The altruism in economics: Getting to the heart of money

The evidence wasn’t just coming from controlled experiments. In the 1990s, Swiss government officials wanted to build a nuclear waste facility outside the village of Wolfenschiessen. After a robust public awareness campaign, a bare majority of villagers—51 percent—supported the project. In hopes of bringing more people on board, payments of up to $8,700 per person was offered; instead, support plummeted to 25 percent. Villagers said they considered the money a bribe and felt belittled that their moral quandary had become a financial transaction. “The message was clear: People are much more altruistic than standard economics claims,” says Bruno Frey, an economist at the University of Zurich who studied the Wolfenschiessen case. “The challenge is for economists to nurture this intrinsic motivation instead of crowding it out.”
Behavioral economists Uri Gneezy and Aldo Rustichini conducted another revealing study. Several daycare centers in Israel had problems with parents picking up their children late, so the economists devised a system of nominal fines—about $3 for each late pickup—to see if this would prompt punctuality. On the contrary, tardiness soared, the rate sometimes tripling. The conclusion? Fines rendered lateness acceptable because it became a financial transaction, while social norms—respect for the daycare workers, for example—were a better motivator for punctuality.
Intrigued, Gneezy and Rustichini went on to show that volunteers collected more money for charities than those who were paid to canvas. “The traditional assumption in economics was that people would do anything for a material payoff,” says Gneezy. “This assumption took economics a long way, and it is still a good assumption in situations, such as two traders on the floor at the stock exchange. But there are situations where other relationships, communal relationships, are preferable.”
Perhaps not surprisingly, traditional economists revolted. As Kristin Monroe, an expert in altruism and political theory at the University of California, Irvine, famously wrote, they tried to “squeeze a fat lady into a corset” by awkwardly forcing these new findings into the cynical confines of standard economic theory. The “warm glow theory,” for example, argues that behaving generously provides pleasure, which is a benefit, thus making altruism “impure.” Other experiments proved people are more likely to behave selflessly in public settings, rendering altruism a cost incurred to enhance one’s reputation. However, prying into a gift horse’s mouth in search of cavities doesn’t make the gift horse vanish. The essential had been accomplished: Economists were admitting, however reluctantly, that altruism existed.
If it feels as though economists are getting an unfair shake, consider the following. In the 1990s, another Cornell University economist, Robert Frank, tested the hypothesis that “exposure to the self-interest model commonly used in economics alters the extent to which people behave in self-interested ways.” Among the findings: Economics majors made less generous offers when playing the Ultimatum Game; economics professors gave less to charity than their university colleagues; and when asked to imagine they’d found somebody else’s $100 bill, economics students were three times more likely to say they’d keep the money than students from the astronomy department. “Economics training doesn’t make you more honest,” Frank says. “It’s wildly implausible. It would be like water running uphill.”
This cynicism comes with disturbing consequences: Negativity begets negativity. The Swiss economists Armin Falk and Michael Kosfeld conducted a seminal study in 2004 on distrust in the business environment. They found that people treated with suspicion are less motivated. A company might, for example, enact a policy forbidding private Internet use at the office and there would be no impact on morale. However, if the company installs spy software on employees’ computers, morale plunges.
This is another economic phenomenon redolent of evolutionary biology, the “tit-for-tat” survival strategy. Under this model, on meeting a stranger, the initial gesture should be conciliatory (a smile or a handshake are human demonstrations of goodwill). But from that point on, one should act as the stranger acts: hostile if hostile, cooperative if cooperative. In short, do unto others as they do unto you. By this logic, if an economic system treats people as mercenaries, mercenaries they will be. But the reverse is also true: Treat people as moral and altruistic, and most will be.
With this wealth of new findings, the challenge is to build new economic models that will eventually translate into viable policies. Among the vanguard on this quest is the University of Massachusetts’ Gintis, who, as the lead author of Moral Sentiments and Material Interests, has literally written the book on altruism and economics. The fact that Gintis champions a more nuanced economic theory can be partly attributed to his eclectic background. He was a Marxist in his youth and an adviser to Martin Luther King, Jr. in the 1960s, but he also studied advanced mathematics and received his Ph.D. in economics from Harvard University. Forty years of research has led him to a blunt conclusion: “Altruism isn’t irrational,” he says, “because if it were, the only rational people would be sociopaths.” Of course, there will always be unscrupulous individuals who are devoid of altruism, but they’re the exceptions rather than the rule.
