SS200: Social preferencesSS200: Social preferencesColin F. Camerer, CaltechColin F. Camerer, Caltech

Self-interest is a useful, common assumption…Self-interest is a useful, common assumption…butbut!! Skepticism that any social preference other than self-Skepticism that any social preference other than self-

interest is fragile:interest is fragile:““when self-interest and ethical values with wide verbal allegiance are in when self-interest and ethical values with wide verbal allegiance are in conflict, much of the time, most if the time in fact, self-interest theory…conflict, much of the time, most if the time in fact, self-interest theory…will win.” (Stigler) will win.” (Stigler)

Challenge is to have a general, precise, accurate, Challenge is to have a general, precise, accurate, psychologically plausible model of social preferencespsychologically plausible model of social preferences– Distributional (inequity-aversion. Fehr-Schmidt, Bolton-Distributional (inequity-aversion. Fehr-Schmidt, Bolton-

Ockenfels, Charness-Rabin)Ockenfels, Charness-Rabin)– Reciprocal (Rabin et al)Reciprocal (Rabin et al)– ““Signaling” or self-image (Levine, Bernheim, Rotemberg)Signaling” or self-image (Levine, Bernheim, Rotemberg)

Ultimatum gameUltimatum game Proposer offers division of $10; responder accepts or rejectsProposer offers division of $10; responder accepts or rejects Theories: Theories:

– Rejections express social preferences (care about $, envy, guilt)Rejections express social preferences (care about $, envy, guilt)– ““Unnatural habitat” (adapted to repeated games, one-shot is Stroop)Unnatural habitat” (adapted to repeated games, one-shot is Stroop)

Variants: Variants: – Dictator games (same responsibility?)Dictator games (same responsibility?)– Demographics (generally weak)Demographics (generally weak)– Stakes– rejected $ goes up, % goes downStakes– rejected $ goes up, % goes down– Repetition etc.– weak Repetition etc.– weak – Low information about “pie” sizeLow information about “pie” size lower offers (and “pleading poverty ”) lower offers (and “pleading poverty ”)– Proposer competitionProposer competition offers give most to responder offers give most to responder– Two-stage gamesTwo-stage games responders (weakly) accept lower offers because responders (weakly) accept lower offers because

proposers have an “excuse” (intentions matter) proposers have an “excuse” (intentions matter)

Game-ending ultimatum rejections are like Game-ending ultimatum rejections are like “disadvantageous counterproposals” in longer “disadvantageous counterproposals” in longer

gamesgames

US data (Roth et al 1991)US data (Roth et al 1991)

Ultimatum vs dictator “games” (Forsythe et al 1994) Ultimatum vs dictator “games” (Forsythe et al 1994) NB: Dictator games are “weak situations”, more varianceNB: Dictator games are “weak situations”, more variance

Low, medium, high stakes (Slonim-Roth 1998)Low, medium, high stakes (Slonim-Roth 1998)

Do players learn to accept low offers at high stakes? No. Would Do players learn to accept low offers at high stakes? No. Would learn learn a lota lot more from the strategy method (acc/rej for all offers) more from the strategy method (acc/rej for all offers)

Special subject pools & conditionsSpecial subject pools & conditions

Neural evidence (ACC, DLPFC, insula for low offers; Neural evidence (ACC, DLPFC, insula for low offers; difference predicts rejection r=.4)difference predicts rejection r=.4)

Autistics offer less (don’t expect rejection)Autistics offer less (don’t expect rejection)– Adults learn to take “objective stance”Adults learn to take “objective stance”

Cutting-off-nose effect (Monkeys reject unequal pay, Cutting-off-nose effect (Monkeys reject unequal pay, Brosnan and De Waal, Science 9/18/03; F Brosnan and De Waal, Science 9/18/03; F capuchins will refuse exchange for low payoff if capuchins will refuse exchange for low payoff if others get high payoff)others get high payoff)

Small-scale societiesSmall-scale societies– Variation in mean offer (some offer very little)Variation in mean offer (some offer very little)– Fair offers correlated with “market integration” and Fair offers correlated with “market integration” and

