Are humans always the rational, self-interested agents that mainstream economics
assumes them to be? Discuss, using ideas of reciprocity, altruism and fairness
By Olivia Smith and Steven van de Put
Third Year, Second Prize
Introduction
The Homo Oeconomicus assumption has become a cornerstone of mainstream
economic theory. This notion, introduced by Mill, states that society is an
aggregation of atomistic individuals; each individual is said to act “so as to maximize
his
well-being,
given
the
constraints
he
faces”
1
. Agents are deemed to be fully rational, and only interested in factors directly
linked to their own, personal wellbeing. Mill’s claim contradicts a statement
previously made by Adam Smith, who claims that humans show an interest in others’
welfare and happiness, even if they “get nothing from it but the pleasure of seeing
it”2.
This seems to create a paradox between the self-interested individual assumed by
economic theorists and the real-life situation. This essay will attempt to make a
contribution to this debate, relying on theoretical, economical and philosophical
notions. The existence of social preferences related to reciprocity, altruism and
fairness will be assessed in terms of experimental and neural economics, as well as
philosophical theory and mainstream economic theory. After assessing the
arguments for assumptions of rationality and self-interest, a conclusion will be made
that while there is significant evidence of humans demonstrating other regarding
social preferences, it is not necessarily applicable to all humans; nor do these
assumptions necessarily need to be accurate for them to be of use to mainstream
economic analysis.
Reciprocity
“Kindness is the parent of kindness.” A. Smith (1759; 1982, p. 225)
Reciprocity is demonstrated when agents act according to the actions of others;
individuals decide on the payoffs of reference agents by assessing their actions3. A
kind response will be met with a positive payoff, whereas an action that is perceived
as hostile will result in a negative reaction. Social preferences like this can be seen to
occur during economic experiments.
The following experiments have some significant drawbacks. Firstly, it has been
claimed that “transparency (complete information) significantly increases trusting
behaviour in one-shot interactions”4. In the laboratory setting there is complete and
perfect information, whereas in a real world economic transaction transparency is
unlikely. Real life situations tend to be accompanied by at least some degree of
1
Sickert, 2009, P 1
Smith 1759, P 1
3
Fehr et Fischbacher, P 151
4
Kanagaretnam, 2010 P 1
2
information asymmetry, meaning that an experiment in which complete information
is available could be deemed unrealistic.
Secondly, it has been argued that the idea of reciprocity is based on the idea of
repeated interactions. In our social networks, interactions are highly unlikely to be
one-shot only, as people are likely to surround themselves with a steady social group.
This obviously leads to a certain form of behaviour, and some economists argue that
“subjects who routinely interact in the repeated game of life import routines and
habits that are appropriate for repeated interactions into the laboratory’s one-shot
situation”5. This can lead to agents acting irrationally as they are unfamiliar with the
idea of a one-shot game. These criticisms are, however, disproven by the following
studies.
The trust game demonstrates participants' positive reciprocal tendencies. The game
has two players. Both players are given $10, and Player 1 is told that he can give any
amount of this money to Player 2. This amount will be tripled before it is given to
Player 2, following which Player 2 has the chance to return any amount of their
money to Player 1.
In this game, the rational and self-interested response for player one is to keep all of
the $10, and player two's rational strategy is to retain any money that is given to him.
This means the Nash equilibrium would result in each player receiving $10. In order
to achieve Pareto efficiency, however, player one would have to give all of his money
in the first place, to reach a total payoff between the players of $40. Thus it can be
seen that higher initial investments trigger higher repayments. Berg, Dickhaut and
McCabe6 undertook a study of this game, in which player ones gave an average of
£5.16 to their investors, and only 1/16th of the games achieved the Nash equilibrium.
One explanation for this response could be altruistic - that player ones were willing
to donate money to the other player. What seems more likely, and what the study
suggests is that the money was given with an expectation that they would receive a
payoff for making this investment.7 Both possible explanations for this response
show that humans are not rational and self-interested, and the latter explanation
shows evidence of positive reciprocity in the human decision making process. This
seems to imply that there is at least a factor of positive reciprocity at work here,
instead of the agents being purely rational and self-interested.
