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Saturday, May 03, 2008

Are Economists Different?

I've been thinking about economists. We are a different breed, I think, at least in one sense. We see markets everywhere. Thinking of getting married? We see a marriage market where partners rationally look at the costs and benefits of a "partnership" and decide accordingly. It is all very sterile and scientific, nothing more than supply and demand, like always.

Thinking of going for a walk in the woods? We can model that choice, it's fairly simple. It has an opportunity cost, and a benefit, and if the benefit exceeds the cost, the walk will be taken.

In fact, all of the "apparently noneconomic dimensions of society" are no match for the economist:

Gary S. Becker ... sheds new light on previously unconnected and poorly understood social phenomena. ... His singular axiom - that all actors in the social game are economic persons who maximize their advantages in different cost situations - allows Becker to study persistent racial and sexual discrimination, investment in human capital, crime and punishment, marriage and divorce, the family, drug addiction, and other apparently noneconomic dimensions of society.

There are very few choices that cannot be reduced to the language of economics. There are, after all, markets in everything!

But maybe economists are people for whom this way of thinking is attractive. People choose their majors, they are not assigned randomly, and for some people this "economic way of thinking" is very natural (and for some it is quite foreign - explain as you will, it just doesn't seem to "click" with them). The first time you see a problem explained with economic tools you say, yes, that's it - that's how people make decisions because when you look inside, it explains how you see the world. And even where you hadn't viewed the world through the eyes of economics before, you suddenly have new insights. Aha! Now I understand how people choose to get married!

Paul Zak gave a seminar yesterday and it made me wonder if economists might, as a group, have some sort of hormonal deficiency, a bad Oxytocin gene or something.

Oxytocin is thought to increase trust between humans:

Oxytocin is a hormone which is released during many experiences, including birth in women. In the brain, oxytocin is involved in social recognition and bonding.

Oxytocin appears to be the 'social glue' that holds entire families, communities and societies together, without needing the government to monitor transactions. Empathy for others begins with the release of oxytocin, which compels feelings of love.

When we feel trusted, our brains release oxytocin. This, in turn, causes us to recriprocate the 'trusted' feeling.

With an added dose of oxytocin, subjects' generosity to strangers increased up to 80%.

Generosity to strangers? With no benefit for me? That can't be right, it doesn't fit our models.

Here's something I found interesting, In Zak's experiments with Oxytocin, there was always one group of people who didn't play the game the same way others played. In the game:

178 students ... were separated into groups of investors and trustees, who were not allowed to communicate with each other. Each investor began the experiment with a fund equal to about five Swiss francs that could be invested with a trustee. Any investment would be automatically tripled. The trustee then could decide how much, if any, of the money would be paid to the investor. Both investor and trustee could take home cash at the conclusion of the experiment, based on how they managed the investments. The more the trustee withheld, the larger his final cash payoff. By design, the investors were caught in a dilemma. If they trusted their partners and invested the maximum allowable, they might reap triple their investment. But they could just as easily lose everything if betrayed by a partner who decided to keep all the proceeds. ...

The researchers found that the volunteers who took oxytocin were twice as likely to risk all their money with a stranger. ... Moreover, the hormone only affected someone's response to another person. Those who engaged in financial trading with a computer partner showed no effect from the hormone...

So, summarizing, we both start with $10. If you send me all of your money, I then have $10 + three times what you sent me = $40 and you will have nothing. If I send you back anything more than $10 but less than $30 we will both be better off. In general, people were willing to trust the other person, and trust increased when Oxytocin was administered. Most of the time, the trust was rewarded.

But there was one group of students with Oxytocin levels that were clear outliers (excessive amounts indicating their receptors were likely inactive) who never gave anything back to the person who had trusted them - they pocketed the $40 (or three times whatever they were sent plus the original $10) and whistled all the way to the bank. They were the exception though, most did choose to give something back so that the gains were shared. But it is not in their self-interest to do so.

Update: Here's the graph I was referring to:

Zak

[One other interesting feature. If the first person sent less than 30%, i.e. less than $3.00, people did not tend to send anything back. It was as though the second person said you idiot, we have this great opportunity to make money, yet you won't trust me to hold up my end? - I'll show you by keeping the money.]

So here's what I wonder. Are economists, as a group (and perhaps libertarians foremost among them), more like the students who acted purely according to self-interest? Did they choose to become economists because when they looked inside at their own decisions, this model of the world - the one where people always follow their self-interest - fit? Do we have a chemical make-up that causes us to see self-interest as a primary, dominating emotional force in all decisions? Is that why we have a hard time understanding things like pure altruism?

    Posted by on Saturday, May 3, 2008 at 12:03 PM in Economics, Science | Permalink  TrackBack (0)  Comments (63)

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