“cooperativeness” “cooperativeness”

““Market” games (9-proposer Market” games (9-proposer competition)competition)

Intentions matter (Falk et al 99) (cf. Intentions matter (Falk et al 99) (cf. law e.g. manslaughter vs murder)law e.g. manslaughter vs murder)

Table8: Ultimatumgameswith varying unchosen paths, Falk et al (1999)

unchosen interpretation of how often the(8,2) o®er is...o®er (8,2) o®er ...rejected ...proposed

(5,5) relatively unfair .44 .31(2,8) not sacri¯cial .27 .73(8,2) neutral .18 |

(10,0) relatively fair .09 1.00

Sanfey et al fMRI study (Sci 13 Sanfey et al fMRI study (Sci 13 March ’03)March ’03)

““ask the brain”: within (L) and pooled (R) correlations ask the brain”: within (L) and pooled (R) correlations

of insula and DLPFC activity & rejectionof insula and DLPFC activity & rejection

Feeling: This is your brain on unfairnessFeeling: This is your brain on unfairness

Pain circuitryPain circuitry

Ultimatum offer experimental sitesUltimatum offer experimental sites

slash & burngathered foods

fishinghunting

The Machiguengaindependent families

cash cropping

African pastoralists (Kenya)

Whale Huntersof

Lamalera, Indonesia

High levels ofcooperation

among hunters of whales, sharks,

dolphins and rays. Protein for carbs

trade with inlanders

Researcher: Mike Alvard

Ultimatum offers across societies Ultimatum offers across societies (mean shaded, mode is largest circle…)(mean shaded, mode is largest circle…)

Fair offers correlate with market integration (top), Fair offers correlate with market integration (top), cooperativeness in everyday life (bottom)cooperativeness in everyday life (bottom)

Ultimatum offers of children who Ultimatum offers of children who failed/passed false belief testfailed/passed false belief test

Autistics v normalsAutistics v normals (adults top, children bottom) (adults top, children bottom)

Israeli subject (autistic?) complaining post-Israeli subject (autistic?) complaining post-experiment (Zamir, 2000)experiment (Zamir, 2000)

Unnatural habit hypothesis…Unnatural habit hypothesis…

"Although subjects fully understand the rules of the "Although subjects fully understand the rules of the game and its payoff structure, their behavior is game and its payoff structure, their behavior is influenced by an influenced by an unconsciousunconscious perception that the perception that the situation they are facing is part of a much more situation they are facing is part of a much more extended game of similar real-life interactions…extended game of similar real-life interactions…We believe that it is practically impossible to We believe that it is practically impossible to create laboratory conditions that would cancel out create laboratory conditions that would cancel out this effect and induce subjects to act as if they this effect and induce subjects to act as if they were facing an anonymous one-shot [ultimatum were facing an anonymous one-shot [ultimatum game]." (Winter & Zamir, 1997)game]." (Winter & Zamir, 1997)

Testing theories: New ideasTesting theories: New ideas

How to separate preference vs unnatural habitat How to separate preference vs unnatural habitat views?views?– Role of emotionsRole of emotions– Look for cross-game regularity in measured preferencesLook for cross-game regularity in measured preferences– Learning (…or is it temporary satiation?)Learning (…or is it temporary satiation?)– fMRI and ACC Stroop interpretationsfMRI and ACC Stroop interpretations– Rationalization and “moral wriggle room” (Weber, Dana, Rationalization and “moral wriggle room” (Weber, Dana,

Kang 04)Kang 04) State ALT A=(6,1) vs B=(5,5) or State DUMB A=(6,1) vs B=(5,1)State ALT A=(6,1) vs B=(5,5) or State DUMB A=(6,1) vs B=(5,1) Do you want to know the state? Do you want to know the state?

TheoriesTheories Sobel general form Sobel general form Key: What are weights Key: What are weights λλijij??

