Informational Foundations of Economic Behavior

University Of Wisconsin-Madison, Madison WI

Investigators

Abstract

This project seeks explanations for individual and collective behavior that is not readily explained by standard economic theory. Standard economic theory assumes that people are relentlessly self interested and rational, in the sense that they are concerned only with their own consumption and invariably make choices to optimally configure this consumption. However, growing evidence makes a persuasive case that this view is wrong on two counts. People are routinely concerned with more than their narrowly defined self-interest. For example, Americans contribute billions of dollars to charity each year. People also regularly rely on behavioral rules of thumb rather than subjecting every choice to a detailed analysis. Standard economic theory suffices for many purposes, but is ill equipped to deal with many other important questions. Framing a policy response to the recent growth in economic inequality requires an examination of how preferences and motivation extend beyond considerations of pure self-interest. Understanding the performance of our economy, including the recent stock market bubble, requires knowledge of how rational decisions are sometimes displaced by potentially inappropriate behavioral rules. This research combines techniques from evolutionary psychology with techniques from economics to examine how people make decisions. The point of departure is that biological and cultural evolution has influence the way people make use of information and reach decisions, just as it has influenced more obviously physical characteristics. The project begins with theoretical research examining how evolution is likely to have shaped our decision-making capabilities in response to environmental challenges and resource constraints. The work will then proceed to applied and theoretical applications of these models. The result will be insight into why one's evaluation of one's own consumption often depends upon one's past consumption or the consumption of others; why prices and markets are used to allocate some goods but not others; how trust and reputations for cooperation can be built and can allow mutually beneficial interactions that would otherwise be impossible; and how we should make welfare comparisons and evaluations in a society characterized by such behavior. The goal of the research is a better understanding of economic and social behavior. The research will provide better tools for analyzing and evaluating economic interactions and for designing economic policies. The work on trust and cooperation will provide the foundations for a theory of institutional design that will allow us to structure the economy so as to rely more heavily on inherent incentives as the basis for mutually beneficial behavior, while relying less on explicit legal and government intervention. The work on interpersonal consumption links will provide the foundations for policies to deal with income inequality. Ultimately, the result will be a reevaluation of the rigidly individualistic view that characterizes much of current economics.