Economics and Evolutionary Psychology

Economics is built on the assumption that individual behavior can best be predicted by assuming that each individual will take the actions that best achieve his objectives.¹ Evolutionary psychology offers an alternative approach based on the objectives not of us but of our genes.²

Evolutionary Psychology: The Short Version

Evolutionary psychology starts from two simple assumptions:³

The human mind is best understood not as a general purpose computer but as a set of specialized software modules, each designed to deal with a particular subset of problems.

Those programs have been designed by Darwinian evolution to produce reproductive success in our environment of evolutionary adaptiveness, the hunter-gatherer environment in which our species spent most of its species history.

Researchers in evolutionary psychology, starting with these assumptions, have generated and tested predictions ranging from differences in male and female abilities to the timing of morning sickness.

The second assumption is not that individuals seek reproductive success — if we were doing that, the population of developed countries would be increasing much faster than it is — but that we have those psychological characteristics that produced reproductive success in the environment we evolved in.

What Evolutionary Psychology Adds

Economists assume that individuals have objectives. Economic theory does not tell us what those objectives are, although observation and introspection provide some idea of what they are likely to be. Evolutionary biologists, on the other hand, know the objective of genes: reproductive success, more precisely inclusive fitness, getting as many copies of themselves as possible into future generations.

Humans have found ways, ranging from birth control to pets as an emotional substitute for children, to evade our programming, substitute our objectives for those of our genes; that is why we do not produce nearly as many children as we could rear. A phyloprogenitive gene, one that made reproductive success a high priority of every individual, would confer an enormous reproductive advantage on its carriers and rapidly spread through the population. Its absence is presumably due to the difficulty of such precise programming of an organism as complicated as a human being and the short time that has passed since the developments that make that tactic for reproductive success so much superior to less direct approaches.

Economic Puzzles

Economists sometimes observe people acting in ways that appear inconsistent with the economic approach. In this section I first consider a group of puzzles that I believe can all be explained by a characteristic of human psychology, the belief in just prices, explainable on evolutionary grounds. I then consider two other puzzles — inconsistent time preferences and endowment effects — for each of which I can offer an evolutionary explanation.

Consider a restaurant whose patrons know that if they come for dinner on Friday or Saturday they will have to wait at least forty-five minutes for a table. Suppose the wait is the equivalent, from the standpoint of the customers, to a ten-dollar increase in price. If the restaurant raised its price for the nights it was busy by ten dollars the line would shrink to close to zero. Customers would be no worse off — they would be paying the extra price in money instead of time — and the restaurant, still operating at capacity, would be better off by ten dollars per diner. In the longer run, the increase in the amount restaurants could charge on busy nights would increase the supply of restaurants, bringing down the price and transferring some of the benefit back to the customers.

Restaurants occasionally vary their price, usually by announcing special discounts for low-demand nights rather than special surcharges for high-demand nights. Nonetheless, predictable long lines are a familiar feature of the restaurant world. A similar pattern is observed in other contexts — pop concerts, opening nights of popular films, and the like. Doing so appears to make the producer worse off, contrary to what we would expect from the assumption of rationality.

Next consider price control. The costs and benefits of holding a price ten percent below its market level do not depend on whether the restriction prevents a price rise or forces a price reduction, yet the former case is much more common than the latter. Why?

These puzzles can be explained by a single assumption: Individuals believe that the proper price for a good is the price at which they are used to buying the good, resent being charged more than that price, attempt to punish those responsible. That is consistent both with casual observation of reactions to price increases and with the history of ideas such as the scholastic philosophers’ doctrine of the just price.⁴

Seen from the standpoint of economic rationality, such behavior makes little sense. Most people have no clear idea what determines the prices of the goods they buy so no way of knowing whether either yesterday’s price or today’s higher price was fair, just, cost justified. Even if they did know that, why would an unjust price be a reason not to buy a good worth more to me than it costs or to express anger at the seller by avoiding future transactions with him? In a world where goods and services are sold to large numbers of anonymous customers I cannot reasonably expect my refusal to buy, however justified, to induce the seller to lower his price.

