1. Introductory Comment Our argument is very simple. It may not surprise anyone in this audience. But it is a big departure from the standard view in economics. Our argument is that the assumption in economics that preferences are stable and the same for all people should be abandoned.

2. Ernst Fehr Department of Economics Laboratory for Social and Neural Systems Research University of Zurich Karla Hoff World Bank Tastes, Castes, and Culture: The Influence of Society on Preferences November 15, 2011

3. Outline of presentation I. The “stable preferences assumption“ Sociologists‘ view Economists‘ view II. How sound is the economists‘ traditional view? Anchoring and framing effects III. Preference-based explanations may help explain outstanding puzzles Persistent changes in preferences from social influences

4. Part I. Are preferences stable or are they shaped by “society“? A sociologist‘s view “ The assumption that society shapes individuals‘ preferences “clearly concerns one of the core pillars of sociology but it is not easy to suggest any literature to you. It is almost too fundamental for that – like asking economists to suggest some tests on the importance of choice. Almost all sociologists take it as obvious that individuals‘ preferences are formed by society and that society, so to speak, exists within persons.“ -- Peter Hedstrom, Oxford

5. Are preferences stable or are they shaped by “society“? A view from economics De Gustibus non est disputandum (Stigler & Becker, 1977) “... tastes neither change capriciously nor differ importantly between people. On this interpretation one does not argue about tastes for the same reason that one does not argue over the Rocky Mountains – both are there, will be there next year, too, and are the same to all men.“ Not just stable preferences, but also no heterogeneity

6. Stigler & Becker cont‘d Assuming unstable and heterogeneous preferences leads to intellectual laziness “We also claim that no significant behavior has been illuminated by assumptions of differences in tastes. Instead, they, along with assumptions of unstable tastes have been a convenient crutch to lean on when the analysis has bogged down. They give the appearance of considered judgment, yet really have only been ad hoc arguments that disguise analytical failures“

7. Not all economists subscribe to this extreme view but... Almost all economic research examines the changes in individual behavior and aggregate outcomes that follow from changes in constraints Tax, cost, price and information changes Changes in property rights & the contractual environment Implicit assumption Strong preference stability: changes in constraints (“the environment“) leave preferences unaffected Weak preference stability: for the problem under consideration preferences are more stable than constraints

8. Remarks on the assumption of preference stability Important to recognize It is NOT a fact that changes in the environment leave preferences unaffected It is merely a useful assumption that took on the nature of a social convention It is considered bad practice to invoke changes in preferences as explanations “One can explain everything if one invokes changes in preferences as an explanation“ “It is too easy to explain changes in behavior by changes in preferences“

9. ...But recent progress in game theory creates a new problem A clever contract theorist can say: “Give me a real world contract and I will find an extensive form game that rationalizes this contract as an equilibrium of the game“

10. John Sutton The elaboration of multi-stage games allowed a tremendous flexibility in modelling.

11. Sutton, continued Paradoxically, it is the very success of these game theoretic models in providing a rich menu of candidate “explanations,“ which leaves them open to a quite fundamental line of criticism This richness of possible formulations leads to an often embarrassingly wide range of outcomes supportable as equilibria within some “reasonable“ specification In explaining everything, have we explained nothing? What do these models exclude?

12. Our View The methodological arguments against invoking preference changes are not very convincing They rest on conventions, social norms and (unproven) beliefs about the empirical validity of the assumption that one can neglect changes in preferences for the problem at hand Deep down, most of us believe that preferences are shaped by teaching, role models, the behaviors we observe around us and our social interactions with other people Educating one‘s children is not just about skill formation – it‘s also about teaching the “right“ preferences

13. However It is a huge empirical challenge to prove a causal impact of “society“ on preferences This has kept “second-best conventions“ in economics alive but ultimately we want to know the extent to which preferences are shaped by society We next turn to psychological mechanisms that make preferences susceptible to social influences

14. Part II Framing effects on visual perception People often assume that what they see with their own eyes is a correct representation of reality But in fact, our perception of objects is shaped by context.

