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SENTIMENTS, CONDUCT, AND TRUST IN THE LABORATORY

  • Vernon L. Smith (a1) and Bart J. Wilson (a1)
Abstract:
Abstract:

In this essay we provide a brief account and interpretation of The Theory of Moral Sentiments showing that it departs fundamentally from contemporary patterns of thought in economics that are believed to govern individual behavior in small groups, and contains strong testable propositions governing the expression of that behavior. We also state a formal representation of the model for individual choice of action, apply the propositions to the prediction of actions in trust games, report two experiments testing these predictions, and interpret the results in terms directly related to the model. In short, we argue that the system of sociability developed by Adam Smith provides a coherent non-utilitarian model that is consistent with the pattern of results in trust games, and leads to testable new predictions, some of which we test.

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1 See Berg Joyce, Dickhaut John, and McCabe Kevin, “Trust, Reciprocity, and Social History,” Games and Economic Behavior 10 (1995): 122–42.

2 Güth Werner, Schmittberger Rolf, and Schwarze Bernd, “An Experimental Analysis of Ultimatum Bargaining,” Journal of Economic Behavior and Organization 3, no. 4 (1982): 367–88.

3 Kahneman Daniel, Knetsch Jack L., and Thaler Richard H., “Fairness And the Assumptions of Economics,” Journal of Business 59, no. 4 (1986): S285S300.

4 Berg et al., “Trust, Reciprocity, and Social History,” 138–39.

5 Hoffman Elizabeth, McCabe Kevin A., and Smith Vernon L., “Behavioral Foundations of Reciprocity: Experimental Economics and Evolutionary Psychology,” Economic Inquiry 36, no. 3 (1998): 335–52.

6 For discussions of stakes and context, see Colin F. Camerer, Behavioral Games Theory (Princeton, NJ: Princeton University Press, 2003), 60–61; and Vernon L. Smith, Rationality in Economics: Constructivist and Ecological Forms (Cambridge: Cambridge University Press, 2008), chap. 10; for intentions, see Kevin McCabe, Vernon L. Smith, and Michael LePore, eds., “Intentionality Detection and ‘Mindreading’: Why Does Game Form Matter,” Proceedings of the National Academy of Sciences 97, no. 8 (2000): 4404–4409; and Fehr Ernst and Rockenbach Bettina, “Detrimental Effects of Sanctions on Human Altruism,” Nature 422 (2003): 137140.

7 These assumptions were: backward induction (players look ahead and apply reason to the analysis of other and own decisions); decisions are independent of the players’ history or future (the game is played exactly once by anonymously paired players) and complete information on payoffs (fully displayed to both players). For further discussion, see Smith Vernon L., “Theory and Experiment: What Are the Questions?” Journal of Economic Behavior and Organization 73, no. 1 (2010): 59.

8 Cox James C., Friedman Daniel, and Gjerstad Steven, “A Tractable Model of Reciprocity,” Games and Economic Behavior 59 (2007): 1745.

9 Smith Charles John, Synonyms Discriminated: A Dictionary of Synonymous Words in the English Language (New York: Henry Holt and Company, 1894), 574.

10 Adam Smith, The Theory of Moral Sentiments (Sentiments or TMS) (Indianapolis, IN: Liberty Fund, [1759] 1982), 219.

11 So abbreviated and further discussed by McCloskey Deirdre N., The Bourgeois Virtues: Ethics for an Age of Commerce (Chicago: University of Chicago Press, 2006).

12 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Indianapolis, IN: Liberty Fund, [1776] 1981), Vols. 1–2.

13 Adam Smith, TMS, 13.

14 Ibid., 13.

15 Ibid., 15.

16 Ibid., 38.

17 The OED only traces this definition back to 1674, whereas definition 1, the manner of conducting oneself in the external relations of life, goes back to 1490. Examples for definition 2, which is word for word the same as Samuel Johnson’s in 1755, are dated 1521 (perhaps) and 1535.

18 The rules of propriety governing pre-civil order in small groups evolved into the rules of property in the civil order of law — a topic beyond our reach in this paper. See Adam Smith, TMS, 82–85 and see Smith Vernon L., “Adam Smith: From Propriety and Sentiments to Property and Wealth,” Forum for Social Economics 43, no. 1 (2013): 115.

19 Adam Smith, TMS, 225.

20 Charles John Smith, Synonyms Discriminated, 159.

21 Adam Smith uses “Conduct” three hundred nine times in the 338-page TMS, twice in a chapter title and once in the title of the very important Part III (“Of the Foundation of our Judgments concerning our own Sentiments and Conduct, and of the Sense of Duty”). “Behavior,” on the other hand, never appears in a title and is used only eighty times. Moreover, the conjunction X and “Behavior” is used seventeen times where X is Conduct, Character, Sentiments, or Countenance; again, he refers five times to Whole Behavior. The substance of Smith’s thought process — one to which we are not accustomed — is revealed in his careful diction.

