Session 3 (2): Warm-glow Altruism, Prosocial Sanctioning & The “Dysmal” Science of Economics

And the conference blog keeps going! Now with the second part of Saturday morning, 10th of April at the Compassion & Altruism in Economic Systems conference in Zurich:

The second speaker was William Harbaugh,PhD, focusing on decision making towards donations and its neural connections in the brain:

Giving his own short overview of economic theory, he stated that participants in the market can often rely on self-interest and not compassion, regulated by the rules that people can sell their goods and have to pay if they harm others, this mechanism works through prices that provide incentives and information. (Although I really wondered what he meant by “harm others”, I assume he was referring to legal protection of exchanges on the market)

Ignoring all the other imperfections of markets he focused on externalities, the circumstance that some exchanges benefit people who do not pay, such as with public goods (a pity he forgot to mention the scenario of externalities that cause harm to people who are not involved in the exchange either).

Moving on to the issue of charity, he gave a series of statistics such as some numbers on how much citizens of various countries give to charity every year as part of their income:

US: 68% give something, 2.2% of their income

UK: 1% of their income ; France 0.3%; Italy 0.1%

These number however indicate by no means that one country is more altruistic than the other, as amongst other things you have to take into account the low level of public welfare in the United States for example.

Number that I myself can confirm from my times as fundraiser on shopping streets across Germany showed that low-income groups give the most to charity (below 10.000 dollar income: 5%; below 45.000: 1%; above 100.000: 3%).

Next he referred to an experiment:

- participants were given 100$; they could keep them and leave or give some money to FoodBank (charity that distributes food to the homeless)

- conditions were such that no-one would know how much they kept or spent, but they’d give the data anonymously to a lab assistant on a USB stick later

- then there were different variations in the amount of the money given that would actually reach the FoodBank [FB], from “given 15-> 45 to FB” to “given 45 -> only 15 to FB”.

-> the result was what Harbaugh called the “altruistic supply function”, as of the 80% of  participants who gave some money the pattern was such that they gave less money if it was expensive to give to the FoodBank and more if it was cheap. While this is not selfish behavior, it is still rational.

Yet the question arises: Why do they give anything at all? To check on this, Harbaugh modified the experiment again, this time simply “taxing” the participant 15dollars for the FoodBank. As there is no choice involved, it of course does not allow much in terms of a conventional analysis. Yet Harbaugh overcame this problem by connecting the participants to an iMRI scan to see how the brain reacts to the different conditions.

What he found firstly matched with Tania Singers findings that the areas for self-rewards was active as well when the reward went to others (“warm-glow”), and secondly that these areas were even active (if to a lesser degree) when they did not even make the decision themselves (tax-scenario and “pure altruism”).

The problem in the real world is however that if we act in a large economy, it is easy to help someone if you’re the only one around, but if there’s a thousand other people people around as well, we tend to hope that someone else helps. Harbaugh therefore advocated warm-glow altruism, as although it seems more egoistic it motivates other too to help.

The last speaker of the morning session was once more Ernst Fehr, PhD from the University of Zurich:

Stressing once more how economist’s perspective have changed over the past 20 years by research into human behavior and neuroscience and the previous evidence that prosocial behavior activates the same reward-centres, he came back to the issue of public goods.

Public goods’ special relevance is that they can be consumed by anyone regardless of their contribution to financing of it.

-> While this is partly an altruistic act by those financing it, it also gives incentives for free-rider behavior.

He went on to broaden the concept of public goods to democratic liberties (considering the historical cost of people struggling, dying for them so we can benefit today) as well as the avoidance of global warming.

The problem he saw is that of an undersupply of public goods if selfishness prevails.To see how these mechanisms of altruistic behavior within groups toward a common “project” work he went on to explain an experiment:

- there is groups of 10 people, they don’t know each other and can’t actively communicate with each other but see what the others do;

- each is given $10 that they can either keep or contribute to the “project”; for each dollar given to the project, everyone in the group gets back 20 cents, practically meaning that if everybody would give all their money, the group would double its income!

- this is repeated over 10 periods

-> the results: while in the beginning 40-60% give some money, but over time this behavior goes down (results validated across 15 countries): a pretty meager outcome when just having established how capable we are of altruism!

Why does this happen? Fehr’s answer: while about 50% contribute more money if they believe others will do so too (“conditional cooperators”), there are also a selfish 30% who do not contribute anything, regardless of the others actions. So what happens is that the conditional cooperators see free-riders and don’t want to support them, which leads to a downward spiral. The less people cooperate the less you are willing too, it’s the same with corruption, if you live in a corrupt environment, you are more prone to becoming so yourself. So how can we prevent this!?

We have to contribute to the expectations that we and others cooperate. Yet this seems not enough, Fehr argues, we need institutions and to constrain and sanction free-riders.

In terms of the experiment he added the possibility of “altruistic punishment” from period 11. That means you can spend 1 dollar to take 3 away from someone else, a seeming lose-lose situation as there are costs for both, so why would we do this?

Yet we see what happens when this possibility is introduced:

People DO punish altruistically and the same group with the exact same people suddenly begins to cooperate. Yet, punishment is not automatically making the group better off! We have seen that in some societies that those who are punished before for selfish behavior in one period, strike back in the next at all others, a somewhat blind revenge and therefore “anti-social punishment”. Evidence for such behavior has been collected for example in Greece, while the US, UK and Nordic countries show high levels of prosocial sanctioning.

Fehr attributed these differences mostly to civic norms , which in combination with altruistic sanctioning serve as the foundation of overcoming the common goods problem in a society. Altruistic cooperation is not enough he concludes, as even a minority of free-riders might drag down the system. It is the same with financial markets: how else to prevent the detrimental effects of markets and transform the “dysmal” science of economics?

Altogether another interesting session, yet for my taste still a bit too theoretical after I had hoped to really see how all these insights can be translated into more practical solutions. But in the aftermath I believe that this hope was maybe still a little too optimistic, despite the circumstance that the conference as whole in its interdisciplinary was probably well ahead of the curve in terms of transforming the economic systems of this world. Yet, the session to come was in my opinion the most interesting and inspiring.  Micro-finance & solar-grandma-engineers coming up, stay tuned!