Behavioural Economics I

This article is part 1 in a four-part series on behavioural economics. Next article: The endowment effect.

In the classical realm of economic theory, consumers are said to be utility maximisers. These economic agents will always prefer a situation where they can increase their utility (a measure of well-being or happiness) and will achieve this by any means necessary. Given the opportunity, economic agents will take advantage of others and abuse their power, and although this can be true in many aspects of life, in this article we will explore why people are intrinsically honest, defying classical economic theory, giving a brief insight into how we can explain economic behaviour through the power of behavioural economics.

‘Lost Wallets’

In an effort to measure civic honesty around the globe, Cohn et al. devised a comprehensive study to measure whether people's own material incentives were able to overpower their innate sense of honesty and altruism all together. By distributing over 17,000 ‘lost wallets’ in over 40 countries, Cohn et al. were able to surprisingly prove that people are more honest than we take each other to be.

The experiment was simple but comprehensive. A group of people in many different countries would hand in a ‘lost’ wallet to a desk in public areas, for example at a hotel desk or at a library. The wallet contained three business cards - a way to contact the owner, a grocery list, and a key to make it seem more legitimate. Another important detail was that the wallets were transparent, so the receiver did not have to open the wallet to see its contents.

The reason why this is important is because some wallets contained money in them, and we wanted to see if this impacted the decision to hand the wallets in or not.

In classic economic theory, we would expect that wallets with money in them would not be returned, but instead the receiver would take the money freely. They may be more inclined to return the wallet without money as there would be little benefit in keeping them. However, in real life, this could not be any further from the truth. In 38/40 of the countries, lost wallets were handed back more often when they contained money. Civic honesty was found to be statistically higher when the wallets were not empty.

So why are people more likely to hand back their wallets when they contain money? Surely that’s counterintuitive? Well, in fact, one strong explanation is that people value honesty due to their own self-image. If we take the money, our own view of our perfect self becomes threatened, so that the psychological effect of taking the money is greater than the money’s value itself.

Similarly, when the wallet contains only business cards, the receiver cannot see any intrinsic value in the wallet. The psychological value of handing the wallet back is now far less worth the effort of making contact with the owner. We disregard the wallet before we even know its contents.

Another interesting fact is that when there is a big money condition (7x what was used initially), we find that people are even more likely to report the missing wallet. One explanation may be that with a greater stake, there is also a greater psychological reward for handing the wallet back. When doing an act of kindness as simple as this, people often feel good about themselves, boosting their own ego, and this could be perceived to be greater than the value of their wallet.

If the combination of threatened self-image with the positive psychological value of returning the item is much greater than the monetary value of the ‘lost wallet’, then people are likely to return the wallet. In fact, the study showed that over 70% of the wallets were returned when it contained a substantial sum of money.

‘Dice in a Cup’

The second study that I wish to use to describe the effect honesty has on society, is one that involves an extremely simple setup. There is a benefit to having simple experiments in a lab setting. When people volunteer to participate in a lab-controlled experiment, they realise they are being watched (unlike with the previous experiment, which was performed on unsuspecting subjects). This often means that people put in fake answers—the answers they think we wish to hear—which aren’t useful to us. The way we get around this is by putting incentives in place and encouraging people to act the way they would in real life and by ensuring that the experiment is simple, there is no chance that a subject could misinterpret the rules of the experiment.

The die-in-the cup experiment run by Gachter and Schulz did just that.

Subjects were told to enter a room, and in the middle of the room sat a table with a die placed on top. The subjects were instructed before they entered the room to roll the die twice and then report the first roll of the die only. The number they reported then corresponded to a payout of the following: 1 = £1, 2 = £2... 5 = £5, and 6 = £0. (The pay-out for different countries were in their corresponding currency of equivalent value.)

The aim of this experiment is to examine the amount of honesty in a society, and in this paper, they compared this with the presence of rule violations across different societies and looked for a relationship. They discovered that the inhabitants of wealthier countries are more honest on average.

In classical economics, if everyone was ‘rational’, they would lie to get the maximum payout every time. This would give an average payout of £5. On the other hand, if everyone was completely honest, the average payout would be £2.50. In the experiment, the mean payout across all countries was around £3 (around £2.90 for the richer nations and up to as high as £4 for the poorer nations).

What this tells us is that people are dishonest, but not fully dishonest. One possible explanation is that people would ‘justify dishonesty’. By choosing the higher of the two rolls, people feel less bad about lying completely and bend the rules in their favour.

Another explanation is that people take the second-best outcome. In the fear of people being suspicious of them, subjects may decide to say 3 or 4 instead of 5 if, for example, they rolled a 1.

But why don’t people lie and say they get a 5 every time? One theory is that people’s desires conflict with their perception of an honest self-image. Like with the lost wallets experiment, people feel guilty by lying completely, but by changing the rules slightly or not taking the highest payout, the benefit of lying is greater than any negative self-perception as in their eyes, they are not lying completely. People are only as dishonest as they can be whilst maintaining a ‘honest’ self-image.

So, as we have shown, the foundation of economics can indeed fall short. The basis that people are utility maximisers is not necessarily true in all circumstances, such as when maximising utility violates self-perception. However, this is not to say that we have disproved all of economics. Economics provides an insight into how people and systems in society interact in an ideal setting, which is still beneficial for understanding what a policy is needed to achieve, but behavioural economics can be used to develop the policy further so that its implementation is more seamless.

To learn even more about the developments in this ongoing discipline, be sure to follow Scientia News on social media and don’t forget to look out for Part 2 in this new 4-part series discussing the realm of behavioural economics!

Written by George Chant

REFERENCES

Alain Cohn et al., Civic honesty around the globe. Science 365,70-73(2019) 

Gächter, S., Schulz, J. Intrinsic honesty and the prevalence of rule violations across societies. Nature 531, 496–499 (2016)