Editing Satisficing (section)

=== Endogenous aspiration levels ===
What determines the aspiration level may be derived from past experience (some function of an agent's or firm's previous payoffs), or some organizational or market institutions. For example, if we think of managerial firms, the managers will be expected to earn [[normal profits]] by their shareholders. Other institutions may have specific targets imposed externally (for example state-funded universities in the UK have targets for student recruitment).

An economic example is the [[Huw Dixon|Dixon]] model of an economy consisting of many firms operating in different industries, where each industry is a [[oligopoly|duopoly]].<ref>{{cite journal |last=Dixon |first=H. |year=2000 |title=Keeping Up with the Joneses: Competition and the Evolution of Collusion |journal=[[Journal of Economic Behavior and Organization]] |volume=43 |issue=2 |pages=223–238 |doi=10.1016/S0167-2681(00)00117-7 }}</ref> The endogenous aspiration level is the average profit in the economy. This represents the power of the financial markets: in the long-run firms need to earn normal profits or they die (as [[Armen Alchian]] once said, "This is the criterion by which the economic system selects survivors: those who realize positive profits are the survivors; those who suffer losses disappear"<ref>{{cite journal |last=Alchian |first=A. |year=1950 |title=Uncertainty, Evolution and Economic Theory |journal=[[Journal of Political Economy]] |volume=58 |issue=3 |pages=211–222 |jstor=1827159 |doi=10.1086/256940  |s2cid=36045710 }}</ref>). We can then think what happens over time. If firms are earning profits at or above their aspiration level, then they just stay doing what they are doing (unlike the optimizing firm which would always strive to earn the highest profits possible). However, if the firms are earning below aspiration, then they try something else, until they get into a situation where they attain their aspiration level. It can be shown that in this economy, satisficing leads to [[collusion]] amongst firms: competition between firms leads to lower profits for one or both of the firms in a duopoly. This means that competition is unstable: one or both of the firms will fail to achieve their aspirations and hence try something else. The only situation which is stable is one where all firms achieve their aspirations, which can only happen when all firms earn average profits. In general, this will only happen if all firms earn the joint-profit maximizing or collusive profit.<ref>Dixon (2000), Theorem 1 page 228. for a non-technical explanation see [http://www.huwdixon.org/SurfingEconomics/chapter8.pdf Chapter 8], [http://www.huwdixon.org/SurfingEconomics/index.html Surfing Economics] by Dixon H</ref>