Friday, January 06, 2006

The economic mammal

How are economic decisions made? How and why are we social? According to the traditional economic , humans are rational and self-regarding beings. Not so, says recent advances in neuroeconomics, the scientific multidisciplinary approach that studies how we make choices and act socially. On the contrary, our social interactions are thought as driven by strategic (mostly unconscious) incentives. At the least we should not think of ourselves as rational beings that are constantly choosing our own behaviour consciously. This also relates to my ongoing "dethronement" idea, especially step III.

A new article in Science by Colin Camerer and Ernts Fehr presents aspects of this discussion.


Science 6 January 2006:
Vol. 311. no. 5757, pp. 47 - 52
DOI: 10.1126/science.1110600


When Does "Economic Man" Dominate Social Behavior?

Camerer and Fehr
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.

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