Journal of Economic and Social Policy
Volume 10
Issue 2 Tenth Anniversary Edition
Article 4
1-1-2006
Is Economic Theory Wrong About Human
Nature?
Pauline Vailancourt Rosenau
UT Houston - School of Public Health Houston, Texas USA
Follow this and additional works at: http://epubs.scu.edu.au/jesp
Recommended Citation
Vailancourt Rosenau, Pauline (2006) "Is Economic Theory Wrong About Human Nature?," Journal of Economic and Social Policy: Vol.
10 : Iss. 2 , Article 4.
Available at: http://epubs.scu.edu.au/jesp/vol10/iss2/4
ePublications@SCU is an electronic repository administered by Southern Cross University Library. Its goal is to capture and preserve the intellectual
output of Southern Cross University authors and researchers, and to increase visibility and impact through open access to researchers around the
world. For further information please contact [email protected].
Is Economic Theory Wrong About Human Nature?
This article is available in Journal of Economic and Social Policy: http://epubs.scu.edu.au/jesp/vol10/iss2/4
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human
Nature?
Pauline Vaillancourt Rosenau
Management and Policy Sciences
UT Houston - School of Public Health
Houston, Texas USA1
Abstract
Traditional economic models assume that all individuals share the same
self-oriented life perspective. The new economics suggests, on the basis of
different methodologies, that this is unlikely. These challenges to traditional
economic views of human nature are summarized under four substantive
topic areas (trusting, bonding, and empathy; altruism and cooperation,
community orientation and accommodation; fairness and reciprocity; and
rationality). Laboratory experiments indicate that a majority of us are
contingent cooperators, trusting and willing to give others the benefit of the
doubt ─ at least initially. Very few people are selfish chronic free-riders
(20-30 percent). The rational-calculating and absolutely consistent Homo
economicus is largely a myth. This has enormous implications for policy
and society.
Introduction
Historically, economic and social policy has been informed by classical,
Keynesian, welfare, and supply-side economic theory. While there has been
much debate about the assumptions of these theories in the past, it has been
largely subjective and normative, dependent on opinion rather than direct
evidence. Today, basic research in a number of fields is giving rise to new
specialties in economics. The findings from this research question the
adequacy of many traditional economic assumptions. They point to the need
for reasonable new approaches to economic and social policy in all fields. In
short, taken together, the body of emerging research on economic behavior
constitutes a paradigm shift of significant importance.
1 Received 17 August 2004, revised 1 March 2005, accepted 4 April 2005.
Published by ePublications@SCU, 2006
1
Journal of Economic and Social Policy, Vol. 10, Iss. 2 [2006], Art. 4
2
Journal of Economic and Social Policy
Traditional Economics
Adam Smith's Wealth of Nations, first published in 1776, lays out the basis for
modern - and largely untested - economic theory. In his earlier Theory of
Moral Sentiment he wrote of the need for an individual to consider the 'welfare
of the whole society of his fellow-citizens' (Smith 1759, part 6). But modern
economics has focused on his Wealth of Nations, interpreting him as saying
that it would be optimal if each individual, family, and business pursued its
own self-interest. This would, then, thanks to the mechanism of the invisible
hand, maximize the success of the economy. In short, aggressive individual
selfishness and business profit-maximizing make for the general welfare, the
common interest, and social progress (Smith 1776). Darwinian natural
selection would lead to improvement and progress in the world of business
just as it did in the animal kingdom. By extension, individual liberty is best
maximized and government interference with the process of competition is
best minimized. It is also essential to the model that individuals be rational as
consumers in assessing their own self-interest (Rice 1997, p. 6). Economic
behavior is based on preferences and is relatively constant over time.
Individuals will ultimately maximize their expected utilities. Economic theory
assumes that everyone will 'free ride' if given the opportunity. It suggests that
human beings are all willing to let someone else do the work and then take
credit for it. It takes for granted that consumers respond to price and wage
changes and that they will evaluate their options and consistently act to
maximize their choice based on self-interest defined in terms of their
preferences. Actors are assumed to be individually-oriented and inherently
uncooperative.
Criticisms of classical economic theory are common but they are seldom about
fundamental assumptions and, therefore, do not present a serious challenge to
the field as a whole. In any case, small deviations from a theory are not
considered by mainstream economists to be a problem. They often
acknowledge that 'perfect competition' is exceptional. Despite the fact that the
basic model of market competition is unrealistic, it remains in place, though
other alternative models sometimes fit the data employed by economists much
better (Stiglitz 1997, pp. 29-30). In short, critics have been rare when it comes
to the unquestioned assumptions economists make about human nature
(Richerson & Boyd 2001).
Serious challenges to traditional, mainstream economic models come from the
new approaches to economics in the fields of biology, neuroscience,
anthropology, psychology, and sociology. They suggest that major revisions
http://epubs.scu.edu.au/jesp/vol10/iss2/4
2
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human Nature?
3
are needed because traditional economic models are poor predictors of human
economic behavior. This paper briefly summarizes and reviews the
methodologies, explanatory models, and substantive findings of the 'new
economics' - it points to the policy consequences of the new economics. These
contributions are of sufficient importance to merit the development of new,
trans-disciplinary sub-specialties in economics, including the fields of neuroeconomics, bio-economics, psycho-economics, evolutionary economics,
experimental economics, behavioral economics, behavioral finance, ecological
economics, environmental economic, and ethico-economics.
