When Does ‘‘ Economic Man’’ Dominate Social Behavior?

Introduction (Via CalTech)

The canonical model in economics considers people to be rational and self-regarding. However, much evidence challenges this view, raising the question of when ‘‘ Economic Man’’ dominates the outcome of social interactions, and when bounded rationality or other-regarding preferences dominate. Here we show that strategic incentives are the key to answering this question. A minority of self-regarding individuals can trigger a ‘‘ noncooperative’’ aggregate outcome if their behavior generates incentives for the majority of other-regarding individuals to mimic the minority’s behavior. Likewise, a minority of other-regarding individuals can generate a ‘‘ cooperative’’ aggregate outcome if their behavior generates incentives for a majority of self-regarding people to behave cooperatively. Similarly, in strategic games, aggregate outcomes can be either far from or close to Nash equilibrium if players with high degrees of strategic thinking mimic or erase the effects of others who do very little strategic thinking. Recently developed theories of other-regarding preferences and bounded rationality explain these findings and provide better predictions of actual aggregate behavior than does traditional economic theory.

Topics Covered:

1. Cooperation in the Presence of Strong Reciprocators

2. The Effects of Competition in the Presence of Strong Reciprocators

3. Bounded Rationality and Strategic Complementarity

Excerpted Conclusion (Via CalTech)

There are many other social domains in which the mixture of heterogeneous social preferences and rationality limits are likely to create profound effects on aggregate behavior. In companies, matching different workers to appropriate jobs, based on their preferences and rationality, implies interesting variation in the nature of employment contracts and firm-level outcomes. Designing well-functioning economic institutions, to help poor countries grow richer, depends on a good model of human behavior. Governments, philosophers, and lawyers are concerned about crafting policies that protect consumers with rationality limits that are swamped by information and choices, while protecting the freedom of choice of expert consumers.

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20. October 2009 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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