Gintis proposes a theory called “strong reciprocity,” arguing that bonds of trust and cooperation within a community often serve as greater motivation than material reward. The theory is based on the premise that humans evolved in small groups with strong social contracts and plenty of contact with strangers. Cooperation within the tribe was advantageous so long as free riders were punished. It was also the best gambit on encountering strangers. Cooperation, particularly in times of famine, was the only means of survival, so altruism became a favored evolutionary trait.
What this means, Gintis says, is that while financial incentives are important motives—perhaps even the most important—they can be trumped by a person’s selfless instinct. This instinct is responsible for some of humanity’s greatest achievements. “Movements for civil rights, civil liberties and political democracy in authoritarian states are responsible for creating modern liberal democracies,” writes Gintis, “yet participation in such movements cannot usually be explained in terms of self-interest.”
No shortage of real-world evidence exists to buttress Gintis’ theory. Successful non-proprietary projects, such as open source code or the emergence of socially responsible investments, wherein people accept lower returns to fund ethical projects, can’t be explained by standard economic models. So while a new theory like strong reciprocity isn’t a panacea, it could expunge the cynicism corrupting economic thought. Gintis offers a simple prescription: Teach business and economics the same way as law and medicine. “Doctors and lawyers learn that a moral code is a vital part of their profession, and that their profession is part of a broader human puzzle,” says Gintis. “This doesn’t prohibit them from making a good deal of money.”
It could work. Dan Ariely, a behavioral economist at Duke University in North Carolina, explored how society can foster honesty in his book Predictably Irrational. He conducted experiments that showed cheating could virtually be eliminated by prompting students with the Ten Commandments or asking them to sign an honor code before taking tests. “When faced with the opportunity for material gain, people will bend the situation so it aligns with their moral values,” says Ariely. “Setting ethical benchmarks, so long as they are repeated at the right moments, keeps people from straying into dishonesty.”
One of the grand creeds associated with standard economic theory is trickle-down economics, the idea that wealth flows down through society. But it appears that what has been trickling down is plain old greed and cynicism. It’s worth noting that in the 19th century, this construct was known as the “horse-and-sparrow model.” Feed a horse enough oats and it will eventually deposit some on the road for the sparrow. Standard economic theory feels an awful lot like that lump of sparrow’s lunch.
For 200 years, economics has slandered humanity. The claim hasn’t been that there are a few bad apples like Bernard Madoff, who has pleaded guilty to perpetrating the biggest financial fraud in history, but that everyone is a bad apple who will cheat, bully and manipulate to maximize personal wealth. Fortunately, we now have a critical mass of studies and a swath of real-world evidence that debunks this malicious smear. The truth is, there are a great, great many good apples out there.
As depressing as this recession is, it does provide an opportunity to review and rewrite certain economic principles. As Duke University’s Ariely says, “It’s a very sad event for the world, but it’s been very good for behavioral economics because now more people are willing to listen.”
And the voices for change are rising on all sides. In Britain, Cardinal Cormac Murphy-O’Connor declared, “Capitalism needs to be underpinned with regulation and a moral purpose.” In Australia, Prime Minister Kevin Rudd published an essay insisting that “neo-liberalism and the free-market fundamentalism it has produced [have] been revealed as little more than personal greed dressed up as an economic philosophy.” And in the same speech in which he praised workers’ selflessness, President Obama condemned the “greed and irresponsibility” that weakened the American economy.
In economic jargon, an “externality” is an unexpected cost or benefit that falls beyond the scope of the original transaction. The externality of the current recession that benefits us all is that it takes an eraser to the false notions that have been scrawled across the economic chalkboard. A fleet of economists is studying altruism and cooperation, and the blossoming of behavioral economics has filled both the halls of academia and the corridors of power with men and women who look beyond outdated models of human behavior.
It’s not that this new breed of economists will be Pollyannas or usher in a financial revolution, but they could help us transcend the poisonous lies of standard economic theory and build a truer foundation for our fiscal policies. And if this comes to pass, what comes trickling down from the economic heights will be far more appealing than the sparrow’s lunch of greed and cynicism we’re currently being served.
Jeremy Mercer is a former crime reporter from Canada who still believes in the goodness of people.