Methodological Challenges
Innovative methodologies increasingly confront the old economics with its
emphasis on analytical tools, verbal accounting, and mathematical equations.
Historically, economists have worried about heteroscedasiticity, autocorrelation, and collinearity. Their favored techniques of analysis include
regression, functional forms, specialized tests, simultaneous equations, and
estimations.
The new economists, discontented with traditional approaches, note
methodological inadequacies relating to the absence of evolutionary processes,
geography, innovation, and technology (Pajares, Hernandez-Iglesias et al.
2004). The new economics does not abandon the old methodologies; it moves
beyond them.
The new economists look to methodologies that use computer science and are
consistent with concepts in cognitive science, artificial intelligence, and
general psychology. They employ techniques of simulation, field data,
modeling, multi-agent systems, several types of game theory, and ad hoc
learning. Their array of methods also includes hormone analysis based on
drawn blood samples as well as neuro-radiology to map brain activity and
neural networks. Beginning with the work of Nobel Prize winner, Vernon
Smith, they integrated laboratory experiments into their research methodology.
These techniques offer the possibility of close control over what is being
measured and tested.
Some of the most important findings of the new economics involve three
games: Prisoner's Dilemma, the Ultimatum Game, and the Dictator Game.
According to the Norton College Dictionary, the Prisoner's Dilemma game is
structured such that the 'non-cooperative pursuit of self-interest by two parties
Published by ePublications@SCU, 2006
3
Journal of Economic and Social Policy, Vol. 10, Iss. 2 [2006], Art. 4
4
Journal of Economic and Social Policy
makes them both worse off'. In cases where one person defects and the other
continues to cooperate, the person who defects gains more than if she or he
had cooperated. In the Ultimatum Game, two people, 'Allocator' and
'Recipient,' are asked to split $10. Allocator must make a one time offer to the
other player. Recipient can either accept or reject this offer. If she or he
accepts it they both keep the proceeds. If Recipient rejects the offer, neither
gets to keep anything. In the Dictator Game there are two players. The first
player proposes a split and decides, for example, to keep $9. The recipient
then gets $10-$9 = $1. In this game, the recipient must accept the amount
offered, no matter what is proposed. The Dictator Game measures the extent
of altruism using gift-giving.
Methodological developments in the new economics include advanced
technology never before available. The use of brain scans to understand
human emotions and behavior is in its infancy but the potential is impressive.
These techniques are already popular for marketing and product development
(Thompson 2003), but there is also substantial research potential for analyzing
brain activity associated within a wide range of basic economic and policy
topics. For example, activity in certain areas of the brain is now known to be
associated with specific emotions, making it possible to distinguish between
rational-calculation and affective feelings. It is increasingly clear that
economic decisions are not only taking place in the brain centers associated
with rational-calculation; they also involve the emotional areas of the brain
(Zak 2004). In the near future hyper-scanning will permit neuro-economists to
watch how two people's brains interact during episodes of communication
(Montague, Berns et al. 2002).
Substantive Challenges
Challenges to traditional economics are not new. Serious questioning of
economic theory from within, using traditional methodologies of logic and
intellectual consistencies, are common. Some of them bridge the old and new
economics. For example, basic human emotions, what Amartya Sen calls
sympathy and commitment, are central to individual choices about economic
decision. The fact that emotions influence economic behavior undermines
assumptions that such decisions are always rational, calculated, and based on
selfish personal preferences. Sen argues that codes of moral behavior exist and
that they distort the calculations that go into making a 'rational' decision
(Sen 1982). Tom Rice similarly points out that concepts such as cognitive
dissonance call into question the idea that people act in a rational manner, 'that
http://epubs.scu.edu.au/jesp/vol10/iss2/4
4
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human Nature?
5
is, make decisions that truly maximize their utility' (Rice 2002, p. 92).
Kahneman, Knetsch, and Thaler suggest community fairness norms may
influence behavior of firms as regards raising prices (Kahneman, Knetsch
et al. 1986). Frank points out that human interdependency means that
individuals cannot, and will not, act exclusively on the basis of personal
preference (Frank 1985).
Today, a growing body of evidence from the new economics testifies to the
need to modify the view of human nature implicit in traditional economics.
These more serious challenges come from outside mainstream economics
altogether. Accommodating the new economists' views of human nature
would complicate the field of economics and its theoretical underpinnings; but
it has the potential to increase predictability and improve its explanatory
powers.
Trust, Bonding, and Empathy
Traditional economic theory ignores concepts like trust, bonding, and
empathy. For example, the Nash Equilibrium predicts that rational human
beings will not trust one another. But laboratory experiments demonstrate that
there is a neuro-physiological basis to trust. It is a physiological attachment
mechanism commonly observed in mammals and might well be the result of
evolved survival mechanisms (Nesse 2001).
Research in the field of neuro-economics suggests that trust between
individuals is surprisingly common. The Investment Game illustrates this
point. An individual, A, has the opportunity to send all or none or any part of a
ten dollar gift to another person, B, who they do not know. The amount sent
will be tripled for player B who can then, if she or he wishes, return part of the
gain to player A. While modern economics predicts that player A will not trust
player B, in fact, in the experiments, A almost always sends money to B.
Economic decisions are not just based on individual utilities – many of us are
too closely attached for this to be the case. Here another illustration is helpful:
research using brain scans shows that individuals who are emotionally close
suffer pain when their friend or spouse is administered a small electrical shock
by an experimenter (Singer, Kiebel et al. 2004).
