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Most insights of environmental economics are in line with the standard neo-classical economic model of rational behaviour, formulated in terms of maximisation of utility in general, or profits in particular. The standard theory of environmental policy is a case in point. However, the maximisation hypothesis and its methodological foundation have been criticised on many grounds, related to a lack of either logical or empirical content. Moreover, over the years great many alternative models of behaviour have been proposed. Both criticism and alternatives are surveyed here. In the context of environmental economics behavioural assumptions have been most significant for the development of economic valuation theory and environmental policy theory. The focus here will be on environmental policy theory.

We discuss the literatures on behavioral economics, bounded rationality and experimental economics as they apply to firm behaviour in markets. Topics discussed include the impact of imitative and satisficing behavior by firms, outcomes when managers care about their position relative to peers, the benefits of employing managers whose objective diverges from profit-maximization (including managers who are overconfident or base pricing decisions on sunk costs), the impact of social preferences on the ability to collude, and the incentive for profit-maximizing firms to mimic irrational behavior.

Since the conceptualization of bounded rationality by Herbert Simon (1947), management scholars started investigating how people—managers and entrepreneurs—really make decisions within (and for) organizations [...]

Intro -- Preface and Acknowledgements -- Contents -- About the Authors -- List of Figures -- List of Tables -- 1 Why Does Psychology Matter in International Relations? -- Metatheorizing Psychology in International Relations -- Explaining and Understanding -- Levels -- Agent and Structure -- International Relations Grand Theories and Psychology -- Comparing or Combining Theories? -- What Do Grand Theories Say About Psychology? -- Psychology as a Causal Factor in Foreign Policy Decision-Making -- Foreign Policy Analysis and Psychology -- Rationality and Psychology -- Roadmap to the Rest of the Book -- Bibliography -- 2 The Cognitive Limitations of Rationality -- Rational Choice -- The Core and the Variants -- Rational Choice as a Middle-Range Theory -- Bounded Rationality -- A Satisfactory Decision will Suffice -- How to Enhance Rationality? -- Poliheuristic Theory -- Two Stages of Decision-Making -- The Non-Compensatory Principle -- The Primacy of Domestic Policy -- Applications -- Soviet Foreign Policy of New Thinking -- Multilateral Nuclear Forces for NATO? -- North Korea: Irrational, Rational or Boundedly Rational? -- Going to War for Domestic Reasons -- Experimenting with Foreign Policy -- Discussion -- Rational Choice Model as an Ideal Type -- Cognition's Relationship to Rational Choice -- What Does Bounded Rationality Really Mean? -- Does Bounded Rationality, or Poliheuristic Theory, Represent 'Reality'? -- How Valid Are These Theories? -- Conclusion -- Bibliography -- 3 Prospects of Loss and Gain -- Prospect Theory -- Framing the Decision -- Loss or Gain? -- Probabilities -- Experimental Evidence -- Applications -- General Relevance to IR/FPA -- Eagle Claw, an Operation that Went Wrong -- The North Korean Decision to Go Nuclear -- Russia's Invasion of Crimea -- Discussion -- From Laboratory to Foreign Policy Reality?.

Bounded rationality theory, first developed by Herbert Simon (1947), is one of the first contributions to political science that explicitly focuses on decision processes and links cognitive science to research on decision processes at the level of both the individual and organisations. In line with more recent behavioral research, bounded rationality theory holds that public policy design should build on a realistic model of human behavior. The article analyzes the decision processes of Danish farmers against their responses to two versions of pesticide taxes implemented in Denmark, one in 1998 and the other in 2013. The two taxes achieved different success rates, although neither version achieved the pesticide reductions predicted by ex-ante models that built on the assumption of farmers as economically rational. We find that farmers' decision processes are consistent with features of bounded rationality, which may partially explain why the taxes were not as effective as predicted. However, with the second version of the tax adopted in 2013, the tax rate was doubled, which may have prompted farmers to give higher priority to economic objectives, possibly explaining why this recent version of the tax has been more successful.