Introductory Comment

Our argument is very simple. It may not surprise anyone in this audience. But it is a big departure from the standard view in economics.

We claim that

The methodological arguments against explaining economic change by changes in preferences are no longer convincing.

We ultimately need to know the extent to which institutions and historical events shape preferences.

Ernst Fehr Department of Economics

Laboratory for Social and Neural Systems ResearchUniversity of Zurich

Karla HoffWorld Bank

Paris School of EconomicsNovember 25, 2011

Tastes, Castes, and Culture:The Influence of Society on

Preferences

Outline of presentation

I. The “stable preferences assumption“ Sociologists‘ view Economists‘ view

II. How sound is the economists‘ traditional view?

Anchoring and framing effects on preferences

III. Preference-based explanations may help explain outstanding puzzles

Persistent changes in preferences from social influences

Part I.Are preferences stable or are they shaped

by “society“?

A sociologist‘s view

“The assumption that society shapes individuals‘ preferences clearly concerns one of the core pillars of sociology but it is not easy to suggest any literature to you. It is almost too fundamental for that – like asking economists to suggest some tests on the importance of choice. Almost all sociologists take it as obvious that individuals‘ preferences are formed by society and that society, so to speak, exists within persons.“ Peter Hedstrom, Oxford, personal

communication

Are preferences stable or are they shaped by “society“?

A view from economics

De Gustibus non est disputandum (Stigler & Becker, 1977)

“... tastes neither change capriciously nor differ importantly between people. On this interpretation one does not argue about tastes for the same reason that one does not argue over the Rocky Mountains – both are there, will be there next year, too, and are the same to all men.“

Not just stable preferences, but also no heterogeneity

Stigler & Becker cont‘d

Assuming unstable and heterogeneous preferences leads to intellectual laziness

“We also claim that no significant behavior has been illuminated by assumptions of differences in tastes. Instead, they, along with assumptions of unstable tastes have been a convenient crutch to lean on when the analysis has bogged down. They give the appearance of considered judgment, yet really have only been ad hoc arguments that disguise analytical failures“

Not all economists subscribe to this extreme view but ...

Almost all economic research examines the changes in individual behavior and aggregate outcomes that follow from changes in constraints

Tax, cost, price and information changes Changes in property rights & the contractual

environment

Implicit assumption

Strong preference stability: changes in constraints (“the environment“) leave preferences unaffected

Weak preference stability: for the problem under consideration preferences are more stable than constraints

Remarks on the assumption of preference stability

Important to recognize It is NOT a fact that changes in the environment

leave preferences unaffected It is merely a useful assumption that took on

the nature of a social convention It is considered bad practice to invoke changes in

preferences as explanations “One can explain everything if one

invokes changes in preferences as an explanation“

“It is too easy to explain changes in behavior by changes in preferences“

...But recent progress in game theory creates a new problem

A clever contract theorist can say:

“Give me a real world contract and I will find an extensive form game that rationalizes this contract as an equilibrium of the game“

John Sutton

The elaboration of multi-stage games allowed a tremendous flexibility in modelling.

Sutton, continued

Paradoxically, it is the very success of these game theoretic models in providing a rich menu of candidate “explanations,“ which leaves them open to a quite fundamental line of criticism

This richness of possible formulations leads to an often embarrassingly wide range of outcomes supportable as equilibria within some “reasonable“ specification

In explaining everything, have we explained nothing? What do these models exclude?

Our View

The methodological arguments against invoking preference changes are not very convincing

The arguments rest on conventions, social norms and (unproven) beliefs about the empirical validity of the assumption that one can neglect changes in preferences for the problem at hand

Deep down, most of us believe that preferences are shaped by teaching, role models, the behaviors we observe around us and our social interactions with other people

Educating one‘s children is not just about skill formation – it‘s also about teaching the “right“ preferences

However

It is a huge empirical challenge to prove a causal impact of “society“ on preferences

This has kept second-best conventions in economics alive

but ultimately we want to know the extent to

which preferences are shaped by society

We next turn to psychological mechanisms that make preferences susceptible to social influences

Part IIFraming effects on visual perception

People often assume that what they see with their own eyes is a correct representation of reality

But in fact, our perception of objects is shaped by context.

Müller-Lyer illusion

Framing effects on preferences

Frames in economics are observables that:

Are irrelevant in the rational assessment of the alternatives,

But nonetheless affect behavior-- Triggering a particular way of thinking about

a choice Determining what details of a set of choices

are salient, or Evoking a self-concept, norm, or world view

Example from “Coherent Arbitrariness“

Ariely, Loewenstien, and Prelec (2003)

The study elicits willingness to pay for various goods

For each item, subjects are asked whether they are willing to pay more or less than a certain price

The price is based on the last two digits of their Social Security number:

After this anchoring question, the experiment elicits the willingness to pay

19$19

Average willingness-to-pay sorted by participants’ Social Security number

0

$10

$20

$30

$40

Trackball Keyboard Cote du Rhone

Hermitage Design book

Belgian chocolates

range of the last two digits of SS number 00-39

range of the last two digits of SS number 40-99

The power of arbitrary numbers as anchors is replicated even where the individual has just experienced the pleasure or pain of an object

So no rationalization in terms of information problems is possibleWhich suggestsTo the extent that social institutions prime individuals’ identities and act as anchoring & framing devices, they also shape preferences.

