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From Homo Economicus to Homo Sapiens

Homo Economicus Will Become More Emotional

The predictions I have made so far, though fraught with the biases I identified early on, are still somewhat conservative in the sense that lots of good work is already going on in the directions I suggest that the field will be headed. So, it seems right to offer the slightly more courageous prediction that Homo Economicus will become more emotional, by which I mean that economists will devote more attention to the study of emotions. To get a sense of what the study of emotions entails, I refer readers to Jon Elster’s (1998) recent article.

Although Elster does not define emotions explicitly, he does offer a list of states that he says are unambiguously emotions, of which a subset are: anger, hatred, guilt, shame, pride, liking, regret, joy, grief, envy, malice, indignation, jealousy, contempt, disgust, fear, and, oh yes, love. Elster distinguishes this list from other “visceral factors” (a more general term, see Loewenstein, 1996) such as pain, hunger, and drowsiness, in that they are triggered by beliefs. Many of these emotions are often accompanied by states of physiological arousal, like fear. How can emotions be incorporated into economic analyses?

The ultimatum game offers one simple example. In the ultimatum game one player, the Proposer, is given a sum of money, say $10, and makes an offer of some portion of the money, x, to the other player, the Responder. The Responder can either accept the offer, in which case the Responder gets x and the Proposer gets $10-x, or reject the offer in which case both players get nothing. Experimental results reveal that very low offers (less than 20 percent of the pie) are often rejected. Speaking very generally, one can say that Responders react emotionally to very low offers. We might get more specific and say they react indignantly.

What is certain is that Responders do not act to maximize their own payoffs, since they turn down offers in which they receive a small share of the pie and take zero instead. Matthew Rabin’s (1993) model of fairness, which is an attempt to explain such behavior (specifically, the resisting of unfair offers) is based partly on emotions. Rejecting a positive offer in the ultimatum game is spiteful; it hurts both parties. Unfortunately, such behavior is more common than economic theorizing would lead us to expect. I need only mention the word “divorce” to bring to mind all-too-many familiar examples. Spite is not confined to ex-spouses. The Coase theorem prediction that the allocation of resources is independent of the assignment of property rights depends on the willingness of the parties to a lawsuit to recontract. However, recontracting requires interaction that can be made difficult by spite.

In a recent study of this issue, Ward Farnsworth (1999) interviewed attorneys from over 20 nuisance cases in which injunctive relief was sought and either granted or denied after full litigation before a judge. In not a single case did the parties even attempt to contract around the court order.

Prof. Richard H. Thaler

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