Beyond Homo Economicus - The Influence of Social Norms and Cultural Identity on Economic Behaviour

TABLE OF CONTENTS

LIST OF FIGURES

LIST OF TABLES

I. INTRODUCTION
1.1 Economic Theory and Experimental Economics
1.2 Human Behaviour, Social Norms and Cultural Identity

II. INFLUENCES ON ECONOMIC BEHAVIOUR
2.1 Homo Economicus vs. Homo Sociologicus
2.1.1 The Rationale of Homo Economicus
2.1.2 Influences on Homo Sociologicus
2.1.3 Combining the Two
2.2 Social Norms and Economic Behaviour
2.2.1 Norms of Reciprocity
2.2.1.1 Experimental Evidence: Norms of Reciprocity
2.2.2 Norms of Cooperation and Fairness
2.2.2.1 Cooperation and Fairness in Games: The Prisoner’s Dilemma
2.2.3 Norms of Distribution

III. CULTURAL VARIATIONS IN ECONOMIC BEHAVIOUR
3.1 The Assumption of Cultural Variations in Economic Behaviour
3.2 Testing the Model
3.2.1 Restrictions to Cross-Cultural Studies
3.3 Evidence from Experiments
3.3.1 An East-West-German Comparison by Ockenfels and Weimann
3.3.1.1 Experimental Designs
3.3.1.2 Results
3.3.2 Prisoner’s Dilemmas in Japan and the United States
3.3.2.1 Experimental Design
3.3.2.2 Results
3.3.3 Bargaining Behaviour in Four Countries
3.3.3.1 Experimental Design
3.3.3.2 Results
3.4 Deducting “Toughness” of Societies from Experimental Results

IV. SUMMARY AND CONCLUSION

BIBLIOGRAPHY

LIST OF FIGURES

Figure 1: Two Games that Show the Importance of Intentions. (Falk and Fischbacher, 2000, p. 5)

Figure 2: Prisoner’s Dilemma Pay-Off Matrix. (Varian, 2001, p. 481)

Figure 3: Pay-Off Matrix in the Prisoner’s Dilemma conducted in Japan and USA.

LIST OF TABLES

Table 1: Cooperative Choices in Each Condition Among American and Japanese Participants. (Hayashi et al., 1999, p. 38)

Table 2: Means of Actual and Expected Gifts in Eastern and Western Germany. (Ockenfels and Weimann, 1999, p. 13)

I. INTRODUCTION

1.1 Economic Theory and Experimental Economics

Ever since philosophers set up their first models to predict human behaviour, it was apparent that their findings had to be handled with care and that experimental evidence was needed to corroborate their theories. In their models, general assumptions such as perfect knowledge or perfect homogeneity make it obvious that these models could not simply be taken as projections of real markets.

The question, however, is, to what extend these theories have their legitimation anyway. Even though assumptions made by economists when setting up market models may be false, many predictions derived from these models are not. We therefore need to find out what determines the market outcome. However, in order to understand how markets work, we first have to understand how human beings work. Experimental economics can be a valuable instrument for that, because, as Alvin E. Roth put it, experimental economics can “bridge the gap between the study of ideally rational behavior and the study of actual behavior” (Roth, 1991, p. 107).

1.2 Human Behaviour, Social Norms and Cultural Identity

The quest must therefore be to find what influences human behaviour. I will lay out in this paper two main concepts on human bevaviour, namely the concepts of homo economicus and homo sociologicus. These models try to explain human behaviour and its influences from two different approaches. Whereas most of the economic models presented in the past were based on the strictly rational behaviour of homo economicus, recent findings show that social norms, which influence the behaviour of homo sociologicus, do seem to play an important part in human economic behaviour, which I will lay out in Chapter II. The recognition of the importance of social norms in human decision failing brings up the question whether people in different societies with different social norms behave differently, as this would not only diminish the significance of findings made in experiments carried out in one specific society, but also completely reject the concept of homogeneity, whether this homogeneity is based on rationality or irrationality. I will present recent findings on this and discuss the implications in Chapter III.

II. INFLUENCES ON ECONOMIC BEHAVIOUR

2.1 Homo Economicus vs. Homo Sociologicus

Even though the clashes between homo economicus and homo sociologicus are significantly big, as are the consequences of human behaviour implied by either of them, there is still no consent in the social sciences as to which of the models applies to and explains human behaviour.