People in groups where trust is high respect agreed-upon rules of the game and
reciprocate when granted favors; cooperative arrangements are more common,
based on community level connectedness. One example is the microfinance
institutions and fisheries involving 8-15 million households world wide (Pretty
2003). They are of long term benefit to the economy. Another example: trustPublished by ePublications@SCU, 2006
5
Journal of Economic and Social Policy, Vol. 10, Iss. 2 [2006], Art. 4
6
Journal of Economic and Social Policy
based collective management has been found to be more effective than the
unlimited pursuit of individual self-interest in protecting the environment.
Bonding and empathy are relevant to understanding the process behind the
development of social capital defined as 'social bonds and shared norms'. It is
high in groups that are well-organized, perhaps because social capital lowers
the transaction costs between the members of a group (Ostrom 1990).
Trust is essential to economic exchange but traditional economic models do
not have the intellectual infrastructure to incorporate the emotional into
economic policy. The new economics shows that to do so is essential if
models are to be adequate predictors. Data suggests that a society that is low
on trust is very likely to be caught in a 'poverty trap'. High trust societies have
'higher rates of investment and growth' (Zak & Knack 2001). It is also
probable that low trust causes poverty rather than vice-versa (Zak 2003).
Altruism, Cooperation, Community Orientation, and Accommodation
Traditional economics assumes that most people are selfish – not altruistic and
cooperative. They say that faced with a Prisoner's Dilemma type situation
(explained above) in laboratory experiments people should or would defect. If
this is the dominant strategy, and if defectors get the biggest payout, then 'by
virtue of their higher payoffs, defectors would eventually drive cooperators to
extinction -- hence the standard conclusion in behavioral biology that genuine
cooperation or altruism cannot survive in competitive environments' (Frank
2001, p. 61). Economists see it this way: 'Cooperators help others at a cost to
themselves, while defectors receive the benefits of altruism without providing
any help in return' (Nowak, Sasaki et al. 2004, p. 646). But this theoretical
conclusion may be based on narrow contextual circumstances that do not
reflect the real world.
In fact, research by the new economists shows that a surprisingly large
proportion of humans are altruistic, cooperative, and community oriented.
They regularly perform acts of generosity that are not self-serving and do not
yield immediate personal benefit. Between 20 and 30 percent of subjects in
experiments behave as economists predict – they are largely selfish free-riders
(Fehr & Gachter 2000, p. 157; Fischbacher, Gatchter et al. 2001). But slightly
over 50 percent are contingent cooperators. These cooperators give the benefit
of a doubt to those they interact with – at least initially. It is a cognitive
predisposition that is present in many people even in the absence of reward
(Brandts & Schram 2001). This has been found to be the case using outcome
measures of laboratory experiments and it has been confirmed by analyzing
brain patterns of human subjects (McCabe, Houser et al. 2001).
http://epubs.scu.edu.au/jesp/vol10/iss2/4
6
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human Nature?
7
As with trust, the new economists' research results concerning altruism and
cooperation go against traditional economic theory. Rather than leading to a
revision of economic theory, this divergence has given rise to a debate about
what accounts for the observed cooperative behavior. The argument offered is
that such altruistic and cooperative behavior is ultimately self-interested or
rational because the recipient gets something from it in the end, even though
the reward may be remote and non-obvious. Traditional economists hold that
altruism and reciprocity are compatible with the rational actor model. They
also argue that altruistic behavior can be attributed to mistakes or confusion in
reasoning (Ostrom & Walker 2003, see this edited book for some examples).
New economists say that there may well be an evolutionary advantage to
cooperation 'even when immediate and tangible pay-offs are absent,
insufficient or sub-optimal'. Psychologists support them; cooperative relations
set the stage for future individual and group survival (Schuster 2004, p. 261).
If many individuals in a group pursue cooperative strategies, these groups may
do better than groups where most individual members are self-interested. For
example, it might well be the case that cooperators make more effective
parents; this would give a survival benefit to groups with many cooperative
individuals. Historically, a 'fitness enhancement … might have compensated
for the initial costs of an indiscriminately sympathetic posture toward
unrelated individuals' (Frank 2001, p. 71).
Cultural evolution and theories that are described as 'gene-culture coevolution' also offer plausible explanations for altruistic and cooperative
behavior (Gintis 2003). If altruism emerges and if it is sustained in a
community, it is not possible for it to be exploited by defectors.
Mathematicians have modeled how a single cooperator employing a 'tit-for-tat'
strategy can influence a situation so that cooperation becomes dominant in a
group through the process of natural selection (Nowak, Sasaki et al. 2004).
From an evolutionary perspective, there may be a selective advantage that
accrues to groups that actually punish cheaters and reward cooperative
behavior (Bowles & Gintis 2000; Fehr, Fischbacher et al. 2002; Pagel & Mace
2004; Gintis 2000). Altruistic punishment is discussed below. There are, of
course, variations with regard to results depending on game form, spatial
structure, and size of the group (Taylor & Day 2004).
New evidence sheds light on why community orientation and cooperative
behavior sometimes takes precedence, in the long term, over individual selfinterest. This new evidence directly addresses the arguments advanced by
skeptics who say altruistic behavior in the end, is always self-interested. First,
laboratory experiments show that people cooperate not just with family or
Published by ePublications@SCU, 2006
7
Journal of Economic and Social Policy, Vol. 10, Iss. 2 [2006], Art. 4
8
Journal of Economic and Social Policy
those genetically related, but also with perfect strangers that they are unlikely
to interact with again in the future (Fehr & Gachter 2002; Grimes 2003).
