The role of moral sentiment in economic decision making Tadeusz Tyszka Centre for Economic Psychology and Decision Making Kozminski University

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he drives nothing from it except the pleasure of seeing it. Smith, A. (1759/2006):The Theory of Moral Sentiments.

Some economic decisions are associated not only with financial outcomes (gains/losses) but also with moral outcomes (negative/positive)

Haidt and Joseph (2004) - five psychological systems harm/care, fairness/reciprocity, ingroup/loyalty, authority/respect, purity/sanctity.

In our research we focused on three of these systems: (1) harm, (2) fairness, (3) trust

harm How do people resolve conflicts between moral sentiments (guilt, disgust, contempt, etc.) and economic self-interest?

Recently, controllers advised an owner of a factory to introduce safety changes because the present technical state can be dangerous for workers. However, the owner has some financial problems. He considers two options: (1) to introduce the changes immediately or (2) to postpone the introduction of changes.

two questions concerning moral judgments. Q1. What is the role of moral emotions in intuitive moral judgments? –Are such judgments the products of the affective or of the rational faculties of thought?

Haidt (2001): people are often unable to articulate a rational basis for strongly held moral convictions

neuroimaging and neuropsychological studies: making moral judgments is accompanied by increased activity of emotional structures.

behavioral studies: using affective manipulations (e.g. introducing disgust) may modify moral judgments

Q2. How do people arrive at moral judgments? Are they consequentialists or deontologists

trolley problem an individual sees an out-of-control trolley approaching five people who are walking along the track. The main track has a side track on which a single person is working. The individual must decide whether to divert the trolley to the side track, killing one person but saving five.

Consequentialists What is morally right or wrong depends upon (expected) consequences of the act.

Deontologists Consequences do not matter, some acts are simply intrinsically wrong, and can not be justified by the goodness of their consequences.

Are people deontologists or consequentialists ? Research shows a strong relationship between emotions and moral judgments.

footbridge problem Situation is quite similar to trolley case, except that the only way to save the five people is to push a large stranger off the footbridge in front of the oncoming train, witch will stop but will kill the stranger. The individual must decide whether to push the stranger, killing one person but saving five.

conclusions There is a close relationship between emotions and moral judgments. In situations where an act does not elicit strong negative emotions respondent behave as utilitarian, i.e. he/she compares consequences of alternatives and chooses this one which maximizes utility. On the other hand, when an act elicits a strong negative emotions an automatic emotional response is evoked and the individual behave as deontologist.

fairness Preferences concerning the principles of distributive justice both declared in (1) abstract settings and (2) inferred from actual choices with financial consequences.

In moral context we often see discrepancy between what one declares and what one does.

The principles of distributive justice: 1. Maximization of the minimal income in the population (Rawls) 2. Maximization of the average income in the population (Harsanyi) 3. Minimization of the range of distribution (egalitarian position).

Preferences towards principles of justice distribution Idistribution IIdistribution III Minimum income PLN Average income PLN Income range PLN distribution Idistribution IIdistribution III The principle of : 1.Maximizing the minimal income 2.Maximizing the average income 3.Minimizing the income range

3 task groups: 1. pure ranking group: direct ranking (after the justice consideration) from the most just to the least just 2.pure choice group: choice of a distribution which is wanted to be executed - four sets (financial consequences), 3. choice with justice consideration group: (after consideration of the three principles of justice), choice of a principle which is the most just - four sets (financial consequences). Preferences towards principles of justice

RESULTS 1. Direct vs. implied by choice rankings of the principles of justice Type of tasks

RESULTS 2. Preferences with and without justice considerations Type of tasks no difference in direct rankings in two groups: pure choice group and pure ranking group

CONCLUSIONS Preferences for the principles of justice differ depending on task: in direct ranking (merely expressing an opinion) the highest average rank received principle of Minimizing the Income Range, while this principle was the least popular in choice situations (with financial consequences). Justice consideration can influence preference for principles of justice in choice situations with financial consequences.

trust humans value trusting and cooperating with members of one’s in-group. a betrayal of trust produces a great deal of outrage.

declared vs. actual trust asking people in a survey „whether most people can be trusted?” do people behave as if they trusted others?

When you ask people in a survey „whether most people can be trusted” a high percentage of respondents answers “no” Thus, we can conclude that people distrust others

Trust game You receive from the experimenter $ 10 and are asked whether you keep it, or give it to an anonymous person; If you give money to the anonymous person, this sum is tripled – he/she receives 3 x your money; Then, the anonymous person decides about the amount of money (from his tripled amount) to be returned to you.

Findings by Fetchenhauer and Dunning (2008): found that that 64% of subjects send $10 to an anonymous individual. Thus, contrary to what people say when asked whether “people can be trusted”, in a trust game [being a prototype of an economic interaction] they behave as if they trusted others

Subjects were also asked to estimate the percentage of participants of the game who would keep all the money for themselves vs. giving half of this to the sender. Moreover, half of the participants were assigned to a group of receivers and they made decisions to split money equally and to give back half of them to the sender or keep all the money for himself. Here are the results: predicted trustworthiness: 45% actual trustworthiness: 79%

Compare: actual rate of trust: 64 % predicted trustworthiness: 45% actual trustworthiness: 79%

When comparing (1) and (3), i.e. given objective reality, one can claim that experimental subjects trusted “too little” On the other hand, when comparing (1) and (2), i.e. given predicted trustworthiness, one can claim that experimental subjects trusted “too much”

Conclusions: Objectively subjects were irrational – they could earn more if they send $10 to an anonymous individual. Subjectively subjects were also irrational – given their beliefs, they risk too much!

Macko, Malawski & Tyszka (in preparation) conducted two experiments – one with a group of potential entrepreneurs (candidates for starting up their own business), another one with prisoners. Two modifications to the trust game were introduced:

an individual could send: (1) no money to the receiver, or (2) to send the half of their money, or (3) to send whole amount of their money.

the receiver was introduced either as: (1) prisoner, (2) bus driver (meaning “ordinary people”), (3) monk (meaning “perhaps trustworthy person”).

Results: Potential Entrepreneurs Ca. 90% participants sent money to the receivers. However, only 37% decided to send whole amount of their money, 43 % decided to send the half of their money The type of receiver - prisoner, bus driver or monk had significant effect on predicted trustworthiness: –prisoners 45% –bus drivers 38% –monks 58%. However had no effect on the actual rate of trust (the amount of money send to receiver).

Interpretation In the trust game (Intelligent) people, such as Potential Entrepreneurs, were not maximizing the profit! Sending half of the endowment is certainly irrational: If it is rational/ irrational to send half of the money, it is equally rational/ irrational to send the whole amount. Predicted trustworthiness had no effect on actual trust!

Alternative explanation Even at the expense of the financial loss participants tended to preserve their moral self-image. Interestingly, participants in their predictions were not able to “imagine” that receivers would also follow moral norm, that of reciprocity.

Conclusions Large discrepancy between people's stated and actual trust in others can be observed: people say they distrust others, while in their economic interactions with others, such as trust game, they behave as if they trusted others. In the trust game people do not maximize the profit. Both senders and receivers follow certain norms: (1) senders follow reciprocity norm; (2) receivers even at the expense of the financial loss, tend to preserve their moral self-image.