BoundedRationality_TheAdaptiveToolbox.pdf

18
Goodwill Accounting and the
Process of Exchange
Kevin A. McCabe and Vernon L. Smith
Economic Science Laboratory, University of Arizona,
Tucson, AZ 85721-0108, U.S.A.
ABSTRACT
Since the brain of any organism is a scarce resource, we expect to see specialization of
cortical fields to solve content-dependent problems that occurred frequently over
evolutionary time. We expect these solutions to exhibit bounded rationality in so far as
the amount of information processing engaged on any problem is limited by the
opportunity cost of cortical fields devoted to this problem. In this chapter we hypothesize
that personal exchange is one of these problems. We begin by proposing a strategy called
Goodwill Accounting for implementing reciprocal behavior that has been observed in
both "Trust" and "Punishment" games. We hypothesize that this strategy represents a fast
and frugal heuristic for tracking individual reputations without conscious awareness. We
provide evidence for mental modules, studied by evolutionary psychologists, which
together support this heuristic. These modules include friend-or-foe detection, cheater
detection, and shared attention. We then examine the results from an agent-based
simulation of this strategy in an ecology of prisoner's dilemma games. These simulations
demonstrate the basic robustness of the strategy and suggest desirable parameter settings.
We conclude with a discussion of the role of institutions as extensions of the mind's
capacity for exchange.
INTRODUCTION
Economics is the study of exchange. Many things are exchanged: ideas, goods,
services, information, and access rights, to name a few. In fact, the ubiquity of
trade raises the following question: Why do people trade? Economics teaches
that people trade because they differ in their circumstances, abilities, interests,
knowledge, wants, and what they own. Since everyone is different, they place