Second, research based on brain imaging during episodes of observed
reciprocity and trust suggest that it is authentic, rather than merely due to
ulterior motives of rational calculation (Singer, Kiebel et al. 2004). Neuroeconomists conclude, using experiments conducted with MRI-monitored
subjects, that the human brain is 'hard wired' to accommodate rather than
compete (Rilling, Gutman et al. 2002; Sanfey, Rilling et al. 2003). Partners
experience positive feelings when cooperating with another equally
cooperative person and it is not rational calculating areas of brain activity that
are involved. Mutual cooperation has been found to be associated with
'consistent activation in brain areas that have been linked with reward
processing,' ie, the emotional rather than the rational-calculating parts of the
brain. This sensation, feeling, or sentiment may stave off the temptation to act
in a more selfish manner even when selfishness is the most rational choice
(Rilling, Gutman et al. 2002).
Fairness and Reciprocity: Retaliation and Altruistic Punishment
Behavioral economists have discovered that in specific, identifiable situations
fairness concerns trump self-interest and profit maximization (Henrich, Boyd
et al. 2001; Carmer 2003). These findings apply in a wide variety of societies
and cultures (Henrich, Boyd et al. 2004). Preferences and a sense of what is
right, wrong, or just plan 'fair' have more to do with economic behavior than
mere distributional material payoff (Falk, Fehr et al. 1999; Falk, Fehr et al.
2000). In addition, preferences are not inherent in some sense, but rather social
and 'shaped by the economic and social interactions of everyday life' (Henrich,
Boyd et al. 2001, p. 77). For example, contributions to the public good have
been found to be influenced by social interactions with neighbors at least for
90 percent of subjects in a group (Falk, Fischbacher et al. 2003). And another
example: perceived fairness of procedures plays a role in how people react to
authoritative decisions including economic policies (Hibbing & Alford 2004).
The concept of fairness is absent from traditional economics but it influences
economic behavior substantially. At least that is the conclusion emerging from
experiments conducted by researchers in the last several years who find that
fairness values sway behavior. In the Ultimatum Game, Allocators generally
offer 40-50 percent of 'the available money to the other person and
Responders reject low offers with a high probability' (Fehr, Fischbacher et al.
2002). The amount of money involved is not trivial and fairness concerns
remain important even when the stakes amount to between to 2 or 3 times a
monthly wage (Fehr, Fischbacher et al. 2002).
http://epubs.scu.edu.au/jesp/vol10/iss2/4
8
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human Nature?
9
That Homo economicus is fairness-oriented should be no surprise. Even in the
animal kingdom fairness norms have been observed (de Waal & Berger 2000).
Researchers hypothesize that there may be 'early evolutionary origins of
inequity aversion' (Brosnan and de Waal 2003). In situations of equal effort,
capuchin monkeys were found to reject offers of rewards (cucumbers) that
were lower in value to those offered to monkeys in neighboring cages
(grapes). Hauser et al. found that altruistic food giving occurred more
frequently among Tamarin monkeys when it was reciprocal. These animals
'discriminate between altruistic and selfish actions, and give more food to
those who give food back' (Hauser, Chen et al. 2003, p. 2363).
The new economists find that what is considered to be fair and unfair in
market competition and society is not a universal standard, but rather, is
influenced by subjective factors. It varies from person to person (Fischbacher,
Fong et al. 2003) and is, in part, cultural. Experimental laboratory games
conducted in different countries and cultures document that what is considered
fair differs from place to place and between cultures around the world
(Henrich, Boyd et al. 2001). Studies comparing free-riding or 'social-loafing'
among MBA students in China and the US found such behavior far less likely
to occur in China where cultural norms discourage it (Latane, Williams et al.
1979; Earley 1989)
Strong reciprocity is part of a fairness ethic. It is defined as 'the predisposition
to cooperate with others and to punish non-cooperators at personal cost'
(Sanchez & Cuesta 2004, p. 1). A different term, social reciprocity, functions
along the same lines (Carpenter & Matthews 2003). The concept of altruistic
punishment is closely related; it means 'that individuals punish, although the
punishment is costly for them and yields no material gain' (Fehr & Gachter
2002). Neuro-economists do, however, find that psychological satisfaction
results from this type of altruism (Fehr & Rockenbach 2004; J.-F. de
Quervain, Fischbacher et al. 2004).
Despite the fact that what is fair and not fair varies from culture to culture
somewhat, experiments on fairness-related orientations, conducted in many
different circumstances, consistently show that overall 'people tend to behave
pro-socially and punish antisocial behavior, at a cost to themselves, even when
the probability of future interactions is extremely low, or zero' (Gintis 2000,
p. 177). Experiments in the laboratory indicate that people are willing to give
up money to reduce perceived inequities (Zizzo & Oswald 2001; Fehr &
Rockenbach 2003). Even uninvolved third parties, whose economic payoff is
unaffected by societal or group violations of equality distribution and
cooperation norms, are observed to sanction violators (Fehr & Fischbacher
Published by ePublications@SCU, 2006
9
Journal of Economic and Social Policy, Vol. 10, Iss. 2 [2006], Art. 4
10
Journal of Economic and Social Policy
2004). Cooperation is enforced though a range of devices, processes and
techniques – directly and indirectly (Masclet, Noussair et al. 2003). In so
doing, they are enforcing norms that create a group culture that does not
tolerate free-riding (Fehr & Gachter 2000). Most importantly, punishment of
non-cooperators appears to lead to universal cooperation (Fehr, Fischbacher et
al. 2002).
