People playing games: the human face of experimental economics.

1. Introduction

Research in economics is focused primarily on the behavior of groups of individuals aggregated into markets and economies. Economists have paid less attention to understanding individual decision making, which (by rights) is the realm of psychology. Much of economics appears blind to the individual, and this results in the neglect of issues that can be useful in understanding market phenomena such as the gender or race wage gap. Combining a psychological interest in the characteristics and propensities of individuals with an economist's perspective can give insights into important economic outcomes. Experiments, both in the lab and the field, examine the behavior of people in situations that economists are interested in. My purpose is to show how experiments, people playing games in the lab, can provide a window on individual behavior, a measure of the nature and variability of the preferences that underlie economic models, and a better understanding of puzzling economic phenomena.

Altruism and trust are two aspects of human behavior that might seem orthogonal to understanding economies. Yet they are very important factors for the success of an economy. Altruism ensures that the people in the economy who do not (or cannot) win under the market system are taken care of. Altruists also increase the production of public goods. Trust is said to grease the wheels of commerce by enhancing trade among strangers and by making complete contracts unnecessary. Because of the cost of writing and enforcing fully specified contracts, most economic exchange must operate without such contracts, and can do so successfully because of high levels of both trust and trustworthiness in the economy. The research I present today focuses on these two important areas of behavior, and the use of experiments to study them.

2. Economic Man in Residence

Economic man is a simple agent who single-mindedly maximizes his utility, and who lives in our models. He is useful as a building block in economic models, game theoretic among them. He arose, not as a way to describe actual human motivation, but rather as a simplification (as most models arise) intended to capture important aspects of behavior. Much has been made in recent years of the systematic failure of experimental subjects to behave like economic man. This challenge to the vision of man as a rational being has led to the development of many models that extend the range of predicted behaviors to include the kinds of cooperation, trust, and reciprocity that we observe in the lab. Some, indeed, have pronounced economic man dead and, dead or alive, apart from a few especially earnest graduate students in economics, surely no one really believes in him. Nevertheless, he is useful. Assumptions of rational behavior do have handy formal properties, allowing the (relatively) easy aggregation of "maximizing monads" (a term I believe is due to Deidre McCloskey) into markets and economies, and extensions of predictions about individual rational behavior into greater understanding of complex system-level phenomena.

Reliance on economic man in our models does not require that citizens be selfish, but in practice most models assume that agents care only about their own well-being. In the same vein, such reliance does not require that agents behave identically, but in practice, individuals are modeled as being identical. Just as no one really believes people are completely selfish, no one really believes that all people are the same. People are different from each other, and they treat each other differently. The differences are not random: Heterogeneity is systematic. For example, in experimental games, about a quarter of experimental subjects really do behave like economic men (and women), no matter what situation we put them into. Perhaps 20% are altruists, and behave as if the welfare of others is very important to them. The rest could be termed "conditional cooperators," cooperating or behaving altruistically when the costs are low or the benefits high, trusting when the potential gains to trust are high, reciprocating when it is the right thing to do. In a way, these conditional cooperators seem familiar to economists-they often exhibit a kind of economical cooperation. But subjects may be contingent in other ways, as well. In two settings with identical payoff structures, a subject may behave very differently depending on the context. (1) And sometimes the contingencies are things we do not approve of and teach our children not to pay attention to, superficial things such as the mere appearance of a counterpart.

Who are the economic men and women, and who the altruists? Who is trusted and who not? An exploration of the systematic differences in behavior across different categories of persons (gender, racial, etc.) and of the systematic difference in which different categories are treated by others can improve our understanding of market outcomes.

3. Measuring Altruism and Trust

To investigate heterogeneity in behavior requires reliable measurement. Self-reported survey measures of altruism, trust, or trustworthiness have several shortcomings. First, there is no incentive to report correctly, and economists are naturally skeptical of such "cheap-talk" claims. Second, there may be an incentive to misreport. To take a simple example, suppose I ask if you are altruistic or trustworthy. You may exaggerate your virtues to impress me or someone else who might be looking on, or to validate your own self-image. You may not even be consciously aware of your exaggeration, believing you would behave in a certain way. There is plenty of evidence that people over-report socially desirable behavior, such as voting, volunteering, or even exercising.

Laboratory experiments were developed for testing theory and for teaching, but that is not all they are good for. (See Holt (2003) for interesting uses of experiments.) In particular, experimental games can also be designed explicitly to measure preferences. Measuring preferences is important because so many economic models require parameterization of a utility function in order to have empirical content. Knowledge of the arguments that affect utility and their sensitivity not only to price but also to other elements of the environment can help make model predictions more precise.

Experiments are incentivized choices: Something (usually money) is at stake, making misrepresentation costly. Decisions made in the lab are real, not hypothetical. Two important elements of the experimentalists' creed are: Thou shalt pay, that is subjects are really paid according to the decisions that they make in the experiment; and thou shalt not deceive, that is everything we tell subjects in an economics experiment is true. An experiment might give a subject an opportunity to exhibit altruism, trust, or trustworthiness, at some cost. To say that you are altruistic in the lab means giving up some of your money. Doing so provides a behavioral measure of a preference for altruism.

To be a good measure it should have three characteristics. It should be replicable, giving the same result when repeated. It should be internally valid, measuring what it is supposed to measure. And it should be externally valid, correlated with behavior outside the lab. All these things are possible in lab experiments, where it is possible to control the experimental environment and specify carefully the variations or treatments we want to implement. Experiments are replicable and internally valid (if they are designed well). External validity can be tested by collecting information from subjects and by following them outside the lab.

4. Heterogeneity across People: Altruism

To illustrate the ways in which experiments can be used as measures, consider the question: Are women more altruistic than men? To measure altruism we use the dictator game. This is not much of a game, but rather an allocation task. One person, the dictator (though we don't use that loaded word in our carefully neutral instructions), is given an amount of money by the experimenter. He then is given the opportunity to donate some of this money to an anonymous recipient, who was recruited separately to the experiment and is in a different room, never observed by the dictator. In this game, economic man would clearly keep all the money for himself, since there is no reason to do otherwise.

Originally invented as a way to understand anomalous (i.e., contrary to game theory) results in bargaining studies (Forsythe et al. 1994), its use to measure altruism is more recent (Eckel and Grossman 1996a, b). In our early experiments we used a "double blind" protocol developed by Hoffman et al. (1994), which guarantees anonymity between subjects and between the experimenter and the subject, and so removes one of the reasons a person might give away money--to impress the experimenter or other subjects. This protocol was developed to improve the internal validity of the experiment, that is, to make sure it measured altruism.

The distribution of choices in a dictator game experiment with men and women as dictators is shown in Figure 1 (Eckel and Grossman 1998). Men on average donate $0.82 from a $10 endowment; women donate $1.60, a statistically significant difference. More than half of the subjects in this particular protocol give nothing, and more men than women fall into this category. On the other hand, more women than men give $5, half of their endowment, to an anonymous counterpart.

[FIGURE 1 OMITTED]

So by this measure, yes, women are more altruistic than men.