Example from “Fairness perceptions and reservation wages” Falk-Fehr-Zehnder

(2007)

This study elicits reservation wage before the introduction of a minimum wage and after abolishing the minimum wage

Minimum wages cause increases in reservation wages even after they have been abolished!

No rationalization in terms of different constraints possible

Example from “Making Up People” Hoff and Pandey (2006, 2011)

Boys from high castes and from the traditionally “untouchable” castes asked to solve mazes under incentives

Boys are randomly assigned to one of three groups that vary the salience of caste:

Caste identity is not made public in the maze-solving session

It is made public in a session of 3 high- and 3 low-caste boys

It is made public in a session of 6 high-caste boys (or 6 low-caste boys). Thus subjects find themselves segregated by caste status—an event that would be extremely unlikely to occur by pure chance

Segregation is a strong cue to the caste system

The caste system still more or less prevails in villages

The caste system mandates segregation of high from low castes

In 1 out of 4 primary schools in rural India, Dalit children are forced by their teachers or by convention to sit apart from non-Dalits

As many as 40% of schools practice untouchability while serving mid-day meals, making Dalit children sit in a separate row while eating.

--Shah et al.’s survey of 565 villages across 11 states of India in 2001-02

 

25

Cars for transporting the participants to form sessions of boys from different villages

Hardoi District, Uttar Pradesh

26

Set-up of experiment room

If caste is announced, that is done as soon as the participants are seated. Then the experimenter explains how to solve a maze and what a child will earn from maze-solving. The children solve mazes in two 15-min. rounds.

27

To the extent possible participants in a session are drawn from six different cars (villages)

Participants as they are about to be taken home

Average output of high-caste subjects

0

1

2

3

4

5

6

7

Round 1 Round 2

Identity not revealedIdentity revealed in a mixed groupIdentity revealed in a segregated group

Comments on results for high caste

In this experiment, individual output depends only on the individual’s preferences and ability

There is no plausible reason why the ability of the high-caste subjects should be impaired by placing them in sessions of only high-caste boys

In fact, the evidence on the next slide suggests that priming caste increases the high caste’s ability to perform. The effect for the low caste is the reverse. These two effects are consistent with “stereotype susceptibility” (Steele-Aronson 1995).

Probability of failing to learn how to solve a maze

0

0.02

0.04

0.06

0.08

0.1

0.12

High caste

Low caste

Identity not revealed

Identity revealed

Why do high-caste subjects expend less effort in the segregated

sessions?

Making caste highly salient may activate a mental frame in which a high-caste person has:

less need to achieve, so less need to work hard.

Why? We have learned from the society in which we live a variety of roles

Segregating by caste may act as a “frame switch”

Swidler (1986) & DiMaggio (1997)

More evidence of “multiple preference orderings” & “frame switches”

Priming Asian identity of Asian-Americans leads them to be:

more cooperative, less individualistic, & more patient

Priming a “family-oriented” identity triggers values related to family obligations

Priming an “occupation-oriented” identity triggers values related to obligations to one’s firm

LeBoeuf et al. 2010 , Benjamin et al. 2010

The frame primes the duck

The frame primes the rabbit

Part III Preference-based explanations may

help explain outstanding puzzles

The rest of this talk is more speculative

Hypothesis 1An individual’s position in an extreme social hierarchy affects:

his agency &/or

his in-group affiliation, & thus

his willingness to punish violations of a cooperation norm that hurt in-group members

“Caste and Punishment” (Hoff-Kshetramade-Fehr 2011)

We examined the impact of caste status on punishment while controlling for in-group/out-group, wealth, and education effects

Set-up

Groups of 3 members interact: player A, B, and C

Each lives in a different and distant village in north India

A and B play a trust game C is an uninvolved third party who can punish

B For every 2 rupee coin that C spends, B

loses 10 rupees

Trust game with third-party punishment

A

B

Send

s to

B

Send

s ba

ck

half

to A

Mon

ey tr

iples

C chooses punishment for defection

C chooses punishment for cooperation

Doesn’t send

Keeps all the

money

Result

High-caste men are more willing than low-caste men to punish norm violations that hurt a member of their “in-group” (subcaste)

So low caste members seem to care less for ”their“ in-group members

Can this be explained by differences in wealth?