Rationality: It's Hormonal, Emotional, and Intellectual
Traditional economics assumes that rational economic agents are engaged in
decision-making with perfect information. They are assumed to be trying to
maximize their individual expected utilities. Research by the new economists
reports that it is not so much rational as it is influenced by social and
emotional factors (Kahneman & Tversky 2000; Zak & Knack 2001).
Outcomes regarding spending decisions, for example, are often a function of
impulse and instinct. Human motivation is complex and subjective. Several
examples from a wide range of situations suggest this to be the case. In a
family structure, the number of boy and/or girl offspring influences how much
is invested in housing and how many hours per week a father puts in on the
job (fathers put in more hours if they have sons) (Leonhardt 2003). Another
example from the new economics is the finding that people dislike losses more
than they appreciate gains. Most humans are, in short, loss averse and this
drives decisions, be they economic or health related (Tversky & Kahneman
1992). In forced choice situations, would one sacrifice a life if this assured that
five lives would be saved in an emergency situation, assuming that the five
were in great jeopardy? The answer, research suggests, depends on if that one
person is a friend, or geographically proximate, compared with the five people
who are far away and unknown to the decision-maker. The choice is often
emotional and has been documented to be so by MRI studies of the subjects'
brain patterns during the course of making such decisions (Begley 2004).
Behavioral economists find incidental emotions from one life-situation can
influence economic transactions in completely unrelated situations. Several
research examples illustrate this case. This gives rise to the 'endowment effect'
where people ask a higher price for an item that they own, compared to what
they would be willing to pay for the same item if they were about to purchase
it from a stranger. Another example of the same principle reveals that people
like to have options and choices and that it takes considerable monetary
incentives to convince them to give this up (Ahlert & Cruger 2004).
Traditional economic theory predicts that stock traders are 'omniscient and
coldly logical beings, who aim always to maximize their profits based on
http://epubs.scu.edu.au/jesp/vol10/iss2/4
10
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human Nature?
11
complete knowledge about what the entire market is doing' (Ball 2003).
However, Farmer, et al., while modeling agent behavior with data from the
London Stock Exchange, found that the observed action patterns were so
complex and varied that they resembled random choice more than anything
else (Farmer, Patelli et al. 2003). Traders attempt to guard against their own
emotional tendencies but in general they fail this test (Anonymous 2004).
Psychologists Daniel Kahneman and Amos Tversky propose a theory of
'irrational' economic behavior: their Prospect Theory holds that psychological
orientations influence people's choices under conditions of uncertainty
(Kahneman & Tversky 1979). Economic decisions are more often short-term
than long-term oriented. We tend to discount future rewards in favor of the
short term (Ainslie 1992). People tend to prefer the lower benefit now over a
greater reward later, perhaps because it is nearer and more certain. 'A bird in
the hand,' it appears, is valued more than the 'two in the bush'.
Psychological factors such as 'representative thinking' and 'categorization'
influence economic choices. Representative thinking is the assumption that the
past represents future trends. For example, if the stock market is going up it
will continue to do so. And an example from public health: after a prolonged
period of no epidemics, people forget to be vaccinated. If a movie star or the
president has a certain medical problem, it becomes 'an epidemic' as people
ask their doctors to check if they, too, might be ill in the same way.
Categorization means people jump to conclusions on the basis of previous
experience and incomplete data. When someone has lung cancer, people jump
to the conclusions that she or he must be a smoker.
Finally, experimental economists, bio-economists, and neuro-economists have
discovered that 'rational' strategies are influenced not merely by intellectual
analysis or selfish calculation but also by hormones such as oxytocin. These
hormonal effects vary across the population and sway human decision-making
(Zak 2001; Zak & Knack 2001; Zak 2003). Sadness seems to make people
accept higher prices and to purchase more than they ordinarily would (Lerner,
Small et al. 2004).
Conclusion
Overall and in sum, the new evidence from these subspecialties that combine
economics with other social and medical sciences calls into question the views
of human nature implicit in classical economic theory. Their relevance for
economic and social policy is just beginning to be understood. The new
Published by ePublications@SCU, 2006
11
Journal of Economic and Social Policy, Vol. 10, Iss. 2 [2006], Art. 4
12
Journal of Economic and Social Policy
economics challenges the idea that the economic preferences of every
individual are logical, stable, systematic, and consistent. It concludes that
greed and selfishness are not universal human characteristics. It uncovers
substantial variation regarding human motivation where traditional economic
models permit few exceptions to generalizations about the incentives that
drive us. It points to the enormous implications of group reference, context,
culture, and time frame for economic decisions and human behavior in
general.
What does it matter if standard economic assumptions about humans being as
basically ruthless and self-interested are wrong (Frank 2003)? Today's social
institutions in western industrialized countries are structured and organized
around the assumption that people are all basically selfish. If, as this new
research suggests, most people are willing to forgo their individual interest in
favor of better outcomes that work for all, then the appropriateness of these
currently-in-place social structures is in question. What is the cost of
organizing social institutions to fit the minority that are unable to trust others,
always out for themselves at the expense of the larger society, incapable of
fairness (equity and reciprocity), and unconcerned by community needs?