Fehr-Schmidt: <0 for envy, >0 for guiltFehr-Schmidt: <0 for envy, >0 for guilt Bolton-Ockenfels, similar but xBolton-Ockenfels, similar but x i,i,, ,

deviation of share from equalitydeviation of share from equality

(bad blow: (5,5) vs (8,2)..reject gives 10%. Should (bad blow: (5,5) vs (8,2)..reject gives 10%. Should nevernever reject, reject (8,2) 40% of the time) reject, reject (8,2) 40% of the time)

Charness-Rabin: me-min.-total (Rawlsitarian)Charness-Rabin: me-min.-total (Rawlsitarian) Levine: Levine: ααii is i altruism, is i altruism, ββii wt on jwt on j

Theories, 2: IntentionsTheories, 2: Intentions Intentions seem to matter (Rabin)Intentions seem to matter (Rabin)

Chicken: (D,C) and (C,D) are NashChicken: (D,C) and (C,D) are Nash– but if fairness is large, (D,D) and (C,C) are fairness equilibria (thin but if fairness is large, (D,D) and (C,C) are fairness equilibria (thin

line between love (C,C) and hate (D,D))line between love (C,C) and hate (D,D))– Cf. gift of the magi (O. Henry), locket and combCf. gift of the magi (O. Henry), locket and comb

Fehr-Gachter JEP 2000 paperFehr-Gachter JEP 2000 paper

Opportunism: “Self-interest seeking with Opportunism: “Self-interest seeking with guile…” (Wmson). Guile is the interesting guile…” (Wmson). Guile is the interesting part? part?

Alternative: Alternative: – Reciprocity– repay in kind-- + self-interestReciprocity– repay in kind-- + self-interest– Evidence: Evidence:

PD cooperation + expectationsPD cooperation + expectations Ultimatum (negative), trust (positive)Ultimatum (negative), trust (positive)

Fehr-Gachter JEP 2000 paper, IIIFehr-Gachter JEP 2000 paper, III

Public goods with punishmentPublic goods with punishment– N=4. Social return 1.6, private (MPR) .4N=4. Social return 1.6, private (MPR) .4– Punish x units at cost of (1/3)xPunish x units at cost of (1/3)x– Punishment by “police” works! (pp 516-517 ABE)Punishment by “police” works! (pp 516-517 ABE)

Contracts in gift-exchange w/ moral hazardContracts in gift-exchange w/ moral hazard– Prepay a wage. Worker chooses effortPrepay a wage. Worker chooses effort– Positive wage-effort relation: Reciprocity or correlated Positive wage-effort relation: Reciprocity or correlated

types (Healy)types (Healy)– Crowding out by complete contractsCrowding out by complete contracts– Wage competition is resisted by firms– don’t hire Wage competition is resisted by firms– don’t hire

cheapest worker (p 524)cheapest worker (p 524)

Moral hazard in contracting: Moral hazard in contracting: Theory and experimental evidenceTheory and experimental evidence

Fehr setup:Fehr setup:– Firms offer wFirms offer w– Firms earn 10e-wFirms earn 10e-w– Workers choose eWorkers choose e– Workers earn w-c(e)Workers earn w-c(e)– No reputations (cf. No reputations (cf.

PJ Healy)PJ Healy)

Competition does not drive wages down…firms Competition does not drive wages down…firms choose high wage offer workers & expect reciprocitychoose high wage offer workers & expect reciprocity

Sobel JEcLit 2004 reviewSobel JEcLit 2004 review Intrinsic reciprocity (one-shot) vs Intrinsic reciprocity (one-shot) vs

instrumental reciprocity (repeated games)instrumental reciprocity (repeated games) TheoriesTheories Topics:Topics:

– Charity Charity – Holdup problem (Bewley “fanciful”)Holdup problem (Bewley “fanciful”)– Crowding out (benabou-tirole, Gneezy-Crowding out (benabou-tirole, Gneezy-

Rustichini)Rustichini)– Markets (“markets make people look selfish”)Markets (“markets make people look selfish”)