Solution News Source

The altruism in economics: Getting to the heart of money

The evidence wasn’t just coming from controlled experiments. In the 1990s, Swiss government officials wanted to build a nuclear waste facility outside the village of Wolfenschiessen. After a robust public awareness campaign, a bare majority of villagers—51 percent—supported the project. In hopes of bringing more people on board, payments of up to $8,700 per person was offered; instead, support plummeted to 25 percent. Villagers said they considered the money a bribe and felt belittled that their moral quandary had become a financial transaction. “The message was clear: People are much more altruistic than standard economics claims,” says Bruno Frey, an economist at the University of Zurich who studied the Wolfenschiessen case. “The challenge is for economists to nurture this intrinsic motivation instead of crowding it out.”
Behavioral economists Uri Gneezy and Aldo Rustichini conducted another revealing study. Several daycare centers in Israel had problems with parents picking up their children late, so the economists devised a system of nominal fines—about $3 for each late pickup—to see if this would prompt punctuality. On the contrary, tardiness soared, the rate sometimes tripling. The conclusion? Fines rendered lateness acceptable because it became a financial transaction, while social norms—respect for the daycare workers, for example—were a better motivator for punctuality.
Intrigued, Gneezy and Rustichini went on to show that volunteers collected more money for charities than those who were paid to canvas. “The traditional assumption in economics was that people would do anything for a material payoff,” says Gneezy. “This assumption took economics a long way, and it is still a good assumption in situations, such as two traders on the floor at the stock exchange. But there are situations where other relationships, communal relationships, are preferable.”
Perhaps not surprisingly, traditional economists revolted. As Kristin Monroe, an expert in altruism and political theory at the University of California, Irvine, famously wrote, they tried to “squeeze a fat lady into a corset” by awkwardly forcing these new findings into the cynical confines of standard economic theory. The “warm glow theory,” for example, argues that behaving generously provides pleasure, which is a benefit, thus making altruism “impure.” Other experiments proved people are more likely to behave selflessly in public settings, rendering altruism a cost incurred to enhance one’s reputation. However, prying into a gift horse’s mouth in search of cavities doesn’t make the gift horse vanish. The essential had been accomplished: Economists were admitting, however reluctantly, that altruism existed.
If it feels as though economists are getting an unfair shake, consider the following. In the 1990s, another Cornell University economist, Robert Frank, tested the hypothesis that “exposure to the self-interest model commonly used in economics alters the extent to which people behave in self-interested ways.” Among the findings: Economics majors made less generous offers when playing the Ultimatum Game; economics professors gave less to charity than their university colleagues; and when asked to imagine they’d found somebody else’s $100 bill, economics students were three times more likely to say they’d keep the money than students from the astronomy department. “Economics training doesn’t make you more honest,” Frank says. “It’s wildly implausible. It would be like water running uphill.”
This cynicism comes with disturbing consequences: Negativity begets negativity. The Swiss economists Armin Falk and Michael Kosfeld conducted a seminal study in 2004 on distrust in the business environment. They found that people treated with suspicion are less motivated. A company might, for example, enact a policy forbidding private Internet use at the office and there would be no impact on morale. However, if the company installs spy software on employees’ computers, morale plunges.
This is another economic phenomenon redolent of evolutionary biology, the “tit-for-tat” survival strategy. Under this model, on meeting a stranger, the initial gesture should be conciliatory (a smile or a handshake are human demonstrations of goodwill). But from that point on, one should act as the stranger acts: hostile if hostile, cooperative if cooperative. In short, do unto others as they do unto you. By this logic, if an economic system treats people as mercenaries, mercenaries they will be. But the reverse is also true: Treat people as moral and altruistic, and most will be.
With this wealth of new findings, the challenge is to build new economic models that will eventually translate into viable policies. Among the vanguard on this quest is the University of Massachusetts’ Gintis, who, as the lead author of Moral Sentiments and Material Interests, has literally written the book on altruism and economics. The fact that Gintis champions a more nuanced economic theory can be partly attributed to his eclectic background. He was a Marxist in his youth and an adviser to Martin Luther King, Jr. in the 1960s, but he also studied advanced mathematics and received his Ph.D. in economics from Harvard University. Forty years of research has led him to a blunt conclusion: “Altruism isn’t irrational,” he says, “because if it were, the only rational people would be sociopaths.” Of course, there will always be unscrupulous individuals who are devoid of altruism, but they’re the exceptions rather than the rule.