16. Müller-Lyer illusion

18. Framing effects on preferences Frames in economics are observables that: Are irrelevant in the rational assessment of the alternatives, But nonetheless affect behavior-- Triggering a particular way of thinking about a choice Determining what details of a set of choices are salient, or Evoking a self-concept, norm, or world view

19. Example from “Coherent Arbitrariness“ Ariely, Loewenstien, and Prelec (2003) The study elicits willingness to pay for various goods For each item, subjects are asked whether they are willing to pay more or less than a certain price The price is based on the last two digits of their Social Security number: After this anchoring question, the experiment elicits the willingness to pay 19$19

20. Average willingness-to-pay sorted by participants’ Social Security number 0 $10 $20 $30 $40 TrackballKeyboardCote du Rhone HermitageDesign book Belgian chocolates range of the last two digits of SS number 00-39 range of the last two digits of SS number 40-99

21. The power of arbitrary numbers as anchors is replicated even where the individual has just experienced the pleasure or pain of an object So no rationalization in terms of information problems is possible Which suggests To the extent that social institutions prime individuals’ identities and act as anchoring & framing devices, they also shape preferences.

22. Example from “Fairness perceptions and reservation wages” Falk-Fehr-Zehnder (2007) This study elicits reservation wage before the introduction of a minimum wage and after abolishing the minimum wage Minimum wages cause increases in reservation wages even after they have been abolished! No rationalization in terms of different constraints possible

23. Example from “Making Up People” Hoff and Pandey (2006, 2011) High- and low-caste boys are asked to solve mazes under incentives Low-caste boys are from formerly “untouchable” castes Boys are randomly assigned to one of three groups that vary the salience of caste: Caste identity is not made public It is made public in a session of 3 high- and 3 low-caste boys It is made public in a session of 6 high-caste boys (or 6 low- caste boys)

24. Segregation is a strong cue to the caste system The caste system still more or less prevails in villages The caste system mandates segregation of high from low castes In one out of four primary schools in rural India, Dalit children are forced by their teachers or by convention to sit apart from non-Dalits As many as 40 percent of schools practice untouchability while serving mid-day meals, making Dalit children sit in a separate row while eating. --Shah et al.’s survey of 565 villages across 11 states of India in 2001-02

25. 25 To the extent possible participants in a session are drawn from six different cars (villages) Subjects on their way home

26. 26 Cars for transporting the participants to form sessions of boys from different villages Hardoi District, Uttar Pradesh

27. 27 Set-up of experiment room If caste is announced, that is done as soon as the participants are seated. Then the experimenter explains how to solve a maze and what a child will earn from maze-solving. The children solve mazes in two 15-min. rounds.

28. Average output of high-caste subjects 0 1 2 3 4 5 6 7 Round 1Round 2 Identity not revealed Identity revealed in a mixed group Identity revealed in a segregated group

29. Comments on results for high caste In this experiment, individual output depends only on the individual’s preferences and ability There is no plausible reason why the ability of the high-caste subjects should be impaired by placing them in sessions of only high-caste boys In fact, the evidence on the next slide suggests that priming caste increases the high caste’s ability to perform. The effect for the low caste is the reverse. These two effects are consistent with “stereotype susceptibility” (Steele-Aronson 1995).

30. Probability of failing to learn how to solve a maze 0 0.02 0.04 0.06 0.08 0.1 0.12 High caste Low caste Identity not revealed Identity revealed

31. Why do high-caste subjects expend less effort in the segregated sessions? Making caste highly salient may activate a mental frame in which a high-caste person has: less need to achieve, so less need to work hard. Why? We have learned from the society in which we live a variety of roles Segregating by caste may act as a “frame switch” Swidler (1986) & DiMaggio (1997)

32. More evidence of “multiple preference orderings” & “frame switches” Priming Asian identity of Asian-Americans leads them to be: more cooperative, less individualistic, & more patient Priming a “family-oriented” identity triggers values related to family obligations Priming an “occupation-oriented” identity triggers values related to obligations to one’s firm LeBoeuf et al. 2010, Benjamin et al. 2010

33. The frame primes the duck

34. The frame primes the rabbit

35. Part III Preference-based explanations may help explain outstanding puzzles The rest of this talk is more speculative

36. Hypothesis 1 An individual’s position in an extreme social hierarchy affects:  his agency &/or  his in-group affiliation, & thus  his willingness to punish violations of a cooperation norm that hurt in-group members