Can anything be done or should anything be done to change the views and
behavior of the ruthlessly selfish? Have we all become so accustomed to
dealing with highly self-interested individuals that we have come to accept it
as the norm? Does this type of behavior become a self-fulfilling prophecy
(Frank 2005)? Certainly school curriculum seems to be effective in teaching
individuals to be selfish or altruistic though, of course, one may be so without
formal education to a particular orientation. For example, long ago research
showed that students majoring in economics are more likely than students in
other disciplines to learn a selfish, free-riding, and uncooperative orientation
towards others (Marwell & Ames 1981) (Yezer, Goldfarb et al. 1996) (Frank,
Gilovich et al. 1993). What would be the consequences of an educational
program that sought to teach community orientation and empathy with others?
Would a city or country be vulnerable if it chose to educate its citizens to be
less selfish while its neighboring cities or countries did not do so (Rosenau
2003, pp. 185-87)? There is some evidence that at the level of the nation-state,
those states that play fair, that do not initiate conflict, or that refuse to join in
alliances with states that do instigate conflicts, survive and even prosper in an
environment where many other states act in a self-interested manner (Cusack
& Stoll 1994; Stoll 1998). All this suggests that the assumptions implicit in
modern economics regarding human nature may be well off the mark.
http://epubs.scu.edu.au/jesp/vol10/iss2/4
12
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human Nature?
13
References
Ahlert, M. & Cruger, A. 2004, 'Freedom to Veto', Social Choice and Welfare, vol. 22,
pp. 7-16.
Ainslie, G. 1992, Picoeconomics: The Strategic Interaction of Successive
Motivational States Within the Person, Cambridge University Press, Cambridge.
Anonymous 2004, The Successful Investor: Mastering Investor Behavior for Building
Long-Term Wealth, Selected Funds - Davis Distributions, LLC: 1-8.
Ball, P. 2003, 'Stock Market Traders Show Signs of Zero Intelligence',
<http://www.nature.com/nsu/nsu_pf/030922/030922-6.html> accessed May 19,
2004.
Begley, S. 2004, 'Researchers Seek Roots of Morality in Biology with Intriguing
Results', Wall Street Journal.
Bowles, S. & Gintis, H. 2000, 'Reciprocity, Self-Interest, and the Welfare State',
Nordic Journal of Political Economy, vol. 26, no. 1.
Brandts, J. & Schram, A. 2001, 'Cooperation and Noise in Public Goods
Experiments: Applying the Contribution Function Approach', Journal of Public
Economics, vol. 792, pp. 399-427.
Brosnan, S. F. & de Waal, F. B. M. 2003, 'Monkeys Reject Unequal Pay', Nature
vol. 425, pp. 297-299.
Carmer, C. 2003, Behavioral Game Theory: Experiments on Strategic Interaction,
Princeton University Press, Princeton.
Carpenter, J. P. & Matthews, P. H. 2003, 'Social Reciprocity', 2004,
<http://community.middlebury.edu/~jcarpent/papers/SR.pdf.>
Cusack, T. R. & Stoll, R. J. 1994, 'Collective Security and State Survival in the
Interstate System', International Studies Quarterly, vol. 38, no. 1, pp. 33-59.
de Waal, F. B. M. & Berger, M. 2000, 'Payment for Labour in Monkeys: Capuchins
Will Voluntarily Share Treats with Other Monkeys that Helped to Secure Them',
Nature, vol. 404, p. 563.
Earley, P. C. 1989, 'Social Loafing and Collectivism: A Comparison of the United
States and the People's Republic of China', Administrative Science Quarterly,
vol. 34, pp. 565-581.
Falk, A., Fehr, E. et al. 1999, On the Nature of Fair Behavior, Zurich, Institute for
Empirical Research in Economics.
Falk, A., Fehr, E. et al. 2000, Testing Theories of Fairness-Intentions Matter, Zurich,
Institute for Empirical Research in Economics.
Falk, A., Fischbacher, U. et al. 2003, Living in Two Neighborhoods-Social
Interactions in the Lab. Zurich, Institute for Empirical Research in Economics.
Published by ePublications@SCU, 2006
13
Journal of Economic and Social Policy, Vol. 10, Iss. 2 [2006], Art. 4
14
Journal of Economic and Social Policy
Farmer, J. D., Patelli, P. et al. 2003, 'The Predictive Power of Zero Intelligence in
Financial
Markets',
<http://www.arxiv.org/PS_cache/condmat/pdf/0309/0309233.pdf.> accessed May 18, 2004
Fehr, E. & Fischbacher, U. 2004, Third Party Punishment and Social Norms, Institute
for Empirical Research in Economics, University of Zurich, Zurich.
Fehr, E., Fischbacher, U. et al. 2002, 'Strong Reciprocity, Human Cooperation, and
the Enforcement of Social Norms', Human Nature, vol. 13, no. 1.
Fehr, E., Fischbacher, U. et al. 2002, Do High Stakes and Competition Undermine
Fairness? Zurich, Institute for Empirical Reseach in Economics.
Fehr, E. & Gachter, S. 2000, 'Cooperation and Punishment in Public Goods
Experiments', American Economic Review, vol. 90, no. 4, pp. 980-994.
Fehr, E. & Gachter, S. 2000, 'Fairness and Retaliation', in The Economics of
Reciprocity, Giving and Altruism, (eds), L. A. Gerard-Varet, S. C. Kolm and J.
