Viktor J. Vanberg The Economics of Moral Preferences Department of Economics Bar Ilan University Tuesday, June 8, 2010

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg. 2 1.The economic model of man 2.“Preferences over actions” and rule-following behavior 3.A. Sen on “sympathy” and “commitment” 4.The “reason” of rules and the “rationality” of moral preferences 5.Rule-following, moral preferences and emotions 6.Summary The Economics Moral Preferences

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg The economic model of man -Two components of the economic model of man: The self-interest assumption The rationality assumption -Rationality specified as maximization of a utility function Rationality  Maximization Self-interest  Content of the utility function -Critique Traditional ( Veblen a.o.) New: Behavioral and experimental economics

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg The economic model of man -Typical “orthodox” reaction to critique: Readiness to modify (adapt) the self-interest assumption (  content of the utility function) Insisting on rationality assumption (  maximizing behavior) -Example: Ultimatum game  Fehr a.o.: Enlarging the utility function by including “moral preferences” "social preferences”, “preferences for reciprocal fairness”, “concerns for equity”, But: Retaining the maximization assumption

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg The economic model of man -My main conjecture: Inconsistent solution. To include moral preferences in the utility function means to add an explanatory factor that is incompatible with the model of rational maximization. -My reasoning: K. Arrow: “Choice is over sets of actions, but preference orderings are over consequences.” Rational choice theory implies an instrumental view of human action: Choice among potential alternative courses of action is explained in terms of expected consequences.

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg The economic model of man According to its instrumental outlook at actions rational choice theory has no consistent place for explanatory factors other than the agent’s evaluations of the consequences that are expected to result from alternative options. Moral preferences are however typically not about expected consequences of actions but are about evaluating actions per se. Moral preferences are “preferences over actions” not “preferences over outcomes”. As such they do not fit into the rational choice scheme. To explain behavior in terms of moral preferences means to tacitly shift from a theory of rational choice to a theory of rule-following behavior.

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg “Preferences over Actions” and rule- following behavior -Why is the shift to a different paradigm not noticed? Failure to distinguish between  „other regarding preferences“ (i.e. evaluation of outcomes not only in terms of the agent’s own interests but in terms of how they affect other persons), and  „concerns for fairness“.  “predisposition to reward cooperative behaviour and to impose sanctions on others for norm violations” (Fehr). Rational choice theory and its focus on single actions (case- by-case choice).  „other regarding preference“ compatible with maximization logic.  moral preferences as „predispositions“ are about types of actions, they are not compatible with case-by-case choice.

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg A. Sen on “sympathy” and “commitment” -Instructive in this context is A. Sen’s critique of rational choice theory. Sen: Orthodox rational choice theory and the difference between  “accounting for sympathy” and  “accounting for commitment”. -“Sympathy”  “broadening the concept of self-interest”.  compatible with “minimal version of rational choice theory”.  “maximizing an identifiable maximand”.

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg A. Sen on “sympathy” and “commitment” -“Commitment” cannot be accounted for by the “minimal version”. Sen’s solution: Giving up the assumption of “self-goal choice”. Ph. Petit: “highly implausible”. -My conjecture: Sen’s problem can be solved (without giving up the assumption of “self-goal choice” or even the self- interest assumption) by distinguishing between “preferences over outcomes“ and „preferences over actions”. -Sen: Commitments “arise from selfimposed restrictions on the pursuit of one‘s own goals (in favor of, say following particular rules of conduct).” Commitment and rule-following.

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg The “reason” of rules and the “rationality” of moral preferences -Hayek: Rules as adaptation to our “inescapable ignorance of most of the particular circumstances which determine the effects of our actions.” -R. Heiner: “Imperfect agents” and the “reason” of following rules (C-D gap). -Comparison of the outcome-patterns from attempted case-by-case maximization and from rule-following behavior. Imperfectness of agents versus imperfectness of rules. -Evolved (learned) rules embody knowledge of relevant contingencies in the environment (“tacit knowledge”).

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg The “reason” of rules and the “rationality” of moral preferences -The consequentialist (instrumental) rationale of rule- following: Rule-following can be overall more advantageous (i.e. more “rational”) for imperfect agents than rational case- by-case maximization. -Rational choice theory presumes a “calculus of advantage” at the level of single (case-by-case) choices. -A theory of advantage-seeking rule-following presumes a “calculus of advantage” at the level or rules.

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg The “reason” of rules and the “rationality” of moral preferences -A theory of (prudent, ‘rational’, self-interested) rule-following behavior and the “calculus of advantage” at the level of rules. Nature of such „calculus of advantage“?  Psychological theories of learning (e.g. theory of operant conditioning).  Evolutionary theory („selection by consequences“; „conjectures and refutations“;...).  J.H. Holland: Theory of adaptive agents / systems.

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg Rule-following, moral preferences and emotions -Moral preferences and emotional consequences of actions that are counter to an agent’s pre-dispositions (e.g. uneasiness in case of rule-violations).  Can including emotional consequences in the utility function help to integrate moral preferences in a rational choice framework? -J. Elster: “Dual role of emotions”. “as psychic costs or benefits that enter into the utility function”. their role in “shaping choices as well as rewards”; role as “action tendencies”. -F. van Winden et al.: “emotions as an action tendency, or pattern of readiness, urge to execute or abstain from a particular form of action.”

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg Rule-following, moral preferences and emotions -A theory of rule-following behavior and the function of emotions. -Hayek: “Man as a purpose seeking as well as a rule- following animal.” -The “wisdom” of rules and the temptation of situational incentives.  What protects the “rationale of rules” from the opportunism of situational “rational” choice? -Emotions serve to “stabilize” rule-following behavior. Emotions as “currency” in the calculus of advantage at the level of rules (strength of commitment to rules).

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg Rule-following, moral preferences and emotions -Moral preferences as emotion-based dispositions for following moral rules. -Robert Frank (Passions Within Reason, 1988): Emotions as “commitment device”. “Emotions often predispose us to behave in ways that are contrary to our narrow interests, and being thus disposed can be an advantage.”

Prof. Dr. Viktor J. Vanberg, Albert-Ludwigs-Universität Freiburg / Walter Eucken Institut Freiburg Summary -Rational choice theory and behavioral anomalies. -Revisionist strategy: Modifying the content of the utility function while maintaining the maximization assumption. -Moral preferences as preferences over actions. -Preferences over actions and rule-following behavior. -Hayek: “Man as a purpose-seeking as well as a rule- following animal.” -Supplementing the theory of rational choice by a theory of (prudent) rule-following. Rational choice: Forward looking explanation (outcomes). Rule-following: Backward looking explanation (learning in the past about successful types of actions).