July, 2020

Institutional Change and the Importance of Understanding Shared Mental Models

  • Diana Thomas

    Associate Professor of Economics, Creighton University
  • William F. Shughart II

  • Michael Thomas

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Arthur Denzau and Douglass North’s paper “Shared Mental Models: Ideologies and Institutions” seeks to explain differences in economic performance across time and space recognizing that under conditions of uncertainty actors base their decisions “in part upon […] myths, dogmas, ideologies, and ‘half‐baked’ theories.” The model Denzau and North develop is firmly rooted in the orthodoxy of economics but emphasizes the significance of shared ideologies and ideas in driving economic change. In this paper, we discuss how the legacy of Denzau and North (1994) should be applied to current and future economic inquiries and, in particular, how it might inform work in development economics, behavioral economics, and in the study of the effects of social norms on economic outcomes. We argue that a perspective that emphasizes the role of the economic actor as entrepreneur in the context of shared mental models and institutions can improve economic analysis in those areas of research, which currently focus on the economist as exogenous policy expert.