2.1.1 The Rationale of Homo Economicus

Homo economicus is the most frequent actor in economic models, someone guided solely by rationality and without any influences from outside, or, as Ockenfels and Weimann put it, a “strictly rational fellow without sex, age, or cultural identity” (Ockenfels and Weimann, 1999, p. 275). He has no cognitive boundaries, i.e. he knows and anticipates everything, and does not care about his environment at all. He is thus frequently called a “self-contained and asocial atom” (Elster, 1989, p. 99).

In a fictive round of the dictator game, in which homo economicus is free to divide €10 among himself and someone else, who has no choice but to accept the offer, homo economicus would act perfectly rational and maximise his income: he would keep everything to himself.

2.1.2 Influences on Homo Sociologicus

On the contrary, homo sociologicus would presumably behave very differently in the same round of the dictator game. For example, if there was a social norm of distribution which desires perfect equality, homo sociologicus would do the contrary to homo economicus, but the only right decision in his view: he would divide the €10 equally.

Therefore, homo sociologicus is not influenced by rationality at all, but only by social norms. Social norms have two main features: non-outcome-orientation and prescribtion of action. In contrast to rationality, which is conditional as well as future-oriented (“To achieve X, do Y”), social norms are the opposite: either unconditional (“Do X!”), or, if conditional, not future-oriented (“If others do X, than do Y!”) (Elster, 1989, p. 99).

2.1.3 Combining the Two

Accepting the fact that influences on actual human behaviour presumably include both the narrow self-interest of homo economicus as well as the social forces controlling homo sociologicus leads us to the task of finding a possible combination of rationality and the compliance with social norms to explain human behaviour. We therefore need to acknowledge that rationality and social norms do not need to be incompatible.

Considering that human beings are social beings which live and can only survive in groups, it seems sensible for the individual to follow the social norms of his group, or, in this case, his society (Bolton and Ockenfels, 2000, p. 189). This implies that complying with social norms is not the opposite of being rational, which is sometimes indicated by economists. This applies especially as many social norms have arisen to overcome the differences between collective and individual rationality, and complying with them makes everyone better off. I will discuss this in further detail in Chapters 2.2.2 and 2.2.2.1.

2.2 Social Norms and Economic Behaviour

Social norms regulate human behaviour in many different ways. Consumption norms, for example, regulate manners of dress and manners at table, whereas norms regulating the use of money include the unaccaptence of buying votes or offering money in return for a favour done by a friend (Elster, 1989, pp. 100).

There are also several norms which apply particularly in certain game situation, such as norms of reciprocity, cooperation, fairness and distribution, and which are of special interest in understanding how differences in behaviour among societies can arise.

2.2.1 Norms of Reciprocity

Norms of reciprocity regulate reactions to actions, i.e. they regulate how to behave “in return”. Invitations, for example, are regulated by these norms. Once your neighbours have invited you for dinner, you have to return their invitation. However, if they do not return your invitation in turn, you are not obliged to invite them ever again. Good and bad behaviour is therefore rewarded and punished respectively, regulated by social norms.

2.2.1.1 Experimental Evidence: Norms of Reciprocity

Falk and Fischbacher prove in their “Theory of Reciprocity” (2000) the fact that reciprocal behaviour is observeable and that intentions matter. This is important as intentions determine whether a certain treatment is considered kind or unkind. Falk and Fischbacher proved this by means of two reduced ultimatum games with the set-up laid out in Figure 1 below.

illustration not visible in this excerpt

Figure 1: Two Games that Show the Importance of Intentions. (Falk and Fischbacher, 2000, p. 5)

In the two games (a) and (b) the first player is asked to divide $10 among himself and the second player. In Game (a), he can offer either $2 to the second player and keep $8, or offer an even split between the two players of $5 each. In Game (b), the first player again has the option to offer $2 to the other player and keep $8 to himself or to keep the $10 all to himself.

Even if we do not assume the income-maximising behaviour of homo economicus, which implies that there should be no rejection of a positive offer, the consequentialistic point of view implies that rejection rates of the 8/2 offer should be the same in both games. However, it can be found that whereas in game (b) the 8/2 offer is rejected in only 8.9 percent of the cases, it was rejected in 44.4 percent of the cases in game (a) (Falk and Fischbacher, 2000, p. 6).

The reason for this behaviour is that people consider the 8/2 offer an unkind treatment if there is also the possibility for the first player to offer 5/5, whereas it is considered a kind treatment if the other possibility for the first player is to offer 10/0, i.e. nothing to the second player. The 8/2 offer is therefore punished (rejected) or rewarded (accepted), depending on whether it is considered a kind or unkind treatment. This proves that many players in these two games act in a reciprocal manner.

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