Social Norms and Economic Behavior

Gelf Magazine looks at research on how social norms affect economic behavior, e.g. how conventions about how to split a restaurant bill change what people order. Do people take advantage of their dinner companions when the bill is split evenly and order more expensive meals, or do social conventions prevent them from exploiting such arrangements?:

Money-Grubbing, by Hadley Robinson, Gelf Magazine: What's the best way to split a restaurant bill? Should each diner pony up personal costs, taking into account tip and tax? Or is it better and easier to just split the check evenly?

A study ... tested that question. ... The finding: How you're going to pay directly affects what you order. Research subjects chose the cheapest grub when they were paying individually. When splitting the bill evenly, they ordered pricier items. When paying nothing at all, their consumption went up even further.

Gelf caught up recently with Uri Gneezy, one of the three economists who conducted this experiment. Gneezy is ... at the University of California, San Diego. We talked about ... economics ... [and] the importance of social norms...

Gelf Magazine: Why did you do this study?

Uri Gneezy: ...It is a nice demonstration of negative externalities. ... In this case, the fact that I consume more has some externality—it has some effect on you based on the additional cost that you have to pay for it. ...

GM: Your research subjects didn't know each other. Why would it make a difference if you were with friends...? Because you care more about them?

UG: I don't think it's because you care more, but because you know you can get away with it once, but next time ... he'll eat the lobster... You'll pay for it later on. That's why I expect it to be different with people you know well. ...

GM: What are the social implications of the results?

UG: In economics there is a big discussion about negative externalities: ... Traditional economic theory assumes people are selfish. Then there is a new line in economics that ... many times people do care a lot about others. Some of the lab findings ... claim we do think about others when we make decisions. That may be true in the lab, but that is not what we are finding when we go out in the field. ... Negative externalities are important... People are selfish ..., just like the traditional economic theory predicts. ... I think we show that there is more to the original economic theory than new experiments claim: that people are in fact selfish and react strongly to economic incentives.

GM: Have you done other studies on this?

UG: I'm doing behavioral economics. I have a bunch of studies like this. It's ... a very active research area. Here's an example of another study: Imagine that you have kids in a daycare and you need to pick up kids before 4 pm... Parents tend to come later and later, and the teacher wants to improve on that, so she gives a fine to parents that come more than 10 minutes late. The fine was about $2 in Israel for coming late. Before that, the social norm was to be on time, but when we made it some sort of market transaction, it became OK to be late. People think, "OK, if I'm late, it costs $2. I'm not violating social norms by being late." The effect of the fine was to make more parents come late. Before it was, ... [g]ood people don't come late. Now, suddenly if you pay $2, then it's fine to be late. You put a price on the social norm and the social norm is much weaker than it was before. ...

We know very little about social norms. We know intuitively that fairness is important. Every child can tell you that social norms are important, but how does this affect economic behavior? ...

GM: What is the social norm in the restaurant scenario?

UG: The social norm would be if I'm ... going to affect you, I should take it into account. I shouldn't be selfish. You go out to dinner with friends, you hope they won't change what they consume just because you are going to pay part of it. It wouldn't be fair. ... Sometimes people care a lot about social preferences, but when you go to the financial market, people care about it much less. ...

GM: What variations might there be in behavior based on geography, age, culture, or anything else?

UG: I think age is important... Also, culture can matter. In Germany, for example, they count down to the last penny. In Israel, if you do this, ... [y]ou'll get a very bad reputation for calculating up to the last cent. The cultural issue is very important..., you're a cheap guy who would care about stupid things like the last 10 cents. ...

Here's an essay written for the Palgrave Dictionary on social norms. A small part:

Norm enforcement. Broadly speaking there are three different mechanisms by which norms are held in place.

Some are sustained by a pure coordination motive. If it is the norm to drive on the left, I adhere to the norm in order to avoid accidents. If gold is the commonly accepted currency, it would be a waste of time to try to conduct my business with glass beads. These are “social” phenomena, because they are held in place by shared expectations about the appropriate solution to a given coordination problem, but there is no need for social enforcement.

Other norms are sustained by the threat of social disapproval or punishment for norm violations... If queuing is the norm, I will be censured if I try to push my way to the front. If dueling is the proper response to an insult, I will lose status in the community if I do not challenge the one who insulted me. If I am expected to avenge the murder of my brother and fail to carry it out, I may be ostracized by other family members. (Exactly why third parties bother to express disapproval or carry out punishments is a matter of debate, but the evidence suggests that they sometimes do so even at considerable personal cost ...)

A third enforcement mechanism arises through the internalization of norms of proper conduct. If it is the norm not to litter, I will avoid littering even in situations where no one can see me. If I eat a meal in a foreign city and fail to tip the waiter, I need not fear the consequences because there is no continuing relationship; nevertheless I may think the worse of myself for having done it. More generally, norms often take on the character of virtuous or right action (Hume [1740]...), and departures from a norm can trigger emotions of shame or guilt even when third party enforcement is absent... This fact is especially useful in large-scale societies, where it may be difficult to monitor the behaviors required for equilibrium.