Economics of Altruism

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Economics of Altruism
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Singers Lake
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What type of person are you?

• Emotional intelligence
• Altruism quiz
• Empathy quotient

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Are Economists less altruistic by nature?
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Homo economicusECONS - Thaler

• Humans are rational, self-interested actors
• Origin
• Term used by critics of John Stuart Mills work on
  political economy in 1936
• Mills
• man is a being who inevitably does that by
  which he may obtain the greatest amount of
  necessaries, conveniences, and luxuries, with the
  smallest quantity of labour and physical
  self-denial with which they can be obtained.

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ADAM SMITH

• 18th century Scottish philosopher
• Wealth of Nations
• Competition is good
• Invisible hand
• By pursuing his own interest, he frequently
  promotes that of the society more effectually
  than when he really intends to promote it.

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Limitations of selfish rationality

• Sen Absurdity of selfish rationality
• Imagine a man asks a stranger for directions.
• "Where is the railway station?" he asks.
• "There," she says, pointing at the post office,
  "and would you please post this letter for me on
  the way?"
• "Yes," he says, determined to open the envelope
  and check whether it contains something valuable.

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Adam Smiths largely ignored softer side..

• The Theory of Moral Sentiments
• How selfish soever man may be supposed, there
  are evidently some principles in his nature,
  which interest him in the fortune of others and
  render their happiness necessary to him, though
  he derives nothing from it except the pleasure of
  seeing it.

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HUMANS VS. ECONS

• HUMANS
• do not always use cost/benefit analysis to make
  decisions
• things unrelated to money are important
• can be distracted, impulsive, and inconsistent

• ECONS
• rational decision makers
• use cost/benefit analysis
• Maximize individual satisfaction

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First homework

• Read Chapter 1 of Born to Be Good by Dacher
  Keltner, Prof. Psychology, UC Berkeley(available
  as link on class webpage)
• Do assignment posted on webpage for next class

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First altruism assignmentGet educated and get
involvedSat. Jan. 14 830 - 1
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Altruism in animals2008 2 feral dogs in
Santiago, Chile
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Are humans and animals hard wired for selfishness?

• Pursue self interest
• 1954 study rats press bar for hours on end that
  stimulates the pleasure center of the brain
  (septum) when neither hungry or thirsty
• Compete with others Darwinism, survival of the
  fittest (Herbert Spencer)
• Prioritize the bad poison berry, hidden snake
• - Losing 20 elicits stronger reaction than
  finding 20

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Reasons for altruism in animals

• inclusive fitness
• generous act benefits other who share the same
  genes allowing for the propogation of owns own
  genes
• reciprocal altruism
• generous act is eventually reciprocated

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The Compassionate Instinct A Darwinian Tale of
Survival of the Kindest -Dacher Keltner
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Efficiency of altruism
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Rational choice theory

• Choices made by individuals reflect their desire
  to minimize costs and maximize benefits
• Utility function

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Does make us happy?

• Mixed results
• -Correlation between GDP/capita and
  self-reported happiness
• -loss of income affects happiness (Mankiw)
• -surveys asking How happy are you with your life
  right now? find most important determinants of
  happiness are
• -romantic bonds
• -health of family
• -time with friends
• -connection to communities
• When jen ratios are high, so are we

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• Law of diminishing marginal utility the utility
  that any consumer derives from successive units
  of a product diminishes as the total consumption
  of the product increases, ceteris paribus.

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law of spoiled kids!!!
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Economic Approaches to Population Issues

• MICROECONOMIC HOUSEHOLD THEORY OF FERTILITY
• based on theory of consumer behavior
• assumptions
• children are a consumer good and/or investment
  good
• women are rational in their decision making
  process of having children
• number of surviving children Cd Cd f(Y,Pc, Px
  (P other goods), tx( taste for other goods)) x
  1.......n
• graph

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Economic Approaches to Population Issues

• caveats
• Are children a normal good?
• non-pecuniary benefits hard to measure
• Does the law of diminishing marginal utility hold
  for children?

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See Becker, G. A Treatise on the Family, 1981
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Extensions of model new ideas

• Nancy Folbre feminist economist The Invisible
  Heart, 2001
• Economic models undervalue contributions of women
  providing care
• Care work that involves connecting to other
  people, trying to help people meet their needs,
  things like the work of caring for children,
  caring for the elderly, caring for sick people or
  teaching is a form of caring labor.
• can be paid or unpaid

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Nancy Folbre

• Children are not pets!

