When is rational behavior consistent with rules of thumb? A link between evolutionary terminology and neoclassical methodology (Q1304446)

The prime topic of the paper is to investigate the roots of routine behaviour. It starts from the fact that in literature there exist two different branches of modelling industry dynamics. The first approach is the neo-classic according to which the firms are designed as rational decision units controlling for the total industry state path as a stochastic process, while the second approach is the evolutionary according to which decision makers behave less than fully rational in the neo-classical sense. They rather apply decision rules called routines. In the paper, a dynamic industry with optimising interactive firms is formulated as a Markov game. It is shown that a suitable specification of the state space and the interaction structure leads to constant optimal decisions or in other words to routine behaviour of all firms. This result is found to depend on two crucial assumptions, the homogeneity of the state space and the linearity of the payoff functions. These assumptions may be interpreted as one possibility to understand bounded rationality. Myopic expectations according to the entry-exit process lead to a similar result in the extended entry-exit model. Hence, neo-classical methods are merged with evolutionary terminology. This merging, concludes the author, may prove to be a fruitful theoretical approach in order to provide alternative or better explanations for complex systems like industry dynamics.