“The ax­ioms un­der­pin­ning tra­di­tional eco­nom­ics em­body a view of hu­man be­hav­iour known as homo eco­nomi­cus: we choose among the avail­able op­tions that which we want or pre­fer the most. But what makes us want or pre­fer some­thing?”

Financial Mirror (Cyprus) - - FRONT PAGE -

Why do peo­ple vote, if do­ing so is costly and highly un­likely to af­fect the out­come? Why do peo­ple go above and be­yond the call of duty at their jobs?

Two re­cent books – ‘Iden­tity Eco­nom­ics’ by No­bel lau­re­ate Ge­orge Ak­erlof and Rachel Kran­ton and ‘ The Moral Econ­omy’ by Sam Bowles – in­di­cate that a quiet rev­o­lu­tion is chal­leng­ing the foun­da­tions of the dis­mal science, promis­ing rad­i­cal changes in how we view many as­pects of or­gan­i­sa­tions, pub­lic pol­icy, and even so­cial life. As with the rise of be­havioural eco­nom­ics (which al­ready in­cludes six No­bel lau­re­ates among its lead­ers), this rev­o­lu­tion em­anates from psy­chol­ogy. But while be­havioural eco­nom­ics re­lies on cog­ni­tive psy­chol­ogy, this one is rooted in moral psy­chol­ogy.

As with most rev­o­lu­tions, this one is not hap­pen­ing be­cause, as Thomas Hux­ley sur­mised, a beau­ti­ful old the­ory has been killed by ugly new facts. The ugly facts have been ap­par­ent for a while, but peo­ple can­not aban­don one men­tal frame­work un­less an­other one can take its place: in the end, beau­ti­ful old the­o­ries are killed only by newer, more pow­er­ful the­o­ries.

For a long time, eco­nomic the­ory as­pired to the el­e­gance of Eu­clidean ge­om­e­try, where all true state­ments can be de­rived from five ap­par­ently in­con­tro­vert­ible ax­ioms, such as the no­tion that there is only one line that con­nects two points in space. In the nine­teenth cen­tury, math­e­ma­ti­cians ex­plored the con­se­quences of re­lax­ing one of those ax­ioms and dis­cov­ered the ge­ome­tries of curved spa­ces, where an in­fi­nite num­ber of lon­gi­tu­di­nal lines can pass through the poles of a sphere.

The ax­ioms un­der­pin­ning tra­di­tional eco­nom­ics em­body a view of hu­man be­hav­iour known as homo eco­nomi­cus: we choose among the avail­able op­tions that which we want or pre­fer the most. But what makes us want or pre­fer some­thing?

Eco­nom­ics has long as­sumed that what­ever in­forms our pref­er­ences is ex­oge­nous to the is­sue at hand: de gustibus non est dis­putan­dum, as Ge­orge Stigler and Gary Becker ar­gued. But with a few rea­son­able as­sump­tions, such as the idea that more is bet­ter than less, you can make many pre­dic­tions about how peo­ple will be­have.

The be­havioural eco­nom­ics rev­o­lu­tion

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the idea that we are good at mak­ing these judg­ments. In the process, they sub­jected the as­sump­tions un­der­ly­ing homo eco­nomi­cus to ex­per­i­men­tal tests and found them want­ing. But this led at most to the idea of nudg­ing peo­ple into bet­ter de­ci­sions, such as forc­ing them to opt out of rather than into bet­ter choices.

The new rev­o­lu­tion may have been trig­gered by an un­com­fort­able find­ing of the old one. Con­sider the so-called ul­ti­ma­tum game, in which a player is given a sum of money, say, $100. He must of­fer a share of that money to a sec­ond player. If the lat­ter ac­cepts the of­fer, both get to keep the money. If not, they both get noth­ing.

Homo eco­nomi­cus would give $1 to the sec­ond player, who should ac­cept the of­fer, be­cause $1 is bet­ter than zero dol­lars. But peo­ple through­out the world tend to re­ject of­fers be­low $30. Why?

The new rev­o­lu­tion as­sumes that when we make choices, we do not merely con­sider which of the avail­able op­tions we like the most. We are also ask­ing our­selves what we ought to do.

In fact, ac­cord­ing to moral psy­chol­ogy, our moral sen­ti­ments, on which Adam Smith wrote his other fa­mous book, evolved to reg­u­late be­hav­iour. We are the most co­op­er­a­tive species on earth be­cause our feel­ings evolved to sus­tain co­op­er­a­tion, to put “us” be­fore “me.” These feel­ings in­clude guilt, shame, out­rage, em­pa­thy, sym­pa­thy, dread, dis­gust, and a whole cock­tail of other sen­ti­ments. We re­ject of­fers in the ul­ti­ma­tum game be­cause we feel they are un­fair.

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