Are apes the real Homo Economicus?

A new academic year has started and it's about time for the Edinburgh Economics Blog to become active again. But first of all, we in the School of Economic would like to thank you readers for all your feedback and suggestions during last year.

And now, a brand new entry.

A good friend recently sent me a reference to a scientific article saying "Santi, I am sure you will like this". The featured article was a work by a team of three US anthropologists who have studied during 10 years the aggressive behaviour of chimpanzees at Kibale National Park in Uganda. In the paper they published this year in Current Biology John Mithani and co-authors describe how these chimpanzees formed coalitions in order to attack others chimpanzees, killing around 20 rivals in the process, and then seized and occupied the territory of the vanquished. Chimpanzees have been long suspected to display this very human type of behaviour and this study seems to provide definitive evidence of it. The authors attribute these aggressions to the desire of extending territories and obtain resources that winners later distribute rather cooperatively among them.

A second study, this one published in 2007 in Science, shows another instance of selfish and materialistic behaviour in chimpanzees. In a paper authored by Keith Jensen, Josep Call and Michael Tomasello, the authors show that, contrary to humans, these apes behave rationally in the Ultimatum Game. Rather than rejecting them, chimpanzees accept low offers, somehow demonstrating that fairness concerns and other-regarding preferences are what distinguish us humans from our primate cousins.

In recent times, the behavioural revolution within Economics has enriched our models of human preferences by incorporating inequality aversion, reciprocity and efficiency concerns. In the end, it seems, apes and not homo sapiens were the true homo economicus.

Economic thinking and political radio shows

Our main objective when teaching Economics is that students become capable of using economic thinking to analyze problems. Unfortunately many still believe that Economics is about regurgitating ideas (imperfectly) learned by heart or just knowing where to invest. Economics changes your way of thinking and will help tremendously in your understanding of the world. Moreover, this "economic mindset" is not that difficult to grasp and once you start using it you will be able to apply it to many aspects of your everyday life. Take for instance this fragment from Consider the lobster (2005), a book by late David Foster Wallace (in the photo), one of the greatest modern american writers and, also, an economic thinker. He uses the basic ideas of public good provision to analyze the rather conservative leaning of political radio shows in the US.

It is a fallacy that political talk radio is motivated by ideology

"The persistence of this fallacy among left-wing opponents of talk radio is extraordinary (...) the usual claim here is that right-wing radio is "owned by large, profit-hungry corporations of wealthy, profit-driven individuals, who use their companies to push a conservative, pro-capitalist agenda." This analysis also identifies the gross economic illogic of this claim. Suppose that I am the conservative and rabidly capitalist owner of a radio company. I believe that the free-market conservatism is Truth and that the US would be better off in every way if everybody were conservative. This, for me, makes conservatism a "public good" in the Intro Econ sense of the term - i.e., a conservative electorate is a public good in the same way that a clean environment or a healthy populace is a public good. And the same basic economics that explains corporate contributions to air pollution and obesity explains why my radio company has zero incentive to promote the public good of conservatism. Because the time and money my one company would spend trying to spread the Truth would yield (at best) only a tiny increase in the conservatism of the whole country - and yet the advantages of that increased conservatism would be shared by everyone, including my radio competitors, even though they wouldn't have put themselves out one bit to help shift public opinion. In other words, I alone would have paid for a benefit that my competition could also enjoy, free. All of which plainly would not be good business... which is why it is actually in my company's best interests to "under-invest" in promulgating ideology."

Impressive, don´t you think?

Selfish basterds: On rationality in Economics (II)

Before proceeding any further, we need to define what does it mean to be rational from an economic perspective. We will say that an agent is rational if this agent takes actions that maximize his expected pay-off from the set of available actions to him, and given the beliefs that he holds about the consequences of these actions (no matter how wrong they can be). That is basically what it means to be rational. It seems a very natural, powerful and simple idea. But then, why do non-economists protest so angrily against this assumption?

I think that the main reason for this is that they are confounding an assumption with an ontological proposition about human nature. Economists do not postulate that people are always rational. Nor that humans are only selfish or materialistic or care only about money. In this post I would like to clarify that rationality is just that, an assumption. In the next one, I will explain why it is not as stupid as journalists relish so much to say.

In "The Methodology of Positive Economics," the leading chapter of Essays in Positive Economics (1953), Milton Friedman argued that it is not important whether humans are actually rational or not. What is important is whether they behave like rational beings, so the rationality assumption can be used fruitfully to explain behaviour. He made the analogy with the study of how leaves locate in the branches of trees. The tree may not truly grow them to maximize exposure to sunlight, but if they behave as if it did, then it is a powerful assumption to make in our study of trees. That is the principle that should guide us in the use of the rationality assumption.

It is true that sometimes economists have jumped into the void of wishful thinking, and postulated that human nature (in case such a thing exists) corresponds to the one of a rational, narrowly-minded, materialistic being. Many market-triumphalists have done that (not Friedman, interestingly enough), and policy prescriptions sometimes have suffered from an abuse of rationality, and more specifically of narow self-interest (they are not the same as we will see next time) as a fundamental belief and not as an approximation to reality. That is precisely why that girl that I mentioned in my previous post in this series thought that Economics was hideous; or why journalists, like Adam Curtis, like to portray economists (and economics students, by extension) as sociopaths. But what should concern us is that any economist willing to make the leap from assumption to beliefs is doomed to do wrong and potentially dangerous economic analysis.

