5.4 Beyond self-interest: Experimental evidence on people’s preferences and views of fairness

In Figure 5.4, we saw that countries confronting differing levels of market income inequality (the red bars plus the blue bars) implement policies to lower that market inequality to the disposable income Gini coefficient (just the red bars).

Moreover, countries with similar levels of market inequality reduce income inequality by different amounts. If we compare the US and Finland, for example, we see that both of them have a market Gini coefficient of 0.52. What do the Finnish and American people think of their level of inequality? How would we know?

Figure 5.4 lets us see the consequences of the institutions and policies of the two countries. The Finnish government implements taxation and redistribution policies to lower its disposable income Gini coefficient from 0.52 to 0.27, whereas in the US the Government’s policies lower the disposable income Gini coefficient just from 0.52 to 0.38.

Contrasting the two numbers tells us something about what the people living in the two countries think about inequality. Given their willingness to pay higher taxes and adopt redistributive policy to decrease the Gini coefficient, it appears that the Finns dislike inequality more than Americans do. Perhaps, on average, they think it is more unfair than Americans do, and they’re willing to pay taxes to manage that unfairness. How, then, can we start to understand what people think about fair and unfair outcomes? The answer is to understand people’s motivations and goals through experiments.

Experiments and preferences

experiments

A social science experiment is a way of studying how people behave by putting people in a situation where the researcher controls the setting, gives people clear rules, and then observes what they do. The researcher may change one thing at a time to see how people’s decisions or actions respond, thereby identifying causation.

causes

The causes of an outcome are the factors or events that produce it. In economics, identifying a cause means showing that a change in one thing produces a change in another, not just that the two are correlated. See causal, causality, causation, natural experiment, correlation.

ceteris paribus

Ceteris paribus means ‘other things equal’. Economists use the term when they hold other relevant factors constant to focus on the relationship being studied. See also model.

interdependence principle, principle of interdependence

The outcomes people obtain in economic interactions depend on the actions that they and others take in response to each other and on what they believe about the future.

Understanding people’s motivations is essential to predicting how they will behave as workers, employers, and citizens. Economists use experiments to observe behavior under controlled conditions to help understand what causes different outcomes. To learn about preferences, economists use experiments in which people play games designed to study their actions, beliefs, and motivations. Experiments allow us to control for other influences on a person’s behavior and focus on their goals. They also allow economists to implement the ceteris paribus (other things equal) assumption that is so important when we try to identify causes and consequences of a change or difference. By conducting experiments, we can see how people behave in controlled, interdependent contexts.

preferences

The relative values a person places on each possible outcome of a choice or decision they have to make.

social norm

An understanding among most members of a society about what people should do in a given situation when their actions affect others.

When we want to understand people’s goals, we try to understand their preferences. A person’s preferences are their evaluations of outcomes that motivate their actions. Preferences explain why we take actions we believe will bring about an outcome that is better than or at least as good as other possible outcomes. Preferences include:

• tastes, such as liking one kind of food and disliking another
• emotions or visceral feelings, such as joy, anger, ecstasy, or disgust
• social norms, such as norms that get us to tell the truth or treat people fairly
• psychological tendencies, such as thrill-seeking, introversion, or aggression
• habits, such as making your bed in the morning or having an addiction.

the principle of doing the best you can

Doing the best you can means that, from the set of actions available to them, people will choose the action that they believe will result in the outcome that they value the most, taking into account what they believe the other player will do in response to their choice.

When you have a preference, you like one outcome more than another, and you will act in a way to bring about the outcome you want or avoid the outcome you don’t want. People’s preferences help us understand how people do the best they can.

In Chapter 1 and Chapter 2, the Worker’s preferences and Bunker’s preferences were represented by the payoffs in the games they played. For each player, an outcome was associated with a number—their payoff in profit or quality of life—and players chose actions that they believed would result in their most preferred (highest payoff) outcome given what the other person did in response. In games like those (and others we’ll see in Chapter 6 and Chapter 7), preferences are often represented by monetary payoffs. Preferences can also represent our broader evaluations of the positive and negative attitudes we have about outcomes that lead us to action.

Self-interested preferences and social preferences

social preferences

A person is said to have social preferences if their goal depends on what happens to other people, as well as on their own payoffs.

fairness

A way to evaulate an outcome based on one’s conception of justice.

altruism

Altruism is a social preference: a person who is willing to bear a cost to benefit somebody else is said to be altruistic or to have altruistic preferences.

reciprocity

A preference to be kind to or help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind.

We call a person who acts based entirely on self-interest Homo economicus or “economic man.” In the next section we will see evidence that, while people are concerned about their own payoffs, they may also care about what happens to others. When people care about what happens to other people as well as to themselves, they have social preferences.

Social preferences that have been documented in experiments by social scientists include the following:

• Fairness: a dislike for differences that we think to be unjust, either because the outcomes are too unequal or because the ways they came about are unfair. Fairness is sometimes called inequality aversion.
• Altruism: willingness to bear a cost to benefit someone else.
• Reciprocity: a preference to be kind to or help other people who are kind and helpful and who observe social norms and to withhold help and kindness from people who are not helpful or kind or who violate social norms.
• Self-determination: a preference for autonomy and a dislike of being controlled by others. Sometimes called control aversion.

Social preferences are often described as “other regarding,” meaning caring about others. Included are negative feelings about others, like spite, or hostility toward “others” based on religious, national, racial, gender, or other differences.

Social preferences include social norms—our common understanding about what people should do in a given situation when their actions affect others. Many social norms concern notions of fairness or evaluations of an outcome based on our conception of justice in society.

trade-off

A trade-off exists when gaining more of one thing means giving up something else that is valuable. See also the principle of trade-offs and opportunity costs.

principle of trade-offs and opportunity cost

The gains you make by choosing some action typically come at the cost of gains that would have been possible had you acted differently.

When people have different preferences, they are willing to make different trade-offs given the same opportunity costs: People with different preferences are willing to give up different things when confronting the same sets of choices.