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Friday, April 28, 2006

Altruism as a profit motive

More than money
Economics researchers show that altruism can make everyone a winner in business
By Carolyn Meinel

World business leaders want to make their enterprises more altruistic, judging from this year’s World Economic Forum in Davos, Switzerland. They’re doing it not out of guilty consciences but because economics researchers such as California Institute of Technology professor Colin Camerer are showing how to structure social systems so that altruism can make everyone a winner.

Camerer gave a talk at Davos on “Economics Misbehaving,” and led a dinner discussion titled “It’s not all about the money, is it?” Some 30 people attended the discussion, including James Surowiecki, author of The Wisdom of Crowds and a journalist with The New Yorker ; Duane Wall, managing partner of global law firm White & Case; and Boston Consulting Group co-chairman John Clarkeson.

“There was a surprising consensus — to an economist — that money is only one motivator and maybe a poor one,” said Camerer.

Camerer’s observations were right on target, Wall said. “We gave our views on what we thought were noneconomic motivations,” he said. “We made a list and then the table voted on them. Number one was ‘recognition and respect.’ Number two was ‘achievement and accomplishment.’”

At the end of the discussion, the world’s business leaders apparently understood the importance of these motivations. Participants detailed new projects in disaster relief, hunger and anti-corruption. “I was particularly impressed by this notion of ‘I will,’” said World Economic Forum founder Klaus Schwab.

Challenging the “economic man”

Camerer is big news in the business and economics communities because of his research into the psychological and neurobiological bases of decision-making. In his early years, however, Camerer was the odd man out amid a widespread belief in “economic man,” a concept first expressed by Adam Smith in his 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations . “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their self-love,” Smith wrote. Economists enlarged upon this hypothesis with the concept of economic man — a totally rational and purely selfish being — and assumed that everyone fits this model.

Perhaps the most bemusing thing about the power of Smith’s “economic man” was the fact that earlier, Smith himself had been on the other side of the debate. According to Camerer, Smith’s book The Theory of Moral Sentiments , published in 1759, was “bursting with insights about human psychology, many of which presage current developments in behavioral economics.” However, economists ended up taking their cues from Smith’s later views. (See “The myth of the selfish gene,” page 12.)

Camerer’s goal has been “to restore common sense over the wishful thinking that this simple model is adequate.” The first experiment to cast doubt on economic man was conducted in the summer of 1952 at a Rand Corp. workshop, he said. John Nash — Nobel Prize-winning game theorist and hero of the movie A Beautiful Mind — was there and recruited the staff to play games he devised. However, the players didn’t act much like economic man.

This evidence failed to shake economic theorists. “Nash’s limitation was that he was not a psychologist,” Camerer said. “Consequently, he remained caught up in the math nuances of game theory and couldn’t make sense of natural human behavior.”

Game theorists continued to focus on mathematics, unconcerned about conflicting data from real people. “It was only a couple of years ago that behavioral economics became accepted in economic circles,” according to William R. Ferrell, a member of the editorial board of the Journal of Behavioral Decision Making . “Then people interested in real behavior came along who found it suggested a lot of interesting models and hypotheses. The economists finally began to take note of the discrepancies between their traditional models and the behavioral results and make adjustments — and, of course, more models,” Ferrell said.

“Next, the problem was, economists have a fetish about money,” said Camerer. Their theory was, if players make a “mistake” — such as failing to behave like economic man — they end up paying more money, so they won’t make mistakes. “This gave them license to ignore the results of experiments with low or zero pay. However, we found that a potential to win $20 was enough to motivate players. They may even perform worse if we offer more money.”

Not just about money

Now behavioral economics is a hot field. A recent issue of Science carried a review article titled, “When Does ‘Economic Man’ Dominate Social Behavior?” written by Camerer and Ernst Fehr, director of both the Ludwig Boltzmann Institute for the Analysis of Economic Growth and the Institute for Empirical Research in Economics at the University of Zurich in Switzerland. They presented results from experiments showing that games may be devised to elicit either altruistic, irrational or economic man behaviors. (See “Beauty contest,” page 10; “Prisoners’ dilemma” and “Ultimatum game,” page12; and “Business entry,” this page.)

People made decisions close to the Nash equilibrium, said Camerer. “The point is that the same precise model of steps of thinking can explain what happens in the entry game,” he said. “The difference is that in the [business entry] game, if people do only a little thinking, they will stay out of small markets and go into big ones. But people who do a little more thinking will then go into small markets and stay out of big ones. So the steps of thinking balance everything out. Small markets get the right number of firms, and large markets do too.” This tends to create a system of behavior that adds up to close to the Nash equilibrium, Camerer said.

These experiments show that it is possible to structure situations that bring about better societies. “It was about how people are sometimes confused, succumb to temptation and care about others,” said Camerer about his talk at Davos. “The theory that all people are always out for themselves — the naive theory of economic man — is wrong. The thing that makes this viewpoint wrong is that a large percentage of people are reciprocal,” he said.

“We now understand a lot mathematically about how self-interest and reciprocity interact and how changing the economic rules of the game can create situations in which the reciprocity motive gets even the most selfish people to play along and act reciprocally, to everyone’s benefit.”

(Carolyn Meinel is a science writer living in Sandia Park, N.M.)


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