Transcript Trust and Motivation

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.
We claim that
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The methodological arguments against explaining economic
change by changes in preferences are no longer convincing.
We ultimately need to know the extent to which institutions
and historical events shape preferences.
Tastes, Castes, and Culture:
The Influence of Society on
Preferences
Ernst Fehr
Department of Economics
Laboratory for Social and Neural Systems Research
University of Zurich
Karla Hoff
World Bank
Paris School of Economics
November 25, 2011
Outline of presentation
I. The “stable preferences assumption“
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Sociologists‘ view
Economists‘ view
II. How sound is the economists‘ traditional view?
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Anchoring and framing effects on preferences
III. Preference-based explanations may help explain
outstanding puzzles
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Persistent changes in preferences from social influences
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, personal communication
Are preferences stable or are they shaped by
“society“?
A view from economics
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De Gustibus non est disputandum (Stigler & Becker, 1977)
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“... 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
Stigler & Becker cont‘d
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Assuming unstable and heterogeneous preferences
leads to intellectual laziness
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“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“
Not all economists subscribe to this
extreme view but ...
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Almost all economic research examines the changes in
individual behavior and aggregate outcomes that follow
from changes in constraints
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Tax, cost, price and information changes
Changes in property rights & the contractual environment
Implicit assumption
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Strong preference stability: changes in constraints (“the
environment“) leave preferences unaffected
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Weak preference stability: for the problem under consideration
preferences are more stable than constraints
Remarks on the
assumption of preference stability
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Important to recognize
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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“
...But recent progress in game theory
creates a new problem
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A clever contract theorist can say:
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“Give me a real world contract and I will
find an extensive form game that
rationalizes this contract as an equilibrium
of the game“
John Sutton
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The elaboration of multi-stage games allowed a
tremendous flexibility in modelling.
Sutton, continued
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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?
Our View
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The methodological arguments against invoking
preference changes are not very convincing
The arguments 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
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Educating one‘s children is not just about skill formation
– it‘s also about teaching the “right“ preferences
However
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It is a huge empirical challenge to prove a causal
impact of “society“ on preferences
This has kept second-best conventions in economics
alive
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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
Part II
Framing effects on visual perception
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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.
Müller-Lyer illusion
Framing effects on preferences
Frames in economics are observables that:
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Are irrelevant in the rational assessment
of the alternatives,
But nonetheless affect behavior-
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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
Example from “Coherent Arbitrariness“
Ariely, Loewenstien, and Prelec (2003)
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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:
$19
19
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After this anchoring question, the experiment elicits
the willingness to pay
Average willingness-to-pay sorted by
participants’ Social Security number
range of the last two digits
of SS number 00-39
$40
range of the last two digits
of SS number 40-99
$30
$20
$10
0
Trackball
Keyboard
Cote du
Rhone
Hermitage
Design
book
Belgian
chocolates
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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.
Example from “Fairness perceptions and
reservation wages” Falk-Fehr-Zehnder (2007)
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This study elicits reservation wage before the
introduction of a minimum wage and after
abolishing the minimum wage
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Minimum wages cause increases in
reservation wages even after they
have been abolished!
No rationalization in terms of different
constraints possible
Example from “Making Up People”
Hoff and Pandey (2006, 2011)
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Boys from high castes and from the traditionally
“untouchable” castes asked to solve mazes under incentives
Boys are randomly assigned to one of three groups that
vary the salience of caste:
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Caste identity is not made public in the maze-solving session
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It is made public in a session of 3 high- and 3 low-caste boys
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It is made public in a session of 6 high-caste boys (or 6 lowcaste boys). Thus subjects find themselves segregated by
caste status—an event that would be extremely unlikely to
occur by pure chance
Segregation is a strong cue to the caste
system
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The caste system still more or less prevails in villages
The caste system mandates segregation of high from
low castes
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In 1 out of 4 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% 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
Cars for transporting the participants to form sessions
of boys from different villages
Hardoi District, Uttar Pradesh
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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. 26
To the extent possible participants in a session are
as they are about to be taken home
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drawn from six different cars Participants
(villages)
Average output of high-caste subjects
7
Identity not revealed
Identity revealed in a mixed group
Identity revealed in a segregated group
6
5
4
3
2
1
0
Round 1
Round 2
Comments on results for high caste
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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).
Probability of failing to learn
how to solve a maze
0.12
0.1
0.08
Identity not
revealed
0.06
0.04
Identity
revealed
0.02
0
High
caste
Low
caste
Why do high-caste subjects expend less
effort in the segregated sessions?
