Neuroeconomic Foundations of Trust and Social Preferences: Initial Evidence.

Neuroeconomics merges methods from neuroscience and economics to better understand how the human brain generates decisions in economic and social contexts. Neuroeconomics is part of the general quest for microfoundations—in this case, the microfoundation of individual decision-making in social contexts. The economic model of individual decision-making is based on three concepts: the action set, preferences, and beliefs. Economists assume that an individual will choose his preferred action for a given set of available actions and a given belief about the states of the world and the other players’ actions. Neuroeconomics provides a microfoundation for individual beliefs, preferences, and behavior; it does so by examining the brain processes associated with the formation of beliefs, the perception of the action set, and the actual choice. Moreover, since the set of available actions can be framed in different ways and different frames of the same action set sometimes elicit different behaviors, neuroeconomics may also contribute to a deeper understanding of framing effects. This paper discusses recent neuroeconomic evidence related to other-regarding (nonselfish) behaviors and the decision to trust in other people’s nonselfish behavior. As we will show, this evidence supports the view that people derive nonpecuniary utility (i) from mutual cooperation in social dilemma (SD) games and (ii) from punishing unfair behavior in these games. Thus, mutual cooperation that takes place despite strong free-riding incentives, and the punishment of free riders in SD games is not irrational, but better understood as rational behavior of people with corresponding social preferences. Finally, we report the results of a recent study that examines the impact of the neuropeptide oxytocin (OT) on trusting and trustworthy behavior in a sequential SD. Animal studies have identified OT as a hormone that induces prosocial approach behavior, suggesting that it may also affect prosocial behavior in humans. Indeed, the study shows that subjects given OT exhibit much more trusting behavior, despite the fact that OT does not seem to change their explicit beliefs about others’ behavior. This suggests that OT has a direct impact on certain aspects of subjects’ social preferences. Interestingly, however, although OT affects trusting behavior, it has no effect on subjects’ trustworthiness. At the general level, economic theory has been reluctant to assume anything specific about human preferences, except for the fact that they satisfy the axioms of revealed preference theory. In practice, however, economists often make the strong assumption that individual preferences are exclusively self-regarding. However, a large body of evidence (Colin F. Camerer, 2003; Fehr and Fischbacher, 2003) now suggests that many people exhibit social preferences and that even more people typically show trust in the existence of these preferences. Sequential SD games that are played only once are a neat vehicle for demonstrating the behavioral relevance of social preferences. A sequential SD game can be described as follows: there are two players, A and B, each of whom has an initial endowment of $10. First, player A decides whether to keep his endowment or to send it to player B. Then player B observes A’s action and decides whether to keep her endowment or to send it to A. The experimenter doubles each transfer payment (i.e., both players are better off if they transfer their endowments than if they both keep them). This situation mimics a sequential economic exchange in the absence of contract enforcement institutions. B has a strong incentive to keep her endowment regardless of whether A transferred or not; if A anticipates this behavior, however, he has little reason to transfer his endowment. A mutually beneficial exchange can only take place if A trusts B and if B behaves nonselfishly by transferring her endowment. Literally hundreds of experiments, with stake levels up to several months’ income, have con* Institute for Empirical Research in Economics, University of Zurich, Blümlisalpstrasse 10, 8006 Zurich, Switzerland (e-mails: [email protected], [email protected], [email protected]).