• Children as public goods

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Public goods

• Non-rival
• consumption of the good by one individual does
  not reduce availability of the good for
  consumption by others
• Non-excludable
• no one can be effectively excluded from using
  the good

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Empirical evidence

• Poor countries have higher fertility rates
• But new evidence shows that rich countries with
  high female labor participation have MORE babies
• -why? Better support for working mothers
• (flexible hours, childcare)

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BEHAVIORAL ECONOMICS EXPERIMENTS IN ALTRUISM
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INEQUALITY

• Constructive inequality differential rewards to
  skill and effort lead to economic growth
• Destructive inequality dysfunctional workings of
  an economy that slows its own growth by blocking
  the accumulation and income-generating
  opportunities of the poor

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Game Theory

• Game theory study of interacting decision makers
  whose payoffs depend on the actions of both
• Collusion Economic agents formally agree to
  coordinate their activities to increase their
  joint profit / benefit
• dominant strategy a strategy that is best for a
  player in a game regardless of the strategies
  chosen by the other players
• Nash equilibrium a situation in which economic
  actors interacting with one another each choose
  their best strategy given the strategies that all
  others have chosen

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Ultimatum game

• Player 1 gets and makes an offer to player 2
• Player 2 can accept offer or reject, resulting in
  neither player keeping the
• Offers some evidence against the presence of
  rational, self-interest

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RESULTS

• Economic theory predicts that ECONS should offer
  0.01 and their rational partners should accept
• However, 71 of HUMANS offer between 40 and 50
  of their money

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Class ultimatum experimentWould it matter if
touch were involved?

• Winning Touch NBA Teams that Touch the Most Win
  the Most, Study Says

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Dictator

• Not technically a game since only one person has
  decision making power
• Dictator decides how much money to give second
  player
• Offers some evidence against the presence of
  rational, self-interest

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Dictator variant

• Anonymity
• Half class goes outside
• Dictators do not reveal identity

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Trust game

• Player 2 decides how much to give to dictator
• is tripled by Professor (matching amount will
  vary)
• Dictator decides how much to give Player 2

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The gruesome case of the Chinese toddler left for
deadOct. 2011
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Empathy fatigue

• Emotional detachment brought about by prolonged
  emotional exposure

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MOTIVATIONS FOR ALTRUISM

1. Ethics
2. Reciprocity
3. Business strategy

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ALTRUISM MOTIVATED BY ETHICS

• Is economics really about rational, self
  interested actors?

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Living a life of altruism

• Quotes of Mother Teresa
• We cannot all do great things, but we can do
  small things with great love.
• It is a kingly act to assist the fallen.
• If you can't feed a hundred people, then feed
  just one.

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Golden Ladder of Giving-Moses Maimonides, Jewish
scholar, 1135-1202 AD

1. Giving unwillingly.
2. Giving willingly but inadequately.
3. Giving adequately after being asked.
4. Giving before being asked.
5. Giving to an unknown recipient.
6. Giving anonymously to a known recipient.
7. Giving anonymously to an unknown recipient.
8. Giving to prevent poverty by teaching a trade,
   setting a man up in business, or in some other
   way preventing the need of charity

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BLOOD BANK EXPERIMENTKansas City and
DenverCornell University 1973

• CONTROL
• Sent letter asking
• them to volunteer
• to give blood

• TREATMENT
• Sent letter
• offering to pay
• them 10
• to give blood

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WHICH GROUP GAVE MORE?

• PAID DONORS
• 65 gave blood

• VOLUNTEERS
• 93 gave blood

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WHATS GOING ON?!

• Crowding out
• People perform certain tasks for the common good
  but their motivation is crowded out if they are
  offered a financial reward.
• -theory by Richard Titmuss, British social
  researcher

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ALTRUISM AS A FORM OF RECIPROCITY
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ALTRUISM AS A BUSINESS STRATEGY

• Strategy to become part of community
• Positive public image
• Signal of high product quality
• Develop social skills to enhance client
  relationships
• Inspired employees

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EVERY DAY COMPASSION AT GOOGLEChade-Meng Tan