What good economists think is that the assumption of rationality can be a very powerful tool in explaining behaviour. It is a simplification, of course, but without simplifications, no theory has any explanatory power. In that respect, I would like to mention a short story by the Argentinian writer Jorge Luis Borges (in the photo above). In On Rigour in Science, Borges told the story of an empire, whose scientists, after generations, build a map of the kingdom in 1:1 scale. The map was a totally accurate description of reality. But what would be the use of such a map? Absolutely none. The assumption of rationality, Economics in itself, is a map of human and social phenomena. There may be some maps better than others, and we should strive to improve the ones we have, but without them, we will certainly get lost.

(To be continued).

Selfish basterds: On rationality in Economics (I)

In this series of entries, I would like to reflect on the assumption of rationality in Economics. By using my personal experience and some elements from economic theory, I will discuss the common misconceptions on Economics, economists and rationality. Today, I will start with some personal anecdotes.

In my MSc dissertation, I worked with a model of coalition formation in which individuals differed in resources and abilities and could get together in order to produce output. Over and over again, I found that in the equilibrium of that model the more able agents formed groups with other able agents and that the group structure was ordered in that way. I say that I got that result over and over again because I found it outrageous so I checked and rechecked my computations. I did not like the fact that MY model yielded a hierarchical world in which people ended up merging with people similar to them and the less able and less rich got excluded. The fact was that I was letting my personal ideas obscure my economic thinking.

A few years later, I was a recently appointed lecturer at the University of Edinburgh and I was about to run my first economic experiment. As part of the process, I had to find subjects. I resorted to traditional methods like posters, showing up at the beginnning of lectures and distributing flyers across George Square. Students mostly liked the idea of being paid £10 for an hour of their time so the experience of chatting them up was pleasant. However, I remember vividly the visceral reaction of one female student. When I told her that we were looking for people to participate in research in Economics she answered "I hate Economics, I don't want to have anything to do with it. It's hideous."

Since last year, I have taught game theory on the MSc on Carbon Management that we run jointly with the Business School and Geosciences. I performed a simple classroom experiment in which students in the course played a public good game. They had to decide whether to contribute towards a public fund or not. Individual payoffs (I actually paid them in cash) increase with the number of contributors if you contribute too, but they increase even faster if you remain out. In equilibrium everybody should free-ride. Most students were shocked to find that, indeed, very few of them contributed. They thought that the world, and even themselves, was different. But once they felt the power of incentives, they were the first ones in leaving moral self-images aside.

Last Spring, I gave a workshop on economic experiments to students interested in the topic. I reported one experiment ("The Competitive Advantage of Sanctioning Institutions," O. Gürerk, B. Irlenbusch and B. Rockenbach, Science, 2006), in which subjects had to choose whether to play the game above or another version in which after contributions decisions are made, they could punish others at a cost. As you can expect, contributions are typically much higher in the latter case. I asked the audience which game they thought that subjects selected more often in the first round of the experiment. They all answered "the one with punishments". They were dismayed to find that it was actually in the other way around and that contributions were very low. I asked one student why she answered in the way she did. She replied "because that is how I would like the world to be, a world where people are nice".

So the moral of this first post is the following: Don't let your good feelings mix up with your Economics. Otherwise you will not be doing a good service to yourself nor to the world.

Only if you are ready to abandon your prejudices and your self-image as a saint, then you can continue reading.

(to be continued)

Lucas defends economics

A follow up in this week's economist, by Nobel winner Robert Lucas, to the articles a couple of weeks ago about the state of economics (see earlier posting). Lucas makes some good points in defense of economics and macroeconomics in particular. He points out that the efficient markets hypothesis merely says that people make the most efficient possible use of the information available to them - this does not per se rule out bubbles (or other inefficiencies at the aggregate level) because no one knows when or if a bubble will burst. He also argues that the rapid and apparently successful response of policy in the US to the crisis was informed by recent macroeconomic research.

The state of economics

This week's Economist has some articles on the credit crunch and the science of economics. It is fairly critical of both macroeconomics and financial economics. My feeling is that it is a bit harsh to half-blame economics, particularly financial economics, for causing the crisis. There are a number of reflections on the Economist articles in the blogosphere by Stephanie Flanders here, Paul Krugman and Brad DeLong. Krugman is partly defensive, but DeLong isn't:

In my view, when you have Nobel Memorial Prize-caliber economists like Arizona State's Edward Prescott, Chicago's Robert Lucas and Eugene Fama, and Harvard's Robert Barro claiming that there are valid theoretical arguments proving that fiscal stimulus simply cannot work, not even in a deep depression--even though they cannot enunciate such theoretical arguments coherently--it is entirely fair for outsiders to conclude that academic economics as a profession is useless.