a collective-action problem. This approach facilitates modeling somewhat elusive elements of Minsky’s hypothesis in a relatively tractable fashion. The collective-action model points to critical tipping points in the financial instability argument and strengthens its call for policy action.