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An individual is said to have social preferences if their personal utility is influenced by the well-being of others, not just their own direct payoffs. This concept formally acknowledges that people often care about what happens to others, moving beyond the traditional assumption of pure self-interest. These preferences can be positive, such as altruism, or negative, such as spite and envy, and can also include a preference for fairness, like inequality aversion.

Social Preferences

Altruism is a social preference where an individual's utility is positively affected by the benefits received by others. In essence, an altruistic person experiences increased satisfaction when another person's well-being improves.

Altruism

Inequality aversion is a social preference characterized by a favorability towards more equitable outcomes. An individual with this preference derives higher utility from distributions that are more equal, independent of their own absolute payoff.

Inequality Aversion

Spite and envy are social preferences where an individual's utility is negatively impacted by the benefits or good fortune experienced by others. In such cases, another person's gain leads to a reduction in one's own level of satisfaction.

Spite and Envy as Social Preferences

This example introduces a scenario that contrasts with standard self-interested models, such as a personal budgeting problem. A student named Zoë wins £200 in a lottery and must decide whether to keep the entire amount or share some with her flatmate, Yvonne. The choice she makes is not about consuming goods herself but depends on her social preferences in this specific context—that is, whether she acts out of altruism or self-interest.

Zoë's Dilemma with Lottery Winnings

An individual's social preferences, such as altruism or self-interest, may not be constant but can vary depending on the situation. A person might exhibit different behaviors in different contexts. For example, Zoë could be altruistic when deciding how to share unexpected lottery winnings, yet act in a self-interested manner when managing her planned student budget. This indicates that altruistic behavior can be context-dependent.

Situational Nature of Social Preferences

In a one-time, anonymous interaction, Person A is given $20 and can offer any portion of it to Person B. Person B has no choice but to accept the offer. A model assuming individuals are motivated solely by their own financial gain would predict that Person A will offer $0 and keep the full $20. However, in real-world experiments, Person A often chooses to offer a positive amount (e.g., $5). Which of the following provides the best explanation for this observed behavior?

An economic model that incorporates the idea that individuals' utility can be influenced by the well-being of others will always predict more generous and cooperative outcomes compared to a model assuming individuals only care about their own direct payoffs.

Analyze Maya's decision in the following scenario. From a purely self-interested financial perspective, which option was better for her? Then, provide a plausible explanation for why she chose the course of action she did, considering that an individual's satisfaction can be influenced by factors other than their own direct monetary gain.

Partnership Dissolution Decision

Each scenario below describes an individual's decision. Match each scenario to the underlying preference that best explains the behavior.

Imagine two colleagues, Alex and Ben, are assigned to a project where their manager will award a $100 bonus to be split between them based entirely on Alex's recommendation. Alex can choose any split. First, state the split that a model of pure self-interest would predict for Alex. Second, if Alex instead chooses to split the bonus evenly ($50 for Alex, $50 for Ben), explain how this action demonstrates a departure from pure self-interest and what it suggests about Alex's preferences.

Analyzing a Bonus Split Decision

Critically evaluate the importance of incorporating the idea that individuals' utility can be influenced by the well-being of others into economic models. In your answer, discuss at least one significant strength and one significant limitation of moving beyond the traditional assumption that individuals are motivated solely by their own direct payoffs.

Evaluating Assumptions in Economic Models

When an individual's personal satisfaction or utility is affected by the material payoffs or well-being of other people, and not just their own, they are said to exhibit ____.

In which of the following scenarios does an individual's action provide the clearest evidence that their utility is influenced by more than just their own direct material payoff?

An individual whose utility is solely determined by their own material payoff will always choose a different course of action than an individual whose utility is also influenced by the well-being of others, given an identical set of choices that impact both individuals.

Analyze the decision made in the following scenario. First, evaluate the decision from the perspective of an individual motivated solely by their own direct financial payoff. Second, explain how the decision can be understood if we assume the individual's personal satisfaction is also influenced by the well-being of others.

The Community Garden Decision

Altruism is the desire to help others, motivated by a selfless concern for their well-being, even when the personal costs of helping are greater than the potential benefits. Individuals acting altruistically may completely disregard the significant risks or sacrifices to themselves.

Inequality aversion is a social preference for more equitable outcomes. An individual with this preference may be willing to forgo personal gain to reduce large disparities in resources between themselves and others, disliking outcomes that are unfairly advantageous or disadvantageous.

Positive reciprocity is the social behavior of responding to perceived kindness with kindness. It involves rewarding cooperative or helpful actions from others with similar beneficial actions, thereby fostering mutual cooperation and reinforcing social bonds.

Positive Reciprocity

Reciprocity is a social principle centered on mutual exchange. In the context of relationships, it manifests as a 'give and take,' where individuals contribute with the expectation of receiving benefits in return. This dynamic is crucial for relationship formation, as people are more inclined to like and interact with those who reciprocate positive feelings and actions.

Reciprocity

Social preferences can be categorized based on how an individual's utility is affected by the well-being of others. Key types include altruism, where another's benefit increases one's own utility; inequality aversion, which is a preference for more equitable outcomes; and spite or envy, where another's benefit decreases one's own utility.

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