When Does "Economic Man" Dominate Social Behavior?

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.

[1]  H. Pedersen.  J. M. Keynes: THE GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY. Macmillan, London 1936. 403 S. , 1936 .

[2]  J. Keynes,et al.  The General Theory of Employment, Interest and Money. , 1936 .

[3]  J. Keynes,et al.  The General Theory of Employment, Interest and Money. , 1936 .

[4]  J. Keynes.  The General Theory of Employment , 1937 .

[5]  A. Tversky,et al.  Judgment under Uncertainty: Heuristics and Biases , 1974, Science.

[6]  David M. Kreps,et al.  Rational cooperation in the finitely repeated prisoners' dilemma , 1982 .

[7]  W. Güth,et al.  An experimental analysis of ultimatum bargaining , 1982 .

[8]  Michael Waldman,et al.  Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity , 1983 .

[9]  D. Fudenberg,et al.  The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look , 1984 .

[10]  R. Roll.  Orange Juice and Weather , 1984 .

[11]  Janet L. Yellen,et al.  Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria , 1985 .

[12]  J. Geanakoplos,et al.  Multimarket Oligopoly: Strategic Substitutes and Complements , 1985, Journal of Political Economy.

[13]  Charles R. Plott,et al.  Rational Choice in Experimental Markets , 1986 .

[14]  Drew Fudenberg,et al.  The Folk Theorem in Repeated Games with Discounting or with Incomplete Information , 1986 .

[15]  Reinhard Selten,et al.  Bounded rational behavior in experimental games and markets : proceedings of the Fourth Conference on Experimental Economics, Bielefeld, West Germany, September 21-25, 1986 , 1988 .

[16]  Colin Camerer,et al.  EXPERIMENTAL TESTS OF A SEQUENTIAL EQUILIBRIUM REPUTATION MODEL , 1988 .

[17]  M. D. Wilkinson,et al.  Management science , 1989, British Dental Journal.

[18]  L. Summers,et al.  Noise Trader Risk in Financial Markets , 1990, Journal of Political Economy.

[19]  W. Güth,et al.  Ultimatum bargaining behavior : a survey and comparison of experimental results , 1990 .

[20]  S. Zamir,et al.  Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study , 1991 .

[21]  E. Ostrom,et al.  Covenants with and without a Sword: Self-Governance Is Possible , 1992, American Political Science Review.

[22]  M. Rabin.  Published by: American , 2022 .

[23]  R. Nagel.  Unraveling in Guessing Games: An Experimental Study , 1995 .

[24]  R. McKelvey,et al.  Quantal Response Equilibria for Normal Form Games , 1995 .

[25]  D. Levine.  Modeling Altruism and Spitefulness in Experiments , 1998 .

[26]  E. Fehr,et al.  Does Money Illusion Matter? , 1998 .

[27]  Alvin E. Roth,et al.  Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic , 1998 .

[28]  Colin Camerer,et al.  Iterated Dominance and Iterated Best-Response in Experimental P-Beauty Contests , 1998 .

[29]  E. Fehr.  A Theory of Fairness, Competition and Cooperation , 1998 .

[30]  E. Fehr,et al.  Wage Rigidity in a Competitive Incomplete Contract Market , 1999, Journal of Political Economy.

[31]  E. Fehr,et al.  Cooperation and Punishment in Public Goods Experiments , 1999, SSRN Electronic Journal.

[32]  Miguel A. Costa-Gomes,et al.  Cognition and Behavior in Normal-Form Games: An Experimental Study , 1998 .

[33]  L. Cameron,et al.  Raising the Stakes in the Ultimatum Game: Experimental Evidence From Indonesia , 1999 .

[34]  H. Gintis.  Strong reciprocity and human sociality. , 2000, Journal of theoretical biology.

[35]  A. Shleifer,et al.  Inefficient Markets: An Introduction to Behavioral Finance , 2002 .

[36]  Gary E. Bolton,et al.  ERC: A Theory of Equity, Reciprocity, and Competition , 2000 .

[37]  M. Rabin,et al.  Understanding Social Preference with Simple Tests , 2001 .

[38]  R. Boyd,et al.  In Search of Homo Economicus: Behavioral Experiments in 15 Small- Scale Societies , 2001 .

[39]  Colin Camerer.  Behavioral Game Theory: Experiments in Strategic Interaction , 2003 .

[40]  R. Thaler,et al.  Anomalies: The Law of One Price in Financial Markets , 2003 .

[41]  Lars Peter Hansen,et al.  Advances in Economics and Econometrics , 2003 .

[42]  U. Fischbacher,et al.  The nature of human altruism , 2003, Nature.

[43]  Martin Dufwenberg,et al.  A theory of sequential reciprocity , 2004, Games Econ. Behav..

[44]  Colin Camerer,et al.  A Cognitive Hierarchy Model of Games , 2004 .

[45]  Steve B. Wyatt,et al.  Are Judgment Errors Reflected in Market Prices and Allocations? Experimental Evidence Based on the Monty Hall Problem , 2004 .

[46]  B. Rockenbach,et al.  The Competitive Advantage of Sanctioning Institutions , 2006, Science.

[47]  C. Hauert,et al.  Via Freedom to Coercion: The Emergence of Costly Punishment , 2007, Science.

[48]  J. Dreher,et al.  Hormonal and Genetic Influences on Processing Reward and Social Information , 2007, Annals of the New York Academy of Sciences.

[49]  C. Boone,et al.  Individual-level heterogeneity and macro-level outcomes , 2007 .