When Does "Economic Man" Dominate Social Behavior?

Article by Colin F. Camerer1 and Ernst Fehr, Science, 6 January 2006: Vol. 311. no. 5757, pp. 47 - 52 (Subscription required.)

Abstract: 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.

This article is a tough read, but interesting. I have wondered for a long time why communities act in ways that appear more rational than one would expect when considering the decision making of individuals in the community. (Why do farming communities in developing countries often make choices on the crops to grow and the way to grow them that seem to be economically very rational, when the individual farmers have limited educations and don't seem to go about decision making based on economic calculations?) The article suggests some theory that would partially account for such behavior.

The article also might help understand how "trust" develops in communities. In many developing nations, corruption is rampant. In developed nations, markets work in part because people comply with obligations. The rule of law seems to explain only part of the difference. This analysis seems to suggest that small changes in the numbers of altruistic people who inforce compliance with obligations, and small differences in the costs of non-compliance can result in large changes in the stable operations of groups.