Economics of Altruism

Lately I have been thinking about altruism.What are the driving forces that make a hard-working individual share some of his money and belongings? Why do I write this article even though my country is not in Medium’s partnership programme?

Anyway,economists have always assumed and based their whole neoclassical theory baring in mind the notion of ‘’Homo Economicus’’.A cold-blooded rational creature who always acts accordingly to its own self-interest.

Thus altruism does not exist in the sphere of classical and neoclassical economics and as Adam Smith accurately quoted ‘’It is not from the benevolence of the butcher,the brewer,or the baker that we expect our dinner but from their regard to their own interest’’.

I know for sure that a lot of you do not agree and may even find disturbing the statements above but trust me the whole science of Economics was based just on this phrase by Adam Smith.The peculiar thing about economics is that actually there is little room for experimentation but even if an experiment could be conducted how could we actually measure altruism?

Let me introduce you John F. Nash-I know you have seen the movie-but I will introduce him anyway.John Nash made huge contributions to differential geometry and equations but his work on game theory and the renowned ‘’Nash Equilibrium’’ changed economics forever.Prisoner’s dilemma is a very simple experiment that illustrates strategic cooperation through Nash equilibrium and gave birth to a whole new field,that of behavioural economics.

You see, behavioural economists were until recently the black sheep of the economics community. The reason for this is that they were continually putting into question the foundations of classical economics and they did that through, god forbid,experiments.The results were groundbreaking.

A year ago I was part of a research team in University of Amsterdam.Our duty was to run two different experiments so that to check:

1.The rationality of individuals

2. The altruism of individuals

We would do that by running an ‘’Ultimatum’’ and a ‘’Dictator’’ game.Before I present you the results let me describe the games for you.

Ultimatum is a game in which two players who do not know each other have an onetime chance to split a sum of money.Player 1(Paul) is given 10$ and must share from 0–10$ with Player 2(Maria).If Maria accepts the offer of Paul they split the money accordingly,if Maria denies the offer though both get nothing.Before you continue reading I want you to think what you would do in Paul’s or Maria’s position.What offer would you make?What offer would you accept?

For an economist,the dominant strategy in this situation is obvious.Paul would offer the minimum amount of money(0.01$) and of course Maria would accept it because 0.01$ are more valuable that no dollars at all.Right?Wrong.

We conducted this experiment among a group of 84 students. 70% of Marias rejected an offer that was equal or less that of 2$ but what is even more surprising is that on average the initial offer was about 3.5$.That means all Pauls out there were pretty generous as they were offering more that ⅓ of their money.

The results were puzzling,even though the participants of the experiment did not know each other.Maybe social pressure would make them raise their offers.When you walk past a homeless man do you ever feel yourself a little ‘’heavier’’ like it is your duty to spare some change to this individual?I do and probably you do too.

But we were sure that with the Dictator game the true colours of our participants would show up.Homo economicus would eventually rise from its ashes.

Dictator game is more straightforward.Paul is given again 10$ and is told to share 0–10$ with Maria.The trigger point of this experiment is that Maria is not given a chance to accept or reject Paul’s offer.Paul may offer 0$ to Maria and game ends there,Maria can do nothing to punish Paul contrary to the Ultimatum game.

So what is the dominant strategy for Paul in this case?Of course he gets to keep all 10$ and Maria,well.. gets nothing.Right?Embrace yourselves.

The average offer of all Pauls in our experiment was 1.7$.Despite the fact that selfishness could not be punished or even known,they chose to offer almost 20% of their money.

What we can conclude is that maybe we are hard-wired to be altruistic or even be so prone to our social surroundings and pressure that at times we lose our sense of rationality and self-interest.