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Making caste highly salient may activate a mental
frame in which a high-caste person has:
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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)
More evidence of “multiple preference
orderings” & “frame switches”
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Priming Asian identity of Asian-Americans leads them
to be:
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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
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LeBoeuf et al. 2010 , Benjamin et al. 2010
The frame primes the duck
The frame primes the rabbit
Part III
Preference-based explanations may help
explain outstanding puzzles
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The rest of this talk is more speculative
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
“Caste and Punishment”
(Hoff-Kshetramade-Fehr 2011)
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We examined the impact of caste status on
punishment while controlling for in-group/out-group,
wealth, and education effects
Set-up
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Groups of 3 members interact: player A, B, and C
Each lives in a different and distant village in north
India
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A and B play a trust game
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C is an uninvolved third party who can punish B
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For every 2 rupee coin that C spends, B loses 10
rupees
Trust game with third-party punishment
C chooses punishment for cooperation
B
C chooses punishment for defection
A
Result
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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“ ingroup members
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Can this be explained by differences in wealth?
Do richer individuals punish more?
(land ownership)
Punisher is high caste
Punisher is low caste
6
5.05
Mean relative punishment
5
4.12
4
3
2.35
2.24
2
1
0
N = 33
N = 62
Owns below m edian land
N = 90
N = 20
Owns at least m edian land
Do richer individuals punish more?
(house ownership)
Punisher is high caste
Punisher is low caste
6
Mean relative punishment
5
4.47
4.37
4
3
2.66
1.89
2
1
0
N = 34
N = 47
Lives in a m ud house
N = 89
N = 35
Lives in a brick house or a
m ixed m ud and brick house
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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:
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In payoffs in the game
In education
In wealth
The difference is interesting because
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Fehr et al. (1997) indicates that altruistic sanctioning is
a powerful means of enforcing contracts.
Vicious circle of caste?
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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
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Persistence of the caste system
Hypothesis 2
Culture shapes the demand for
social insurance
Attitudes toward government
redistribution vary across countries
Survey question: Should government reduce income differences?
Eugster et al. 2011
“German” and “Latin”
language regions in Switzerland
Votes in Swiss Referenda on Social Security
German-speaking |Latin language speaking
German-speaking |Latin language speaking
German-speaking |Latin language speaking
Year the vote was held is in parentheses. Communities are collected in bins by their distance to the language border, in 5km intervals. Dots show the per
cent Yes-votes of all validly cast votes, per 5 km bin of communities. Negative distances correspond to majority German-speaking communities; positive
distances correspond to major French-, Italian, or Romansh-speaking communities. The vertical line indicates the language border. Also shown is a LOWESS
fit to the bin-level shares, a locally weighted regression using 80% of the data to smooth each point.
Eugster et al. 2011
Establishing causality
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In a within-canton regression discontinuity design,
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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
Conclusion
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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.”
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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
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But evidence suggests that changes in constraints
can change preferences
Examples
Change in a
constraint
Change in
minimum wage
Caste
Expansion of the
welfare state
Change in
preferences
Change in
reservation wage
Why?
Entitlement effect
Falk, Fehr,
Zehnder 2006
Cues to the caste order
Possibly a decline
lower the willingness of the in the need to
high caste to expend effort achieve
(a framing effect)
Hoff-Pandey
2006, 2011
One’s position at the top or Effect on agency
bottom of the caste order
&/or
shapes the willingness to
in-group affiliation
punish norm violations
Hoff,
Kshetramade,
Fehr 2011
The work ethic of the
next generation is
reduced
Rational adaptation
of parenting
strategies
LindbeckNyberg 2006
Take-away message
Institutions have broader implications than economists have
generally recognized
Constraints & beliefs
Institutions
(“rules of the
game”)
&
Preferences by
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activating a particular selfconcept or world-view (one
of many that are held)
shaping a new self-concept
or world-view
creating systems of meaning
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Investigating the causal influences on preferences
remains a huge challenge,
But is likely to shed light on changes central to
economic change
One further note on framing effects on
visual perception
According to Segall et al. (1966),
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The Müller-Lyer illusion is completely absent in some undeveloped societies
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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)
Thank you for your attention
Post-talk discussion:
“Elicitation effects” on preferences
An additional effect of institutions on preferences/behavior is through default
options, e.g. in retirement savings plans
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A field experiment in a Swiss Red Cross blood drive provides new evidence
for the view that:
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In some domains, many individuals do not have preferences.
Preferences are constructed when they are elicited, & constructing them can be
costly.
Findings is that 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
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& so a change in the default option leads to swings in behavior
Stutzer et al. (2011)