Introductory Comment

1. 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.

2. Tastes, Castes, and Culture:The Influence of Society on Preferences Ernst Fehr Department of Economics Laboratory for Social and Neural Systems Research University of Zurich Karla Hoff World Bank Paris School of Economics November 25, 2011

3. 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

4. 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

5. 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

6. 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“

7. 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

8. 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“

9. ...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“

10. John Sutton • The elaboration of multi-stage games allowed a tremendous flexibility in modelling.

11. 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? Sutton, continued

12. 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

13. 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

14. 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.

16. Müller-Lyer illusion

18. 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

19. 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

20. Average willingness-to-pay sorted by participants’ Social Security number range of the last two digits $40 of SS number 00-39 range of the last two digits of SS number 40-99 $30 $20 $10 0 Trackball Keyboard Cote du Hermitage Design book Belgian Rhone chocolates

21. 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 possible Which suggests To the extent that social institutions prime individuals’ identities and act as anchoring & framing devices, they also shape preferences.

22. 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

23. 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

24. 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

28. Average output of high-caste subjects Identity not revealed Identity revealed in a mixed group Identity revealed in a segregated group 7 6 5 4 3 2 1 0 Round 1 Round 2

29. 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).

30. Probability of failing to learn how to solve a maze 0.12 0.1 Identity not revealed 0.08 0.06 Identity revealed 0.04 0.02 0 High caste Low caste

31. 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)

32. 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

33. The frame primes the duck

34. The frame primes the rabbit

35. Part III Preference-based explanations may help explain outstanding puzzles • The rest of this talk is more speculative

36. Hypothesis 1 • An 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

37. “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

38. 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

39. Trust game with third-party punishment C chooses punishment for cooperation Sends back half to A B Keeps all the money Sends to B C chooses punishment for defection Money triples A Doesn’t send

40. 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?

41. Do richer individuals punish more?(land ownership)

42. Do richer individuals punish more?(house ownership)

43. 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.

44. 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

45. Hypothesis 2 Culture shapes the demand for social insurance

46. Attitudes toward government redistribution vary across countries Survey question: Should government reduce income differences? Eugster et al. 2011

47. “German” and “Latin” language regions in Switzerland

48. Votes in Swiss Referenda on Social Security 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. Eugster et al. 2011

49. 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

50. 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