Introduction to Behavioral

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I N T R O D U C T I O N

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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.

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