“Homo economicus” “ECONS” - Thaler Humans are rational, self-interested actors Origin –Term used by critics of John Stuart Mills work on political economy in 1936 –Mills: man is “a being who inevitably does that by which he may obtain the greatest amount of necessaries, conveniences, and luxuries, with the smallest quantity of labour and physical self-denial with which they can be obtained.”
ADAM SMITH 18 th century Scottish philosopher Wealth of Nations Competition is good Invisible hand “By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.”
Limitations of selfish rationality Sen: Absurdity of selfish rationality Imagine a man asks a stranger for directions. "Where is the railway station?" he asks. "There," she says, pointing at the post office, "and would you please post this letter for me on the way?" "Yes," he says, determined to open the envelope and check whether it contains something valuable.
Adam Smith’s largely ignored softer side….. The Theory of Moral Sentiments “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”
HUMANS VS. ECONS HUMANS do not always use cost/benefit analysis to make decisions things unrelated to money are important can be distracted, impulsive, and inconsistent ECONS rational decision makers use cost/benefit analysis Maximize individual satisfaction
First homework Read Chapter 1 of “Born to Be Good” by Dacher Keltner, Prof. Psychology, UC Berkeley(available as link on class webpage) Do assignment posted on webpage for next class
First altruism assignment: Get educated and get involved Sat. Jan. 14: 8:30 - 1
Altruism in animals 2008 2 feral dogs in Santiago, Chile
Are humans and animals hard wired for selfishness? Pursue self interest –1954 study: rats press bar for hours on end that stimulates the “pleasure center” of the brain (septum) when neither hungry or thirsty Compete with others: Darwinism, survival of the fittest (Herbert Spencer) Prioritize the bad: poison berry, hidden snake -Losing $20 elicits stronger reaction than finding $20
Reasons for altruism in animals “inclusive fitness” generous act benefits other who share the same genes allowing for the propogation of owns own genes “reciprocal altruism” generous act is eventually reciprocated
The Compassionate Instinct: A Darwinian Tale of Survival of the Kindest -Dacher Keltner
Rational choice theory Choices made by individuals reflect their desire to minimize costs and maximize benefits Utility function
Does $ make us happy? Mixed results -Correlation between GDP/capita and self-reported happiness -loss of income affects happiness (Mankiw) -surveys asking “How happy are you with your life right now?” find most important determinants of happiness are: -romantic bonds -health of family -time with friends -connection to communities When jen ratios are high, so are we
Law of diminishing marginal utility: the utility that any consumer derives from successive units of a product diminishes as the total consumption of the product increases, ceteris paribus.
Economic Approaches to Population Issues 2.MICROECONOMIC HOUSEHOLD THEORY OF FERTILITY A.based on theory of consumer behavior B.assumptions 1.children are a consumer good and/or investment good 2.women are rational in their decision making process of having children 3.number of surviving children C d C d = f(Y,P c, P x (P other goods), t x ( taste for other goods)) x = 1.......n A.graph
Economic Approaches to Population Issues D.caveats 1.Are children a normal good? 2.non-pecuniary benefits hard to measure 3.Does the law of diminishing marginal utility hold for children?
Extensions of model: new ideas Nancy Folbre: feminist economist The Invisible Heart, 2001 Economic models undervalue contributions of women providing care Care: work that involves connecting to other people, trying to help people meet their needs, things like the work of caring for children, caring for the elderly, caring for sick people or teaching is a form of caring labor. can be paid or unpaid
Nancy Folbre Children are not pets!Children as public goods
Public goods Non-rival consumption of the good by one individual does not reduce availability of the good for consumption by others Non-excludable no one can be effectively excluded from using the good
Empirical evidence Poor countries have higher fertility rates But new evidence shows that rich countries with high female labor participation have MORE babies -why? Better support for working mothers (flexible hours, childcare)
INEQUALITY Constructive inequality: differential rewards to skill and effort lead to economic growth Destructive inequality: dysfunctional workings of an economy that slows its own growth by blocking the accumulation and income-generating opportunities of the poor
Game Theory Game theory: study of interacting decision makers whose Game theory: study of interacting decision makers whose payoffs depend on the actions of both Collusion: Economic agents formally agree to coordinate their activities to increase their joint profit / benefit dominant strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players Nash equilibrium: a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all others have chosen
Ultimatum game Player 1 gets $ and makes an offer to player 2 Player 2 can accept offer or reject, resulting in neither player keeping the $ Offers some evidence against the presence of rational, self-interest
RESULTS Economic theory predicts that ECONS should offer $0.01 and their rational partners should accept However, 71% of HUMANS offer between 40% and 50% of their money
Class ultimatum experiment: Would it matter if touch were involved? Winning Touch: NBA Teams that Touch the Most Win the Most, Study Says
Dictator Not technically a game since only one person has decision making power Dictator decides how much money to give second player Offers some evidence against the presence of rational, self-interest
Dictator variant Anonymity –Half class goes outside –Dictators do not reveal identity
Trust game Player 2 decides how much $ to give to dictator $ is tripled by Professor (matching amount will vary) Dictator decides how much $ to give Player 2
The gruesome case of the Chinese toddler left for dead The gruesome case of the Chinese toddler left for dead Oct. 2011
Empathy fatigue Emotional detachment brought about by prolonged emotional exposure
MOTIVATIONS FOR ALTRUISM 1.Ethics 2.Reciprocity 3.Business strategy
ALTRUISM MOTIVATED BY ETHICS Is economics really about rational, self interested actors?
Living a life of altruism Quotes of Mother Teresa We cannot all do great things, but we can do small things with great love. It is a kingly act to assist the fallen. If you can't feed a hundred people, then feed just one.
Golden Ladder of Giving -Moses Maimonides, Jewish scholar, 1135-1202 AD 1.Giving unwillingly. 2.Giving willingly but inadequately. 3.Giving adequately after being asked. 4.Giving before being asked. 5.Giving to an unknown recipient. 6.Giving anonymously to a known recipient. 7.Giving anonymously to an unknown recipient. 8.Giving to prevent poverty by teaching a trade, setting a man up in business, or in some other way preventing the need of charity
BLOOD BANK EXPERIMENT Kansas City and Denver Cornell University 1973 TREATMENT Sent letter offering to pay them $10 to give blood CONTROL Sent letter asking them to volunteer to give blood
WHICH GROUP GAVE MORE? PAID DONORS 65% gave blood VOLUNTEERS 93% gave blood
WHAT’S GOING ON?! “Crowding out” People perform certain tasks for the common good but their motivation is crowded out if they are offered a financial reward. -theory by Richard Titmuss, British social researcher