Do richer individuals punish more?(land ownership)

5.05

4.12

2.35 2.24

0

1

2

3

4

5

6

Owns below median land Owns at least median land

Me

an

re

lati

ve

pu

nis

hm

en

t

Punisher is high caste

Punisher is low caste

N = 33 N = 62 N = 90 N = 20

Do richer individuals punish more?(house ownership)

4.47 4.37

2.66

1.89

0

1

2

3

4

5

6

Lives in a mud house Lives in a brick house or amixed mud and brick house

Me

an

re

lati

ve

pu

nis

hm

en

t

Punisher is high caste

Punisher is low caste

N = 34 N = 47 N = 89 N = 35

Across the two caste status groups, subjects face identical constraints in our game

The caste difference in punishing cannot be explained in terms of differences:

In payoffs in the game In education In wealth

The difference is interesting because Fehr et al. (1997) indicates that altruistic

sanctioning is a powerful means of enforcing contracts.

Vicious circle of caste?

If the lower willingness to punish contract violations is also associated with a lower propensity to punish free-riders in collective action

Then the low castes would be less able to discipline free-riders and thus to organize collective action, which could contribute to

Persistence of the caste system

Hypothesis 2

Culture shapes the demand for social insurance

Attitudes toward government redistribution vary across countries

Eugster et al. 2011

Survey question: Should government reduce income differences?

“German” and “Latin” language regions in Switzerland

Votes in Swiss Referenda on Social Security

Eugster et al. 2011

German-speaking |Latin language speaking German-speaking |Latin language speaking German-speaking |Latin language speaking

Year the vote was held is in parentheses. Communities are collected in bins by their distance to the language border, in 5km intervals. Dots show the per cent Yes-votes of all validly cast votes, per 5 km bin of communities. Negative distances correspond to majority German-speaking communities; positive distances correspond to major French-, Italian, or Romansh-speaking communities. The vertical line indicates the language border. Also shown is a LOWESS fit to the bin-level shares, a locally weighted regression using 80% of the data to smooth each point. 

Establishing causality

In a within-canton regression discontinuity design,

Using data from all referenda on social insurance from 1980-2009 in Switzerland,

& controlling for a wide set of factors,

The German group still has a much lower demand than the “Latin“ group for social insurance

Cultural differences, not differences in constraints, cause the differences

Eugster et al. 2011

Conclusion

McCloskey (1998) imagines a heckler defending the standard economic paradigm with fixed preferences:

“Give me a break: I’m not in the business of explaining all behaviour. I propose merely to explain some portion, and in many cases a large portion.”

This would be a plausible objection if changes in constraints (“the environment“) left preferences unaffected, or if, for the problem under consideration, preferences were more stable than constraints

But evidence suggests that changes in constraints can change preferences

Change in minimum wage

Change in reservation wage

Entitlement effect Falk, Fehr,Zehnder 2006

Change in preferences

Expansion of thewelfare state

The work ethic of the next generation is reduced

Rational adaptationof parentingstrategies

Lindbeck-Nyberg 2006

Change in a constraint

Caste

Cues to the caste order lower the willingness of the high caste to expend effort (a framing effect)

Possibly a decline in the need to achieve

Hoff-Pandey 2006, 2011

Why?

Examples

One’s position at the top or bottom of the caste order shapes the willingness to punish norm violations

Effect on agency &/or in-group affiliation

Hoff, Kshetramade,Fehr 2011

Take-away message Institutions have broader implications than economists

have generally recognized

Institutions(“rules of the

game”)

Constraints & beliefs

&

Preferences by activating a particular

self-concept or world-view (one of many that are held)

shaping a new self-concept or world-view

creating systems of meaning

Influence

Influence

Investigating the causal influences on preferences remains a huge challenge,

But is likely to shed light on changes central to economic change

One further note on framing effects on visual perception

According to Segall et al. (1966),

• The Müller-Lyer illusion is completely absent in some undeveloped societies

• In the West, the illusion is strongest. Why?

Exposure to ‘carpentered corners’ of modern environments mayhave led to certain visual habits that perpetuate this illusion.

“If even a process as apparently basic as visual perception canshow substantial variation across populations, …what kind of psychological processes can we be sure will not vary?”

Henrich et al. (2010)

Thank you for your attention

Post-talk discussion: “Elicitation effects” on preferences

An additional effect of institutions on preferences/behavior is through default options, e.g. in retirement savings plans

A field experiment in a Swiss Red Cross blood drive provides new evidence for the view that:

In some domains, many individuals do not have preferences. Preferences are constructed when they are elicited, & constructing them can

be costly.

Findings is that individuals who have not formed a preference tend to choose the default option in a menu of options, since this

permits them to avoid making the (costly) active decision

& so a change in the default option leads to swings in behavior

Stutzer et al. (2011)