1. Nelson and Winter (2002) introduce the notion of the “competency puzzle” to distinguish the extensive foresight and broad level of rationality ascribed to actors in the neoclassical model with the bounded sort of rationality assumed in evolutionary models. The competency puzzle captures the paradox of our willingness to place our faith and even lives in the hands of firms that we are confident can perform highly complex and difficult tasks even as we recognize that these same firms are strikingly “bounded” in their rationality. The solution to the puzzle does not involve:

Recognizing that high competency is often achievable where skills and routines can be learned and perfected through practice

Understanding that learning stimulated by positive short-term feedback is often particularly effective for mastering complex activities

Appreciating that sophisticated foresight, logical deliberation, and effective improvisation involve very different mental processes than do routine, learned behaviors

Accepting that when rich and relevant information becomes available to an organization, it often finds routinized ways of exploiting it.

All of the above are parts of the solution to the competency puzzle.

2. Alchian (1950) acknowledged “adaptation by individuals with some foresight and purposive motivation” (emphasis added) and recognized two conscious adaptive behaviors: imitation and “trial and error.” Trial-and-error is often invoked as a means for firms to grope toward better and eventually even optimal positions. Two conditions are necessary for trial-and-error to converge to a maximum or optimum position. Which of the following is not necessary for trial and error to be a successful strategy for achieving an optimum or maximum position?

It must be possible to classify a trial as a success or failure by some criteria of “better” than before.

The intensity or rate of improvement in outcomes must increase as the peak is approached. I.e. as the organism approaches the profit maximizing point, the change in profitability accelerates.

The path followed by trial and error must be a continual rising one without any intervening descents.

All of the criteria (a,b,c) are necessary.

None of these criteria are necessary.

3. The “competency puzzle” is useful to distinguish among levels of rationality and to illuminate the reasons for different levels of performance or competence by the same actor or organization. Which example(s) is (are) consistent with the competence puzzle?

A great athlete or player becomes a lousy coach or team executive

A skilled financial analyst loses his life savings through poor investment portfolio decisions

A highly competent orchestral musician fails as a composer

An airline has a near perfect safety record as it files for bankruptcy protection

All of the above

4. Routines are an important explanatory element of evolutionary economics. Nelson and Winter note that the roles played by routines include:

Routines are one of the reasons firms can be expected to act in the future much as they have in the past

Routines are important to the storing and accessing of knowledge in contrast to the neoclassical assumption that all techniques and production functions are known and accessible regardless of whether or when they have been employed

Routines often include ways of reducing potential organizational conflicts that might occur under less consistent and understood behavioral rules

The evolution of a routine explains how the state of science, technology and complexity of modern economies can arise given our human intellectual limitations.

All are roles or functions of routines.

5. Which factors tend to be associated with high competence in routinized tasks?

Sophisticated foresight

Improvisation of novel action patterns

Logically structured deliberation

Learning guided by short term feedback

All of the above