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«© 2006 William Blomquist ABSTRACT Water resources must be governed before they can be managed, and the crafting of governance institutions is an ...»

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Other constraints are limits on the capabilities of human beings. On the whole, people are neither as smart as they think they are nor as dumb as they sometimes look.

The human organism is "a choosing, decision-making, problem-solving organism that can do only one or a few things at a time, and that can attend to only a small part of the information recorded in its memory and presented by the environment" (March and Simon, 1958: 11). There is what Ronald Heiner (1983) has called a "gap" and what Charles Lindblom (1990) has called a "tragic discrepancy" between the competence of human beings and the difficulty and complexity of the tasks we face. People never have all of the information they need, and yet they are unable to process all of the information they have. They are capable of understanding, and of misunderstanding, themselves, each other, and the physical world.

This "bounded rationality" approach differs in important ways from others employed in analyzing collective problem-solving situations, especially the neoclassical view of "economic man." Among the key points of Hayek's critique of that view was that its assumption of identical, fully informed, flawlessly calculating individuals collapsed the task of modelling collective problem solving into the modelling of individual problem solving. He argued that this could not be done effectively. Not only does all of the information needed to solve collective problems not exist in a single mind, it cannot be given to a single mind (Hayek, 1945).

Other analysts have added that these shortcomings are not redressed by plugging "costly information" or positive transaction costs into the modeling of situations still animated by economic man. Nelson and Winter (1982: 66) point out that costly information makes only a quantitative rather than a qualitative difference if individuals still are viewed as "perfect mathematicians" with unlimited information-processing capabilities. Such individuals still could make unerring investments in acquiring additional information, then reduce all uncertainties to maximum likelihood estimates, and proceed on the basis of their common best estimate to define and implement optimal strategies. Again, collective problem solving reduces to individual problem solving.

The concept of transaction costs, vital to understanding social behavior and the emergence of nonmarket institutional arrangements such as the firm, nevertheless does not provide an adequate understanding of institutional development if it remains coupled to the conception of economic man. As the literature reviewed and summarized by Eggertsson (1990: 102n) points out, the actions of economic man are always efficient, even with the presence of positive transaction costs. If institutional arrangements are developed and sustained, their benefits exceeded the costs; if not, the costs exceeded the benefits. Of this sort of analysis, Field (1979: 57) stated succinctly, "In accounting for both, it explains neither." (see also Bromley, 1989: 5) To examine institutional development with a conception of human action as boundedly rational problem solving brings into focus additional difficulties, as well as opportunities. Boundedly rational individuals do not optimize in the general sense of surveying all possible alternatives and anticipated consequences and then selecting the best option (Alchian, 1950: 211; Eggertsson, 1990: 77). This does not mean that we must drop the assumptions that individuals are rational and self-interested; we still can assume that people are rational in Popper's sense of "acting in accordance with the situation" and self-interested enough to choose their best option if they know the alternatives and their consequences. Rather, we need to recognize that the best option is generally not known in advance, nor is the situation fully understood, and individuals usually have to expend effort in finding out what it is. (Lachmann, 1978: 3) There are two hindrances here for boundedly rational individuals. The first is not knowing in advance the desired outcome or solution. As jazz artist Humphrey Lyttelton,

who reportedly said, "If I knew where jazz was going, I'd be there already." (Elster, 1983:

9) The second hindrance is not knowing what actions will lead to the desired state of affairs even if it were foreknown. Armen Alchian (1950: 218n) offers a different analogy: "The situation is parallel to trying to control the speed of a car by simply setting by hand the indicator on the speedometer." Instead, the challenge of learning to drive a car is to operate its various components so as to reach and maintain the desired speed.

As several analysts have described, boundedly rational individuals attempt to overcome these hindrances created by lack of knowledge of their situations, options, and likely consequences by searching for additional information. Because their informationgathering and information-processing capabilities are limited, individuals typically engage in limited searches (see, for example, March and Simon, 1958: 140; Nelson, 1987: 21; Lindblom, 1990: 7; Ostrom, 1990: 209).

Although limited, search activity in effective problem-solving is not blind (March and Simon, 1958: 140). Search activity tends to focus on other situations or experiences that appear nearby in place or time. Similar-looking problems experienced in the recent past by oneself or by neighbors are likely to shape the understanding an individual has of a situation and to bias the selection of alternatives for action. Actions that seem to have been successful in the past or for someone else are likely to be copied in the hope they will yield success again (Alchian, 1950: 218).

Limited search is quite rational, but still can result in decisions being taken on faulty premises, and individuals still will be prone to error. Seizing upon the similarities between two situations, individuals may overlook a crucial difference that causes a successful strategy in one to yield failure in the other. Actions taken at one time may be attempted again at another but executed differently, and the difference in execution may produce a different outcome. Out of these variations come frustration, failure, surprise, improvement, success, confusion... in varying degrees and combinations. These outcomes were certainly realized by those in the San Fernando and Mojave River cases who tried to apply a formula from the neighboring basins.