Altruism
“How selfish soever man may be supposed, there are evidently some principles in his
nature, which interest him in the fortunes of others, and render their happiness
necessary to him, though he derives nothing from it except the pleasure of seeing it.”
Smith, A. (1969) page 47
5
Fehr and Fischbacher, 2004 , P 156
Berg, J., et al., (1994), p.132
7
Cartwright, E., (2011), p. 187
6
Pure altruism is shown through acts that benefit others, but from which the actor
himself receives no benefit. This can include behaviour ranging from tipping waiters
and waitresses to donating to charity. We can establish that there is at least some
form of altruism in human beings, as there are many charities collecting money for
causes that do not directly affect us or our loved ones, but such an explanation is a
gross simplification.
Experiments conducted in the field of economics seem, generally, to support the
notion that there is some form of altruism in each human being. This can be seen for
example in the dictator game, a simple game in which there are two players. The
proposer is given a sum of money and is asked how much he would like to give to the
other player. If the proposer was completely self-interested and rational, he would
retain the complete payment, and the receiver would never obtain any money. This
is, however, not the case, and the games often average more than zero8, providing
an argument against the traditional image of the self-interested individual.
Although this argument might appear convincing at first, there is a strong argument
against the blind acceptance of the dictator game as a purely altruistic act. Firstly, we
must take into account Neuro-economics of the situation. There is evidence that the
brain’s “reward centre” – the mesolimbic pathway - is active when a person donates
to charity. This part of the brain is responsible for “doling out the dopaminemediated euphoria associated with sex, money, food and drugs”9. This provides
evidence that acts of altruism can be a source of great enjoyment, illustrating that
there might be a selfish motivation behind acts that seem like altruism, as there is a
focus on achieving a state of bliss.
It might also be the case that altruism is linked to Bordieu’s “social capital”. This
social capital consists of two parts: “first, the social relationship itself that allows
individuals to claim access to resources possessed by their associates and second,
the amount and quality of those resources”10. Altruism might be a way to increase
this social capital, and thus altruistic acts might be impure, serving the agent’s goals
over any other cause. This can be seen, for example, when politicians participate in
charity events; their interest is often firstly on the public image it generates, and the
actual act of charity is only of secondary concern. Whereas it is unrealistic to assume
that this is the case for everyone, it might still be the case that people participating
in altruistic acts do so to further their reputation, and further their social capital by
gaining or improving their relationship with associates or peers.
Fairness
In 2007, List undertook a study which demonstrates agents’ sense of fairness,
refuting economic assumptions of self-interest and rationality.11 The experiment is a
form of the dictator game, in varied formats. In the first two variations, the players
are able to give up to $1 and take up to $5 respectively from the receiver, and in the
8
Fehr and Fischbacher, 2004, p. 290
The economist, 2006
10
Portes P 4
11
List, J. A., (2007), p.187
9
other variation as well as being able to take up to $5 from the receiver, players are
made to earn their fee by completing simple tasks for a charitable cause.
Here, the Nash equilibrium is for the proposer to take the maximum amount of
money. There is no repetition of this game, and so nothing to gain by not keeping
the full amount. In the standard dictator game, results are very similar to other
experiments of this nature, with proposers giving a mean of 20% of their $5 leading
to the equalising of the payoff for the two players. In the games in which the
proposer is able to take money from the receiver, much less money is given. List’s
experiment suggests that having the option to take money from other players is seen
as an excuse to give nothing to them. The results of the game in which proposers
earn their fee are indicative of the mentality that people believe they deserve the
money that they worked for, as very few of the proposers in this game gave or took
any money at all.
This model teaches us that social norms and institutions can influence people’s
perceptions of fairness – the slightly differing circumstances of each of these games
show very different results. In a more broad sense, this kind of model is more
indicative of the changing nature of social preferences with the manipulation of
situation than it is proof that people have a sense of fairness in real world
circumstances.
This notion of social preferences being affected by social constructs is also clearly
illustrated in a study by Henrich et al., which involves the same ultimatum
experiment played by participants in 15 different small-scale societies.12 There are
significant differences in the behaviour of both players in the ultimatum game across
societies. These two examples thus demonstrate substantial evidence of the impact
that cultural forces exert over human altruism and social preferences.
