social preferences

Abstract

For the longest time economists reacted allergically to preference formulations that allowed for anything but material self-interest (cf. Binmore, Shaked and Sutton, 1985). The reaction was well founded: by adding elements to the agent’s utility function, potentially one allows economic theory to explain everything and, therefore, nothing. Any behaviour can be explained by assuming it is preferred. However, this strong position has sometimes made economics seem out of touch with the world economists try to explain. Even economists care about the outcomes achieved by others, in addition to their own outcomes. Moreover, they also care about how those outcomes are achieved. Only in 1982, however, was the weakness of taking material self-interest for granted demonstrated by Werner Güth and his co-authors, who showed that economic theory failed in the simplest of decision settings (Güth, Schmittberger and Schwarze, 1982), the ultimatum game. In this game a first mover offers a share of a monetary ‘pie’ to a second mover who either accepts the proposal, in which case it is divided as proposed, or rejects the proposal, in which case both players earn nothing. Since then this game has become the workhorse of experimenters intent on exploring carefully the extent to which people behave in ways that are contrary to their material self-interest.