Public goods with and without cooperationPublic goods with and without cooperation

0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Period

Co

op

era

tio

n r

ate

without punishmentopportunity

with punishmentopportunity

Responder competition: Self-interested behavior can Responder competition: Self-interested behavior can emerge from structure (Guth et al, Fehr et al)emerge from structure (Guth et al, Fehr et al)

0

0.1

0.2

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0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Offer size

Rel

ati

ve

freq

uen

cy

Ultimatum Game (predicted)Ultimatum Game (actual)

2 competing sellers (predicted)2 competing sellers (actual)

5 competing sellers (predicted)5 competing seller (actual)

A

Benabou-Tirole REStud 03Benabou-Tirole REStud 03 Workers infer task difficulty or skill from wage Workers infer task difficulty or skill from wage

offer (“overjustification”, “self-perception”, offer (“overjustification”, “self-perception”, “looking glass self”)“looking glass self”)– Worker exerts effort 0,1, cost is c in [cWorker exerts effort 0,1, cost is c in [c**,c*],c*]– Worker gets signal Worker gets signal σσ correlated with c correlated with c– Success pays V to agent, W to firmSuccess pays V to agent, W to firm– ΘΘ is probability of success given effort is probability of success given effort– Firm offers bonus bFirm offers bonus b– Worker exerts effort c(Worker exerts effort c(σσ,b),b)<<ΘΘ(V+b)(V+b) works if works if

σσ>>σσ*(b)*(b)– Prop 1: In equilibriumProp 1: In equilibrium

Bonus is short-term reinforcer: bBonus is short-term reinforcer: b11<b<b22 σσ*(b*(b11)>)>σσ*(b*(b22)) Rewards are bad news: bRewards are bad news: b11<b<b22E[c|E[c|σσ11,b,b11] < E[c|] < E[c|σσ22,b,b22]]

– Empirical leverage: Negative effect occurs only if Empirical leverage: Negative effect occurs only if firm knows more about task difficulty or worker skill firm knows more about task difficulty or worker skill than the worker knowsthan the worker knows

2. Crowding out2. Crowding out

Do extrinsic ($) incentives crowd out Do extrinsic ($) incentives crowd out intrinsic motivation?intrinsic motivation?– Do puzzles for $ or no-$. After $ removed, no-$ Do puzzles for $ or no-$. After $ removed, no-$

group does more puzzles (Deci et al)group does more puzzles (Deci et al)– Female tennis players: Play for fun as kids…Female tennis players: Play for fun as kids…

……later on tour, quit after getting appearance feelater on tour, quit after getting appearance fee– Q: Is it a “strike” or permanent decrease in Q: Is it a “strike” or permanent decrease in

incentive? incentive?

Sobel JEL arguments & counterarguments:Sobel JEL arguments & counterarguments:“Restricting theory to use only a subset of available “Restricting theory to use only a subset of available

tools is not discipline. It is a handicap.”tools is not discipline. It is a handicap.”

If it ain’t broke don’t fix it.If it ain’t broke don’t fix it.– It is brokeIt is broke

Social prefs too hard for agents or theoristsSocial prefs too hard for agents or theorists– Traditional models impose no limits; why start now? Traditional models impose no limits; why start now? – There are tractable models. No harder than other theory.There are tractable models. No harder than other theory.

Evolutionary models show only selfishness persistsEvolutionary models show only selfishness persists– False.False.

““No other approach of comparable generality…”No other approach of comparable generality…”– Social prefs even more generalSocial prefs even more general

Econ needs discipline from self-interest and “well understood general Econ needs discipline from self-interest and “well understood general principles”principles”– Discipline comes from good scientific practice (and facts)Discipline comes from good scientific practice (and facts)

Standard models make precise predictions. Social won’t.Standard models make precise predictions. Social won’t.– False: E.g. intrinsic reciprocity tightens up folk theorem resultsFalse: E.g. intrinsic reciprocity tightens up folk theorem results

Too many free variables. Too many free variables. – Single model applied to many domains.Single model applied to many domains.