Further evidence against the aforementioned criticisms is provided by the ultimatum
game. In this game there are two players, between which a sum of money is divided.
Player 1 proposes an offer of any amount of the money to give to Player 2. Player 2
then has two options; either he accepts the offer, and they both receive the agreed
amount, or he rejects the offer, meaning that neither player receives any monetary
payoff. Here the dominant strategy for Player 2 is to accept any positive offer. Player
1’s dominant strategy therefore is to offer the smallest possible positive offer. In this
situation, however, it was the case that while Player 1s tended to act largely in
accordance with money-maximising principles, Player 2 was not acting in accordance
with rationality – Player 2s were commonly rejecting offers under half, or the point
of equal payoff . Bearden instead concludes that Player 2 is driven by “a sense of
fairness” and a desire to be treated fairly by the other player13. This study gives
evidence that there is a high degree of reciprocity at work here.
Conclusions
12
13
Henrich, J., et al. (2004),
Bearden, 2001, P 1
It is important to note that in each of the experiments undertaken there is a great
variance of social preference between agents, and there are always a percentage of
players who do act according to the rational and self-interested principles. It seems
that it could be the case that some humans are always the rational, self-interested
agents that mainstream economics assumes them to be – however this essay is
geared towards answering the question of whether the average person is always
rational and self-interested.
A further problem is the nature of the experiments. The dictator game places
participants in “an unfamiliar environment with an inbuilt obvious cognitive demand
to give some money and to follow whatever other cue can be read by the decision
environment.”14 This unnatural situation might lead to an equally unnatural outcome,
and it can thus be seen that the altruism displayed in this experiment might not
reflect real life situations; participants feel unnecessarily pressured into giving
money away which they normally would not do.
These criticisms are meant to highlight that although behaviour might seem altruistic
at the base, it can still be in line with the rational model. Actions may not be
completely self-interested, due to the realization that there is a reliance on other
agents in these situations. This is maybe best highlighted by the quote given by
Becker, who said that “I decide whether to turn out my reading lamp in bed by
comparing the utility of my pleasure in reading with the amount of utility I receive
from my wife's being able to sleep.”15 The rationality of altruism gets further
highlighted by Simon, as he advocates that self-interest actually disadvantages the
individual: “altruists will be fitter than selfish persons, and will gradually dominate
the population.”16
While this essay has argued that humans do demonstrate characteristics of other
regarding preferences, a significant question to be asked is whether this has much
broader significance for economics. It is true that the assumptions that economic
models are based on are often grossly inaccurate, but this is not to say that because
of this the predictions of the models themselves are inaccurate. It is hard to deny
that “in the past few decades, model building in economics has yielded many
powerful, clear results with rigorous demonstrations.”17 And, as earlier highlighted, a
focus on anything but rationality might lead to unworkable models due to the degree
of variation needed in the economic models. By creating rationality as a starting
point, we can, however, create a situation in which “the conclusions of an applied
model are approximately true, and that that is because its assumptions are
sufficiently close to the truth.”18 This shows that even though humans might not
always be perfect examples of rationality and self-interest, these assumptions have
proven themselves to be very useful tools in mainstream economic analysis and
modelling.
14
Zizzo, 2011, P 4
Simon, 1982, P.242
16
Simon, 1982, P.243
17
Gibbard et Varian, P 664
18
Gibbard et Varian, P 676
15
In conclusion, this essay has argued that, generally speaking there is at least some
degree of rationality in economic agents’ behaviour. This rationality can however
take unexpected form, as highlighted by the notions of social capital and impure
altruism; in some cases it might actually be more rational to not be completely selfinterested and be more involved with others. It is not necessarily the case that any
act of altruism should be seen as irrational by definition, for example. While the
essay has demonstrated the existence of other regarding preferences, illustrating
evidence of the existence of reciprocity, altruism and fairness in human social
decision making, drawbacks of this evidence have also been highlighted.
References
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Behaviour, 10:122-142
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