37. “Caste and Punishment” (Hoff-Kshetramade-Fehr 2011) We examined the impact of caste status on punishment while controlling for in-group/out-group, wealth, and education effects

38. Set-up Groups of 3 members interact: player A, B, and C Each lives in a different and distant village in north India A and B play a trust game C is an uninvolved third party who can punish B For every 2 rupee coin that C spends, B loses 10 rupees

39. Trust game with third-party punishment A B Sends to B Sends back half to A Money triples C chooses punishment for defection C chooses punishment for cooperation Doesn’t send Keeps all the money

40. Result High-caste men are more willing than low-caste men to punish norm violations that hurt a member of their “in-group” (subcaste) So low caste members seem to care less for ”their“ in- group members Can this be explained by differences in wealth?

41. Do richer individuals punish more? (land ownership)

42. Do richer individuals punish more? (house ownership)

43. Across the two caste status groups, subjects face identical constraints in our game The caste difference in punishing cannot be explained in terms of differences: In payoffs in the game In education In wealth The difference is interesting because Fehr et al. (1997) indicates that altruistic sanctioning is a powerful means of enforcing contracts.

44. Vicious circle of caste? If the lower willingness to punish contract violations is also associated with a lower propensity to punish free-riders in collective action Then the low castes would be less able to discipline free-riders and thus to organize collective action, which could contribute to Persistence of the caste system

45. Hypothesis 2 Culture shapes the demand for social insurance

46. Attitudes toward government redistribution vary across countries Eugster et al. 2011 Survey question: Should government reduce income differences?

47. “German” and “Latin” language regions in Switzerland

48. Votes in Swiss Referenda on Social Security Eugster et al. 2011

49. Establishing causality In a within-canton regression discontinuity design, Using data from all referenda on social insurance from 1980-2009 in Switzerland, & controlling for a wide set of factors, The German group still has a much lower demand than the “Latin“ group for social insurance Cultural differences, not differences in constraints, cause the differences Eugster et al. 2011

50. Conclusion McCloskey (1998) imagines a heckler defending the standard economic paradigm with fixed preferences: “ Give me a break: I’m not in the business of explaining all behaviour. I propose merely to explain some portion, and in many cases a large portion.” This would be a plausible objection if changes in constraints (“the environment“) left preferences unaffected, or if, for the problem under consideration, preferences were more stable than constraints

51. But evidence suggests that changes in constraints can change preferences

52. Change in minimum wage Change in reservation wage Entitlement effect Falk, Fehr, Zehnder 2006 Change in preferences Expansion of the welfare state The work ethic of the next generation is reduced Rational adaptation of parenting strategies Lindbeck- Nyberg 2006 Change in a constraint Caste Cues to the caste order lower the willingness of the high caste to expend effort (a framing effect) Possibly a decline in the need to achieve Hoff-Pandey 2006, 2011 Why? Examples One’s position at the top or bottom of the caste order shapes the willingness to punish norm violations Effect on agency &/or in-group affiliation Hoff, Kshetramade, Fehr 2011

53. Take-away message Institutions have broader implications than economists have generally recognized Institutions (“rules of the game”) Constraints & beliefs & Preferences by activating a particular self- concept or world-view (one of many that are held), and shaping a new self-concept or world-view Influence

54. Investigating the causal influences on preferences remains a huge challenge, But is likely to shed light on changes central to economic change

55. One last example of framing effects on visual perception According to Segall et al. (1966), The Müller-Lyer illusion is completely absent in some undeveloped societies In the West, the illusion is strongest. Why? Exposure to ‘carpentered corners’ of modern environments may have led to certain visual habits that perpetuate this illusion. “If even a process as apparently basic as visual perception can show substantial variation across populations, …what kind of psychological processes can we be sure will not vary?” Henrich et al. (2010)

56. Thank you for your attention

57. Post-talk discussion: “Elicitation effects” on preferences An additional effect of institutions on preferences/behavior is through default options, e.g. in retirement plans A field experiment in a Swiss Red Cross blood drive provides new evidence for the view that: In some domains, many individuals do not have preferences. Preferences are constructed when they are elicited, & constructing them can be costly. Individuals who have not formed a preference tend to choose the default option in a menu of options, since this permits them to avoid making the (costly) active decision & so a change in the default option can lead to swings in behavior Stutzer et al. (2011)