Modigliani’s and Simon’s Early Contributions to Uncertainty (1952–61)

This article reconstructs Franco Modigliani’s and Herbert Simon’s close collaboration over the 1950s on implementation of a decision theory under uncertainty that partly contributed to the genesis of behavioral economics and rational expectations theory. Their collaboration reveals how the shared identification of uncertainty as a major problem, their similar interpretation of rationality as the ability to select and use relevant information, and their embrace of certain methodological norms for the construction of economic theory (that it should be empirically grounded and mathematically sophisticated) enabled productive cross-fertilization between the two approaches in their nascent forms. In the beginning Modigliani’s forward-looking procedure (with its focus on foresight) and Simon’s backward-looking model (with its focus on learning) were conceived as complementary rather than antithetical for the development of a concrete decision rule under the hypothesis of incomplete information. The article also discusses Modigliani’s and Emile Grunberg’s contribution to rational expectations, concentrating on the paper they wrote but never published, and Modigliani’s early reaction to John Muth’s rational expectations theory.