Coping with Others in the Commons. Uncertainty is significantly greater in collective problem-solving situations if the problems are not fully understood, if individuals' perceptions of the problems and which actions to pursue differ, and if communication is problematic -- all of which are reasonable expectations. The actions of individuals attempting to solve problems will obviously be shaped by their understanding of their situation. Full knowledge of their situation is not "given" to them. The institutional arrangements devised by water users at different times reflected their changing understandings of their situations, and the learning they acquired along the way.

At this point, participants in an interdependent situation may also be expected to become concerned about the unpredictability of other participants' actions. The fact that human behavior is indeterminate presents as great a problem for human beings dealing with each other as for analysts. In order to make plans and choices, actors need to reduce indeterminacy (including the gap between stated intentions and actual behavior) to a manageable level.

Several analysts have proposed that it is precisely this indeterminacy that encourages people to develop and rely upon norms and rules for ordering their behavior and making their actions predictable. Heiner (1983) identifies "the origin of predictable behavior" in the effort to deal with uncertainty and unpredictability. Alchian (1950) suggested that boundedly rational individuals may be more likely to cope with uncertainty by adopting relatively persistent "modes of behavior" in dealing with a certain problematic situation rather than making continuous marginal adjustments in each period based on some optimization criterion. March and Simon (1958: 4) point to the functional utility of organizational "roles" for enhancing predictability in an interactive environment: "Not only is the role defined for the individual who occupies it, but it is known in considerable

detail to others in the organization who have occasion to deal with him." Runge (1984:

155) emphasizes the incentive of individuals who might reap advantages from collective action to establish institutional arrangements to coordinate their expectations about each others' behavior. Over time, uncertainty is reduced as institutions coordinate expectations and their operational qualities become known (Eggertsson, 1990: 72).

Failures and Mistakes in the California Cases. Even skillful and experienced entrepreneurship is practiced by fallible beings operating under constraints. In the development of the governance and management systems in California, tactical mistakes were been made and design flaws can be found. Improvements could be made, even in the most successful cases (see also Lipson 1978: 21).

Analysts who have written about the "mutual prescription" doctrine devised during the Raymond Basin adjudication have noted the race to the pumphouse it engendered.

This was an unintended but not unforeseeable consequence of basing the size of pumpers’ rights on recent historical use. Since the "mutual prescription" doctrine would apply only in an overdrawn basin, and overdraft would imply reductions in groundwater use, the clear incentive for pumpers after Pasadena v. Alhambra was to escalate their groundwater extractions in anticipation of an adjudication, so that the consequent reduction would still leave one with a "liveable" pumping right.

The success of the West and Central Basin adjudications spawned two of the greatest tactical mistakes in development of groundwater basin management in southern California. The judge in the Central Basin case moved over to the Los Angeles vs. San Fernando litigation and issued a judgment imposing a mutual-prescription division of the waters of the San Fernando Valley over the objections of Los Angeles and in contradiction to a long series of cases. This ultimately led to reversal in the California Supreme Court. That 1975 Supreme Court decision left considerable uncertainty over the status of mutual prescription (and basin adjudications generally), helped to finish off the faltering adjudication that had started in the Mojave River Basin, and produced the much more complicated groundwater management arrangements in Chino Basin that leave some overlying users without firm, tradeable rights.

During the same period, some of the attorneys and engineers involved in the Central Basin adjudication moved north to the Main San Gabriel Basin and the Mojave River Basin. In the Main San Gabriel Basin, the Central Basin "formula" was adopted, with important modifications. The Mojave River Basin presented a different set of circumstances however, and the mutual-prescription solution was strongly and successfully resisted by smaller overlying landowners. They did not perceive it as a formula for resolving groundwater problems, but as a water grab by larger upstream ranchers and appropriators. The collapse of the Mojave River adjudication was accompanied by the collapse of the proadjudication majority on the Mojave Water Agency Board of Directors, and the dismissal of pro-adjudication staff members (the agency manager, engineer, and attorneys).

The collapse of the Mojave River adjudication in the 1970s represented not only an attempt to impose a formula, but to move much too quickly in doing so. In previous basin adjudications based on mutual prescription, general agreement first existed about the general shape and nature of the water resource. In the Mojave River adjudication, differences persisted up to the time of the dismissal of the lawsuit over whether the water resource consisted of a single area of influence, an underground stream subject to the laws governing surface watercourses, or a series of three distinct underground basins. It is impossible to say whether water users could have reached a common understanding about the resource, and beyond that whether they could have reached agreement on a plan for allocating rights to its use. Nevertheless, moving forward with an adjudication when users do not even agree about the basic nature of the resource was a significant tactical mistake.

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