No man, or economy, is an island

Economists must heed ‘Robinson Crusoe’ parable in policy designs

WHAT might Daniel Defoe’s Robinson Crusoe parable contribute to economics, our understanding of human behaviour and the design of policies? A lot, according to World Bank economist Karla Hoff and Nobel laureate Joseph Stiglitz.

The two economists argue that standard economic theory has been based on the assumption that individual preferences are fixed, and therefore that policy interventions would not change the nature of an individual, his identity and perception of others. In standard economics, Hoff and Stiglitz say, the social determinants of behaviour are prices (incentives) and the rules of the game, hence the reference to the Crusoe economy where social interactions do not feature.

But Hoff and Stiglitz point out that the narrative of the Crusoe economy misses an important feature of Defoe’s parable. This is that, even on the isolated island, there was a society — Crusoe and his Man Friday — and hence there were indeed social interactions.

“Although Friday’s capabilities are better suited than Crusoe’s to the economic challenges posed by the island environment on which the men have landed, their hierarchical relationship persists. Standard economic theory could not easily account for this. But models of sociology and anthropology would find no puzzle: Friday and Crusoe have naturalised the status they each held before arriving on the island. It has become part of their identities. The society they came from has shaped their identities and preferences,” write Hoff and Stiglitz in a paper, Striving for Balance in Economics: Towards a Theory of the Social Determinants of Behaviour, published by the US-based National Bureau of Economics.

At the core of Hoff and Stiglitz’s case is that society affects individual perception and cognition. They draw on the research of behavioural economists, psychologists, sociologists and anthropologists. These include Daniel Kahneman, a professor of psychology and public affairs emeritus at the Woodrow Wilson School, who won the Nobel prize for economics in 2002 for his work in mixing insights from psychological research with economics to understand human judgment and decision making under uncertainty.

Behaviour is, according to psychologists, often multiple identities. Which of these identities is primed is affected by the social context. The psychological understanding of behaviour has hitherto been anathema to most economists who, according to Hoff and Stiglitz, are trained to view the individual as a unitary being, acting in a consistent manner when exposed to different choices.

They argue that some aspects of human nature fit better into the psychologist’s description of the individual than standard economic theory. But that doesn’t mean that standard economics has got it all wrong. Its model of a unitary and consistent individual may be useful in explaining, for example, a person’s choice between red and green lettuce.

Hoff and Stiglitz cite a study by University of Zurich economists Alain Cohn, Ernst Fehr and Michel André Maréchal — Business Culture and Dishonesty in the Banking Industry — which found that priming bankers for their professional identity stimulated dishonest behaviour. The study was done in two phases. In the first phase, which involved a laboratory game designed to reveal dishonest behaviour, employees of an international bank behaved by and large honestly. In the second phase, which mimicked a competitive environment typical of the banking sector, participants had to toss a coin 10 times and report the results online. Each winning toss was worth $20. To mimic competitive conditions, participants were told they would be paid only if the number of their winning tosses was at least as great as the number for a random player from the pilot study.

ECONOMICS OF ISOLATION: Crusoe and Friday debunk standard economics

Participants became more dishonest when their professional identity was made salient by asking a small number of questions about their professional work in the pre-experiment survey, Hoff and Stiglitz say.

“The findings are consistent with the hypothesis that social cues have a ‘programming’ role on how individuals act. Anything that changes how individuals think may also change how they act,” Hoff and Stiglitz conclude.

They quote another study by economists Uri Gneezy (Technion — Israel Institute of Technology) and Aldo Rustichini (CentER for Economic Research, Tilburg University, the Netherlands). Gneezy and Rustichini describe how the imposition of a fine by an Israeli daycare centre to encourage parents to pick up their children on time increased the number of parents who picked up their kids late.

Harvard politics professor Michael Sandel’s interpretation of the Israeli daycare study is that charging a fee (or imposing a fine) converted a social obligation not to be late into a conventional market exchange.

“One can think of individuals as having a selfish identity and one that is more other-oriented. Which identity gets expressed depends on the framing. Framing a relationship as a co-operative venture primes the socially conscious identity; framing it as a monetary arrangement primes the selfish identity,” say Hoff and Stiglitz.

All of this shows that man is, as social scientists have been saying all along, a social being. He is, as Hoff and Stiglitz conclude, social not just in what he does, but also in the lenses through which he perceives himself and the world. However, the lenses he uses to view the world around him are socially acquired and activated.

So, no man — even Robinson Crusoe — is an island. Of course poet and cleric John Donne knew this. Economists are slowly catching up.

Priming bankers for their professional identity stimulated dishonest behaviour

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