Gintis proposes a theory called “strong reciprocity,” arguing that bonds of trust and cooperation within a community often serve as greater motivation than material reward. The theory is based on the premise that humans evolved in small groups with strong social contracts and plenty of contact with strangers. Cooperation within the tribe was advantageous so long as free riders were punished. It was also the best gambit on encountering strangers. Cooperation, particularly in times of famine, was the only means of survival, so altruism became a favored evolutionary trait.
What this means, Gintis says, is that while financial incentives are important motives—perhaps even the most important—they can be trumped by a person’s selfless instinct. This instinct is responsible for some of humanity’s greatest achievements. “Movements for civil rights, civil liberties and political democracy in authoritarian states are responsible for creating modern liberal democracies,” writes Gintis, “yet participation in such movements cannot usually be explained in terms of self-interest.”
No shortage of real-world evidence exists to buttress Gintis’ theory. Successful non-proprietary projects, such as open source code or the emergence of socially responsible investments, wherein people accept lower returns to fund ethical projects, can’t be explained by standard economic models. So while a new theory like strong reciprocity isn’t a panacea, it could expunge the cynicism corrupting economic thought. Gintis offers a simple prescription: Teach business and economics the same way as law and medicine. “Doctors and lawyers learn that a moral code is a vital part of their profession, and that their profession is part of a broader human puzzle,” says Gintis. “This doesn’t prohibit them from making a good deal of money.”
It could work. Dan Ariely, a behavioral economist at Duke University in North Carolina, explored how society can foster honesty in his book Predictably Irrational. He conducted experiments that showed cheating could virtually be eliminated by prompting students with the Ten Commandments or asking them to sign an honor code before taking tests. “When faced with the opportunity for material gain, people will bend the situation so it aligns with their moral values,” says Ariely. “Setting ethical benchmarks, so long as they are repeated at the right moments, keeps people from straying into dishonesty.”
One of the grand creeds associated with standard economic theory is trickle-down economics, the idea that wealth flows down through society. But it appears that what has been trickling down is plain old greed and cynicism. It’s worth noting that in the 19th century, this construct was known as the “horse-and-sparrow model.” Feed a horse enough oats and it will eventually deposit some on the road for the sparrow. Standard economic theory feels an awful lot like that lump of sparrow’s lunch.
For 200 years, economics has slandered humanity. The claim hasn’t been that there are a few bad apples like Bernard Madoff, who has pleaded guilty to perpetrating the biggest financial fraud in history, but that everyone is a bad apple who will cheat, bully and manipulate to maximize personal wealth. Fortunately, we now have a critical mass of studies and a swath of real-world evidence that debunks this malicious smear. The truth is, there are a great, great many good apples out there.
As depressing as this recession is, it does provide an opportunity to review and rewrite certain economic principles. As Duke University’s Ariely says, “It’s a very sad event for the world, but it’s been very good for behavioral economics because now more people are willing to listen.”
And the voices for change are rising on all sides. In Britain, Cardinal Cormac Murphy-O’Connor declared, “Capitalism needs to be underpinned with regulation and a moral purpose.” In Australia, Prime Minister Kevin Rudd published an essay insisting that “neo-liberalism and the free-market fundamentalism it has produced [have] been revealed as little more than personal greed dressed up as an economic philosophy.” And in the same speech in which he praised workers’ selflessness, President Obama condemned the “greed and irresponsibility” that weakened the American economy.
In economic jargon, an “externality” is an unexpected cost or benefit that falls beyond the scope of the original transaction. The externality of the current recession that benefits us all is that it takes an eraser to the false notions that have been scrawled across the economic chalkboard. A fleet of economists is studying altruism and cooperation, and the blossoming of behavioral economics has filled both the halls of academia and the corridors of power with men and women who look beyond outdated models of human behavior.
It’s not that this new breed of economists will be Pollyannas or usher in a financial revolution, but they could help us transcend the poisonous lies of standard economic theory and build a truer foundation for our fiscal policies. And if this comes to pass, what comes trickling down from the economic heights will be far more appealing than the sparrow’s lunch of greed and cynicism we’re currently being served.
Jeremy Mercer is a former crime reporter from Canada who still believes in the goodness of people.

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