The Altruism in Economics

Standard economic theory states that people are interested only in their own material gain. But new insights from behavioral economics show that altruism rather than avarice is our primary motivation.

Jeremy Mercer -  http://www.dailygood.org/more.php?n=3716

It was evolutionary biologists, with their penchant for field observation, who started to explore the question in an empirical manner. It began with Charles Darwin, who was amazed by the cooperation among bees; moved to William Hamilton, who studied altruism among rabbits; and went on to include Robert Trivers’ work on sharing among vampire bats. Once altruism was established in the natural world, the same analytical eye inevitably turned toward the human sphere.

In 1973, a landmark experiment was conducted at blood banks in Kansas City and Denver. It was inspired by the “crowding out” theory of British social researcher Richard Titmuss, the idea that people perform certain tasks, such as donating blood, for the common good, but that their motivation would be “crowded out” if they were offered a financial reward. The two blood banks were ideal testing grounds because both had “willing” files bearing the names of previous donors. For the experiment, a control group was sent the typical letter announcing a blood drive; a test group was sent the same correspondence offering $10 for a donation. The results were decisive: Within the control group, 93 percent responded to the call to donate; for those offered a cash reward, only 65 percent contributed. “I felt we’d made a real breakthrough,” recalls Bill Upton, who ran the experiment as a psychology student at Cornell University in Ithaca, New York, in the 1970s. “It was significant evidence that money wasn’t necessarily an incentive.”

In fact, the result was remarkable for two reasons. First, it contradicted standard economic theory and proved the existence of human altruism. Second, this major advancement in understanding financial motivation had been made by a psychology student using a sociologist’s theory. Where were the economists?

The reality is that for most of history, economists have preferred theory to experimentation. This changed when the field of behavioral economics began to take shape in the 1970s. The movement adopted insights from psychology along with the empirical methods used in other social sciences to bring a fuller picture of human motivation and decision-making to economics. Behavioral economics has now blossomed into one of the field’s most influential disciplines, with its practitioners populating the bestseller lists and advising the White House and its experiments resonating throughout academia.

Once the experimenting began, the hallowed economic pillars began to crumble. What was perhaps the most important development occurred in 1982 when German economists at the University of Cologne created the Ultimatum Game. In this experiment, Player A is given $10 and Player B is given nothing. Player A must make an offer to Player B; both parties keep the money only if that offer is accepted. According to standard economic theory, the minimum offer of $1 should be made and accepted because it represents a clear financial gain for Player B. But in the thousands of times the experiment has been run, the average accepted offer is $4 and offers of less than $3 are routinely rejected. People, it turned out, were more concerned about equality than financial gain. “Fairness is fairly universal,” says Werner Güth, one of the economists who ran the experiment.

Such a statement may seem so obvious as to be banal. After all, the idea that people have an innate morality has been tossed about for millennia, from Plato’s Meno to the French philosopher Auguste Comte’s invention of the word “altruism” in the 19th century. But for economists weaned on the brutal model of Homo economicus, proof of something as simple as fairness was revolutionary.

The evidence wasn’t just coming from controlled experiments. In the 1990s, Swiss government officials wanted to build a nuclear waste facility outside the village of Wolfenschiessen. After a robust public awareness campaign, a bare majority of villagers—51 percent—supported the project. In hopes of bringing more people on board, payments of up to $8,700 per person was offered; instead, support plummeted to 25 percent. Villagers said they considered the money a bribe and felt belittled that their moral quandary had become a financial transaction. “The message was clear: People are much more altruistic than standard economics claims,” says Bruno Frey, an economist at the University of Zurich who studied the Wolfenschiessen case. “The challenge is for economists to nurture this intrinsic motivation instead of crowding it out.”

Behavioral economists Uri Gneezy and Aldo Rustichini conducted another revealing study. Several daycare centers in Israel had problems with parents picking up their children late, so the economists devised a system of nominal fines—about $3 for each late pickup—to see if this would prompt punctuality. On the contrary, tardiness soared, the rate sometimes tripling. The conclusion? Fines rendered lateness acceptable because it became a financial transaction, while social norms—respect for the daycare workers, for example—were a better motivator for punctuality.

Intrigued, Gneezy and Rustichini went on to show that volunteers collected more money for charities than those who were paid to canvas. “The traditional assumption in economics was that people would do anything for a material payoff,” says Gneezy. “This assumption took economics a long way, and it is still a good assumption in situations, such as two traders on the floor at the stock exchange. But there are situations where other relationships, communal relationships, are preferable.”

Perhaps not surprisingly, traditional economists revolted. As Kristin Monroe, an expert in altruism and political theory at the University of California, Irvine, famously wrote, they tried to “squeeze a fat lady into a corset” by awkwardly forcing these new findings into the cynical confines of standard economic theory. The “warm glow theory,” for example, argues that behaving generously provides pleasure, which is a benefit, thus making altruism “impure.” Other experiments proved people are more likely to behave selflessly in public settings, rendering altruism a cost incurred to enhance one’s reputation. However, prying into a gift horse’s mouth in search of cavities doesn’t make the gift horse vanish. The essential had been accomplished: Economists were admitting, however reluctantly, that altruism existed.

If it feels as though economists are getting an unfair shake, consider the following. In the 1990s, another Cornell University economist, Robert Frank, tested the hypothesis that “exposure to the self-interest model commonly used in economics alters the extent to which people behave in self-interested ways.” Among the findings: Economics majors made less generous offers when playing the Ultimatum Game; economics professors gave less to charity than their university colleagues; and when asked to imagine they’d found somebody else’s $100 bill, economics students were three times more likely to say they’d keep the money than students from the astronomy department. “Economics training doesn’t make you more honest,” Frank says. “It’s wildly implausible. It would be like water running uphill.”

This cynicism comes with disturbing consequences: Negativity begets negativity. The Swiss economists Armin Falk and Michael Kosfeld conducted a seminal study in 2004 on distrust in the business environment. They found that people treated with suspicion are less motivated. A company might, for example, enact a policy forbidding private Internet use at the office and there would be no impact on morale. However, if the company installs spy software on employees’ computers, morale plunges.

This is another economic phenomenon redolent of evolutionary biology, the “tit-for-tat” survival strategy. Under this model, on meeting a stranger, the initial gesture should be conciliatory (a smile or a handshake are human demonstrations of goodwill). But from that point on, one should act as the stranger acts: hostile if hostile, cooperative if cooperative. In short, do unto others as they do unto you. By this logic, if an economic system treats people as mercenaries, mercenaries they will be. But the reverse is also true:
Treat people as moral and altruistic, and most will be.