Evolutionary Psychology and the Just Price

Now shift the analysis back twenty thousand years. As a member of a small hunter-gatherer band, you engage in a variety of transactions with your fellow members, trading goods and services — food, sex, support in intra-group conflict. While money has not yet been invented, prices, the amount of food you must give in exchange for sex, the favors you must do someone if you want him to do a favor for you, are a familiar part of your environment. In this world all markets are thin — it is, after all, a small band — so the typical purchase is a bilateral monopoly transaction: one buyer, one seller.

You are a buyer whose current circumstances make the good much more valuable to you than usual. If you can commit yourself not to pay more than the usual price you, rather than the seller, will get the increased benefit from the transaction. One way to do so is to be emotionally programmed to resent any increase above the usual price, resent it enough so that the humiliation of being “cheated” will outweigh the gain from the transaction.

The argument works both ways; if the seller could commit himself not to accept less than your new, higher value for the good he would be the one to pocket the gains from the trade. There is, however, an important difference between your situations. You know the usual price and, assuming the special circumstances affect only you, know that it is within the seller’s bargaining range. The seller does not know the current value of the good to you; if he commits himself to his guess at what you are willing to pay he may guess too high, charge a price at which the transaction cannot occur.

The strategy works symmetrically when it is the seller whose circumstances have changed, when he is, for some reason, willing to accept a much lower price than usual; people resent not only paying unusually high prices as buyers but also being offered unusually low prices as sellers. That is one explanation for why wages are sticky downwards.

What about a seller whose cost have risen, making him unwilling to sell at the usual price? He can defend himself against the buyer’s commitment strategy by offering to show the buyer that his costs are unusually high, that he is really, not just strategically, unwilling to sell at the usual price. From that we get the conventional view that economists find frustrating and wrongheaded, price as the outcome of bargaining between buyer and seller, each required to justify to the other any deviation from past prices.

In a society where most transactions take place in thin markets, belief in a just price makes sense as a commitment strategy. Until recent centuries, most humans lived in such societies. We now have a possible solution to the puzzles described above.

A Bird in the Hand

The usual economic model of intertemporal choice assumes that an individual’s preference between present and future utility can be described by a discount rate, that the preferred alternative is the one that maximizes the present value of utility discounted at that rate. One implication of that model is that the preference between future alternatives at different dates does not change as we approach them; individual choice is, in that sense, consistent over time.

That does not describe how people actually behave. Many individuals prefer a thousand dollars today to eleven hundred dollars next week yet, faced with the choice between a thousand dollars a year from now and eleven hundred dollars a year plus a week from now, prefer the latter. The usual pattern appears to be a high discount rate for choices in the near future, an increasingly low discount rate as the alternatives become more distant.

Evolutionary psychology suggests a straightforward explanation. In the experimental setting subjects are told that they are choosing between certain payoffs at different times. In the world in which we now live that is a believable story; modern financial institutions make possible secure promises of future performance such as those embodied in certificates of deposit or U.S. government bonds.

The world in which our species evolved did not have such institutions; in that world it was rational to discount promises of future performance. One meal today was worth a great deal more than one meal next week because today’s meal was there to be taken; next week’s might not be. One meal a year from now, on the other hand, was not worth much more than one meal a year plus a week from now; both were promises that might well fall through and the chance of their falling through was not greatly altered by the additional week.

Not only was the behavior rational twenty thousand years ago, it was rational a good deal more recently, sufficiently so to become proverbial. “A bird in the hand is worth two in the bush.”

Endowment Effects

A professor purchases lots of school mugs, selects at random half the members of a group of students, gives one to each of them. He then asks each student with a mug to state the price at which he would be willing to sell it and each student without a mug to state the price he would be willing to pay for one. Finally, he calculates the market clearing price — the price at which there is exactly one seller for each buyer — and reallocates mugs and money accordingly.