M. Ythier, St. Martin's Press, pp. 153-173. New York.
Fehr, E. & Gachter, S.2002, 'Altruistic Punishment in Humans', Nature, vol. 415,
pp. 137-140.
Fehr, E. & Rockenbach, B. 2003, 'Detrimental Effects of Sanctions on Human
Altruism', Nature, vol. 422, pp. 137-140.
Fehr, E. & Rockenbach, B. 2004, 'Human Altruism: Economic, Neural, and
Evolutionary Perspectives', Current Opinion in Neurobiology, vol. 14, no. 6,
pp. 784-790.
Fischbacher, U., Fong, C. M., et al. 2003, Fairness, Errors and the Power of
Competition. Institute for Empirical Research in Economics, Zurich.
Fischbacher, U., Gatchter, S. et al. 2001, 'Are People Conditionally Cooperative?
Evidence from a Public Goods Experiment', Economics Letter, vol. 71, pp. 397404.
Frank, R. 2001, Cooperation Through Emotional Commitment. Evolution and the
Capacity for Commitment, R. M. Nesse, New York, Russell Sage Foundation,
pp. 57-76.
Frank, R. 2003, What Price the Moral High Ground? Ethical Dilemmas in
Competitive Environments, Princeton University Press, New Jersey.
Frank, R. 2005, February 17, Economic Scene, The New York Times, New York City.
Frank, R., Gilovich, T. et al. 1993, 'Does Studying Economics Inhibit cooperation?'
Journal of Economic Perspectives, vol. 7, pp. 159-172.
Frank, R. H. 1985, Choosing the Right Pond: Human Behavior and the Quest for
Status, Oxford University Press, Oxford.
Gintis, H. 2000, 'Strong Reciprocity and Human Sociality', Journal of Theoretical
Biology, vol. 206, no. 2, pp. 169-179.
http://epubs.scu.edu.au/jesp/vol10/iss2/4
14
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human Nature?
15
Gintis, H. 2003, 'The Hitchhiker's Guide to Altruism: Gene-Culture Coevolution and
the Internalization of Norms', Journal of Theoretical Biology, vol. 220, pp. 407418.
Grimes, K. 2003, To Trust Is Human, New Scientist, vol. 178, p. 32.
Hauser, M. D., Chen, M. K. et al. 2003, 'Give Unto Others: Genetically Unrelated
Cotton-Top Tamarin Monkeys Preferentially Give Food to Those Who
Altruistically Give Food Back', Proceedings of the Royal Society of London,
Series B, vol. 270, pp. 2363-2370.
Henrich, J., Boyd, R. et al., eds, 2004, Foundations of Human Sociality;Economic
Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies,
Oxford Univeristy Press.
Henrich, J., Boyd, R. et al. 2001, 'In Search of Homo Economicus: Behavioral
Experiments in 15 Small-Scale Societies', American Economic Review, vol. 91,
no. 2, pp. 73-78.
Hibbing, J. R. &Alford, J. R. 2004, 'Accepting Authoritative Decisions: Humans as
Wary Cooperators', American Journal of Political Science, vol. 48, no. 1, pp. 6276.
J.-F. de Quervain, D., Fischbacher, U. et al. 2004, 'The Neural Basis of Altruistic
Punishment', Science, vol. 305, pp. 1254-1258.
Kahneman, D., Knetsch, J. L. et al. 1986, 'Fairness as a Constraint on Profit Seeking:
Entitlements in the Market', The American Economic Review, vol. 76, no. 4,
pp. 728-741.
Kahneman, D. & A. Tversky 1979, 'Prospect Theory: An Analysis of Decision Under
Risk', Econometrica, vol. 47, no. 2, pp. 263-292.
Kahneman, D. & A. Tversky 2000, Choices, Values, and Frames, University Press,
Cambridge.
Latane, B., Williams, K. D. et al. 1979, 'Many Hands Make Light the Work: The
Causes and Consequences of Social Loafing', Journal of Personality and Social
Psychology, vol. 37, pp. 822-832.
Leonhardt, D. 2003, October 26, It's a Girl! (Will the Economy Suffer?): Couples
With Boys Are Divorcing Less, The New York Times, pp. 1, 11.
Lerner, J. S., Small, D. A. et al. 2004, 'Heart Strings and Purse Strings: Carryover
Effects of Emotions on Economic Decisions', Psychological Science, vol. 15,
no. 5, pp. 337-341.
Marwell, G. & R. E. Ames 1981, 'Economists Free Ride, Does Anyone Else?
Experiments on the Provision of Public Goods', Journal of Public Economists,
vol. 15, pp. 295-310.
Masclet, D., Noussair, C. et al. 2003, 'Monetary and Nonmonetary Punishment in the
Voluntary Contributions Mechanism', American Economic Review, vol. 93, no. 1,
pp. 366-381.
Published by ePublications@SCU, 2006
15
Journal of Economic and Social Policy, Vol. 10, Iss. 2 [2006], Art. 4
16
Journal of Economic and Social Policy
McCabe, K., D. Houser, et al. 2001, 'A Functional Imaging Study of Cooperation in
Two-Person Reciprocal Exchange', Proceedings of the National Academy
Sciences, vol. 98, no. 20, pp. 11832-11835.
