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Strategic
interaction
As already stated, it is important to consider strategic interaction in order to
understand money illusion at the aggregate level. If some economic agents act
irrationally, for example by raising prices without any infl ationary cause, then it
may be optimal for other agents who are rational to react in the same way and
‘follow the crowd’. This effect is of vital importance in stock markets, as noted
by many researchers in behavioral fi nance, particularly in relation to the fi nancial
crisis that began in 2007. Strategic interaction also has to take into account the
possible existence of ‘super-rationality’, as discussed by Fehr and Tyran (2003).
These aspects are all examined in Chapter 9.
Case 1.3 Altruism
The joy of giving
Donating to charity rewards the brain
Providing for relatives comes more naturally than reaching out to strangers.
Nevertheless, it may be worth being kind to people outside the family as the favour
might be reciprocated in future. But when it comes to anonymous benevolence, directed
to causes that, unlike people, can give nothing in return, what could motivate a donor?
The answer, according to neuroscience, is that it feels good.
Researchers at the National Institute of Neurological Disorders and Stroke in Bethesda,
Maryland, wanted to fi nd the neural basis for unselfi sh acts. They decided to peek into
the brains of 19 volunteers who were choosing whether to give money to charity, or keep
it for themselves. To do so, they used a standard technique called functional magnetic
resonance imaging, which can map the activity of the various parts of the brain. The
results were reported in this week’s Proceedings of the National Academy of Sciences.
The subjects of the study were each given $128 and told that they could donate
anonymously to any of a range of potentially controversial charities. These embraced
a wide range of causes, including support for abortion, euthanasia and sex equality,
and opposition to the death penalty, nuclear power and war. The experiment was set
up so that the volunteers could choose to accept or reject choices such as: to give
away money that cost them nothing; to give money that was subtracted from their
pots; to oppose donation but not be penalised for it; or to oppose donation and have
money taken from them. The instances where money was to be taken away were defi ned
as “costly”. Such occasions set up a confl ict between each volunteer’s motivation to
reward themselves by keeping the money and the desire to donate to or oppose a
cause they felt strongly about.
Faced with such dilemmas in the minds of their subjects, the researchers were able
to examine what went on inside each person’s head as they made decisions based
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on moral beliefs. They found that the part of the brain that was active when a person
donated happened to be the brain’s reward centre — the mesolimbic pathway, to
give it its proper name — responsible for doling out the dopamine-mediated euphoria
associated with sex, money, food and drugs. Thus the warm glow that accompanies
charitable giving has a physiological basis.
But it seems there is more to altruism. Donating also engaged the part of the brain that
plays a role in the bonding behaviour between mother and child, and in romantic love.
This involves oxytocin, a hormone that increases trust and co-operation. When subjects
opposed a cause, the part of the brain right next to it was active. This area is thought
to be responsible for decisions involving punishment. And a third part of the brain,
an area called the anterior prefrontal cortex — which lies just behind the forehead,
evolved relatively recently and is thought to be unique to humans — was involved in
the complex, costly decisions when self-interest and moral beliefs were in confl ict.
Giving may make all sorts of animals feel good, but grappling with this particular sort of
dilemma would appear to rely on a uniquely human part of the brain.
Source: The Economist, October 12, 2006
Issues
1 The nature of economic behavior
Economic behavior is not just about monetary transactions. ‘Altruistic’ acts and
spiteful acts also are relevant. We need to understand the basis of such acts in order
to explain and predict human behavior in a wide variety of different situations, such
as donating to charity, labor strikes, lending the neighbor one’s car and remonstrating
with people who litter the streets.
2 Fairness and social preferences
This aspect is closely related to the fi rst one. We need to understand the importance
of inequality aversion, the perceived kindness of others, reciprocity and the intentions
of others if we are to predict behavior in social situations when strategic interaction is
important. This area is covered in Chapter 10.
3 The role of neuroscience
The study described above demonstrates clearly how useful neuroscience can be in
explaining behavior that cannot easily be explained by the standard economic model.
In particular it shows that ‘self-interest’ needs to be understood in a broad context.
Charitable acts are thus self-interested acts because they make us feel good, contrary
to the common narrow understanding of self-interested acts. It is important to realize
that only by performing neuroscientifi c studies involving techniques like functional
magnetic resonance imaging (fMRI) can we establish fi rm evidence regarding the
real motivations behind ‘altruistic’ and spiteful acts, since people often deny these
motivations, and even ‘honest’ introspection may not reveal them. This aspect is
discussed in more detail in the next chapter and also in the concluding chapter.