At the end of this process, the mugs should be in the possession of whichever students most value them. Since they were originally handed out at random, we would expect that about half of the students who most valued them would have gotten them and half would not, hence that about half of the mugs should change hands. In fact, almost none of them did; the median seller required about twice as much to be willing to sell as the median buyer was willing to offer.⁵

This result — applied to mugs and much else — is known as an endowment effect. On average, for many but not all sorts of things, someone who owns something values it more than someone who does not even if who owns what has been determined at random as in the experiment described. The explanation of this pattern of behavior starts with the observation that it is not limited to humans.

Territorial Behavior

A member of a territorial species, fish, bird, or mammal, marks a particular territory for his own, commits himself to fight a trespasser of his own species more fiercely the closer the trespasser gets to the center of the territory. Unless the trespasser is much stronger a fight to the death is a losing game for both parties so the trespasser usually retreats. Presumably the commitment is accomplished through a behavior pattern hard-wired into the psychology of a territorial species. The effect is not limited to real estate. It is a familiar observation that a dog will fight harder to keep his own bone than to take another dog’s bone.

Consider the same logic for humans in a hunter-gatherer society with no external institutions to enforce property rights. Some method, possibly as simple as physical possession, is used to define what belongs to whom. Each individual commits himself to fight very hard to protect his property, much harder than he would be willing to fight in order to appropriate a similar object from someone else’s possession, with the commitment made by some psychological mechanism hard-wired into humans. The result is both a lower level of (risky) violence and a more prosperous society. Evolution selects for the (reproductive) interest of the individual, not the group, but in this case they are the same.

How do I commit myself to fight very hard for something? One way is by perceiving it as very valuable. The same behavior pattern that shows up as territorial behavior in fish and ferocious defense of bones in dogs shows up in Cornell students as an endowment effect.⁶

Filling in the Utility Function

Evolutionary psychology can be used to explain behavior that appears inconsistent with the rational pursuit of objectives. It can also be used to explain why individuals have the objectives they have.

Parental Altruism

Consider parental altruism towards children. In some environments it makes sense as a means to narrowly self-interested ends — productive children are better able to take care of their parents in their old age in a society where that is the chief form of old age insurance. But the behavior appears more general than that, as we would expect if our utility functions were shaped by evolution to maximize reproductive success; children who die young do not produce grandchildren.

Status

My ability to get most of the things I want depends on how much my income can buy, not on whether I can buy more or less than you can, yet humans care about relative as well as absolute income. Why?

How many children I can feed depends on my real income but my ability to persuade one or more women to produce children with me depends on my resources — material and otherwise — relative to those of the other men against whom I am competing; women are a reproductive resource in fixed supply. Similarly, the ability of a woman to persuade a man to produce children with her and help support them depends in part on her status relative to the other women on whose children that man might spend his limited resources. So we would expect both relative status and real income to play important roles in the individual utility function produced by evolutionary selection.

This explanation has an interesting implication. If it is correct, men ought to be primarily concerned with their status relative to other men, women with their status relative to other women. I do not know whether or not that prediction is empirically confirmed.

[This post is based on an old article of mine that goes into somewhat more detail]

1. For a more detailed account, see Chapter 1 of my webbed Price Theory.

2. “Objective of genes” is a metaphor; genes do not have minds. But the organisms around for us to observe, including humans, are constructed by those genes that succeeded, in past generations, in constructing organisms that got those genes passed down, hence genes are shaped, as by an invisible hand, to construct organisms whose characteristics result in reproductive success for the genes that constructed them.

3. A good source is Barker, Jerome H., Cosmides, Leda, and Tooby, John, The Adapted Mind: Evolutionary Psychology and the Generation of Culture, Oxford University Press, 1992.

4. For a discussion of that doctrine and the function it served, along lines related to the argument of this essay, see D. Friedman “In Defense of Thomas Aquinas and the Just Price.” For evidence of similar attitudes in modern consumers, see Richard H. Thaler, Mental Accounting and Consumer Choice, Marketing Science, 1985.

5. Kahneman, D., J. Knetsch and R. Thaler, 1991, "Experimental Tests of the Endowment Effect and the Coase Theorem."

6. Implications of this pattern of behavior for the functioning of modern as well as ancient societies were the subject of an earlier post: A Positive Account of Rights.

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