Montague, P. R., Berns, G. S. et al. 2002, 'Hyperscanning: Simultaneous fMRI during
Linked Social Interactions', NeuroImage, vol. 16, no. 4, pp. 1159-1164.
Nesse, R. M. 2001, Natural Selection and the Capacity for Subjective Commitment.
Evolution and the Capacity for Commitment, R. M. Nesse, New York, Russell
Sage Foundation, pp. 1-44.
Nowak, M. A., Sasaki, A. et al. 2004, 'Emergence of Cooperation and Evolutionary
Stability in Finite Populations', Nature, vol. 428, pp. 646-650.
Ostrom, E. 1990, 'Governing the Commons: The Evolution of Institutions for
Collective Action', R. Calvert & T. Eggertsson, Cambridge University Press.
Ostrom, E. & Walker, J. eds, 2003, Trust and Reciprocity: Interdisciplinary Lessons
from Experimental Research, Russell Sage Foundation.
Pagel, M. & Mace, R.2004, 'The Cultural Wealth of Nations', Nature, vol. 428,
pp. 275-278.
Pajares, J., Hernandez-Iglesias, C. et al. 2004, 'Modelling Learning and R&D in
Innovative Environments: a Cognitive Multi-Agent Approach', Journal of
Artificial Societies and Social Simulation, vol. 7, no. 2.
Pretty, J. 2003, 'Social Capital and the Collective Management of Resources',
Science, vol. 302, pp. 1912-1914.
Rice, T. 1997, 'Can Markets Give Us the Health System We Want?' Journal of Health
Politics, Policy and Law, vol. 22, no. 2, pp. 383-426.
Rice, T. 2002, The Economics of Health Reconsidered, Health Administration Press,
Chicago.
Richerson, P. J. & Boyd, R. 2001, 'The Evolution of Subjective Commitment to
Groups: A Tribal Instincts Hypothesis', Evolution and the Capacity for
Commitment, R. M. Nesse, New York, Russell Sage Foundation, pp. 186-219.
Rilling, J. K.,. Gutman, D. A et al. 2002, 'A Neural Basis for Social Cooperation',
Neuron, vol. 35, no. 2, pp. 395-405.
Rosenau, P. 2003, The Competition Paradigm; America's Romance with Conflict,
Contest, and Commerce, Rowman & Littlefield, Lanham, MD.
Sanchez, A. & J. A. Cuesta. 2004, 'Altruism May Arise from Individual Selection',
<http://arxiv.org/PS_cache/q-bio/pdf/0403/0403023.pdf.> accessed May 18,
2004.
Sanfey, A., Rilling, J. K. et al. 2003, 'The Neural Basis of Economics DecisionMaking in the Ultimatum Game', Science, vol. 300, no. 13, pp. 1755-1758.
Schuster, R. P., Amir, 2004, 'Why Cooperate? An Economic Perspective Is Not
Enough', Journal of Public Economics, vol. 66, no. 3, pp. 261-277.
Sen, A. 1982, Choice, Welfare, and Measurement, Basil Blackwell, Oxford.
http://epubs.scu.edu.au/jesp/vol10/iss2/4
16
Vailancourt Rosenau: Is Economic Theory Wrong About Human Nature?
Is Economic Theory Wrong about Human Nature?
17
Singer, T., Kiebel, S. J. et al. 2004, 'Brain Responses to the Acquired Moral Status of
Faces', Neuron, vol. 41, no. 4, pp. 653-662.
Smith, A. 1759, The Theory of Moral Sentiments, A. Millar, A. Kincaid, and J. Bell,
London.
Smith, A. 1776, An Inquiry into the Nature and Causes of the Wealth of Nation,.
W. Strahan and T. Cadell, London.
Stiglitz, J. E. 1997, Economics, W. W. Norton & Company, New York.
Stoll, R. J. 1998, 'Nice States Finish Pretty Well: Collective Security Behavior in
Militarized Interstate Disputes, 1816-1992', International interactions, vol. 24,
pp. 287-313.
Taylor, P. D. & Day, T.2004, 'Cooperate with Thy Neighbour?' Nature, vol. 428,
pp. 611-612.
Thompson, C. 2003, 'There's a Sucker Born in Every Medial Prefrontal Cortex', The
New York Times, October 26, p. 54.
Tversky, A. & Kahneman, D. 1992, 'Advances in Prospect Theory: Cumulative
Representation of Uncertainty', Journal of Risk and Uncertainty, vol. 5, pp. 297323.
Yezer, A. M., Goldfarb, R. S. et al. 1996, 'Does Studying Economics Discourage
Cooperation? Watch What We Do, Not What We Say or How We Play', Journal
of Economic Perspectives, vol. 10, no.1, pp. 177-186.
Zak, P. J. 2001, 'Research Report ~ The Neurobiological Basis for Trust',
<http://www.gruterinstitute.org/news/spring01/research_report.htm>
accessed
May 19, 2004.
Zak, P. J. 2003, 'Trust', Journal of Financial Transformation, vol. 7, pp. 17-24.
Zak, P. J. 2004, 'Neuroeconomics', The Royal Society, vol. 359, pp. 1737-1748.
Zak, P. J. & S. Knack 2001, 'Trust and Growth', The Economic Journal, vol. 111,
pp 295-321.
Zizzo, D. J. & A. Oswald 2001, 'Are People Willing to Pay to Reduce Others'
Incomes?' Annales d'Economie et de Statistique, pp. 39-65.
Published by ePublications@SCU, 2006
17