22 Charles John Smith discriminates the synonyms for us: “As BEHAVIOUR belongs to the minor morals of society, so CONDUCT to the graver questions of personal life . . . We speak of a man’s behaviour in the social circle, of his conduct in his family, as a citizen, or in life. Good conduct is meritorious and virtuous. Good behaviour may be natural or artificial. The conduct has relation to the station of men’s lives, or the circumstances in which they are placed. Good conduct will include right behaviour as part of it, and a proper demeanour will flow necessarily out of it” (Charles John Smith, Synonyms Discriminated, 159).

23 Adam Smith, TMS, 110.

24 Ibid., 175.

25 The exception is the practice of the virtue of justice. This nontrivial distinction between the rules of justice and the rules of all other virtues separates Adam Smith from Bicchieri, who treats the rules of all virtues as rules of grammar in Cristina Bicchieri, The Grammar of Society (New York: Cambridge University Press, 2006). For Adam Smith, “the rules of justice may be compared to the rules for grammar; the rules of the other virtues [however], to the rules which critics lay down for the attainment of what is sublime and elegant in composition. The one, are precise, accurate, and indispensable. The other, are loose, vague and indeterminate, and present us rather with a general idea of the perfection we ought to aim at, than afford us any certain and infallible directions for acquiring it” (Smith, TMS, 175–76).

26 Friedrich A. Hayek, “Rules, Perception and Intelligibility,” Proceedings of the British Academy 48 (1963): 321–44.

27 Adam Frank, “Quantum Honeybees,” Discover Magazine, 1997, http://discovermagazine.com/1997/nov/quantumhoneybees1263#.UXA6f0raix0.

28 Frank H. Knight, “Ethics and the Economics Interpretation,” Quarterly Journal of Economics 36, no. 3 (1922): 454–81.

29 See also Frank H. Knight, “The Limitations of Scientific Method in Economics,” Rexford G. Tugwell, ed., The Trends of Economics (New York: Alfred A. Knopf, 1924), 229–68, who noted this problem with behavioral representations in economics over ninety years ago.

30 Adam Smith, TMS, 113–14.

31 Ibid., 83, italics added.

32 Ibid., 114.

33 Ibid., 110.

34 Ibid., 159.

35 Hence general rules are not a product of reason, or rational construction; they are formed “insensibly” out of experience and, if efficient, are ecologically rational, as noted in Vernon L. Smith, Rationality in Economics: Constructivist and Ecological Forms (Cambridge: Cambridge University Press, 2008), 269–70.

36 We develop here the implications of our brief footnote 5 in Smith Vernon L. and Wilson Bart J., “Fair and Impartial Spectators in Experimental Economic Behavior,” Review of Behavioral Economics 1, no. 1 (2014): 126.

37 We assume it is stoically obvious, as it is in TMS, that a praisable action by me is one that raises your payoff (more is better); a blamable action reduces your payoff, but in the model, context must make it transparent that the action was extortion-free, intentionally motivated, not just accidental, and so on. Self-respect implies that I also see it as praiseworthy even when this cannot be known by others. Each of these elements (weights) is subject to error, to misreading, and to disagreement. Notice that there may be contexts in which explicit incentives (tipping, bonuses, and wage differentials) are inconsistent with the praise/praiseworthiness of an action, leading to a “crowding out” of their effort-enhancing purpose. See Ernst Fehr and Simon Gachter, “Fairness and Retaliation: The Economics of Reciprocity,” Journal of Economic Perspectives 14, no. 3 (2000): 159–81. In TMS, however, this is due not to outcome fairness (social preference), but to a foul — rule (norm) violation. At three universities we have had to justify paying experimental subjects their participation “earnings” because members of the Institutional Review Board thought such payments were “coercive” (or in violation of psychology practice). Remarkably, however, it is often thought that our strict ban on the use of subject deception is an unreasonable restraint on science!

38 “Society . . . cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder . . . Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it” (Adam Smith, TMS, 86).

39 Charles John Smith, Synonyms Discriminated, 165–66.

40 Adam Smith, TMS, 175–76.

41 Cf. Hayek, “Rules, Perception and Intelligibility.”

42 Wilson Bart J., “Social Preferences Aren’t Preferences,” Journal of Economic Behavior and Organization 73, no. 1 (2010): 7782.

43 Wilson Bart J., “Contra Private Fairness,” American Journal of Economics and Sociology 71, no. 2 (2012): 407435.

44 Where in modern game theory is the assumption of agreement on the interpretation of the act? Hidden obscurely in the assumption that every individual j always chooses the largest possible pot of utilitarian pleasure U j (∙).

45 We name and number them as propositions; TMS does not.

46 Adam Smith, TMS, 78.

47 Ibid.

48 Smith and Wilson use this proposition to interpret the standard ultimatum game context as projecting a form of involuntary extortion: the first player’s choice is subject to veto by the second, the players’ roles having been determined at random (Smith and Wilson, “Fair and Impartial Spectators in Experimental Economic Behavior”). Under this interpretation, the proposition denies that ultimatum offers can be described as involving “beneficence,” or that the responses involve “gratitude” or “punishment” independent of their perception as extortionist. It also suggests that the ultimatum game outcomes will be sensitive to changes in the context wherein procedures or narratives rationalize a process whereby subjects have reached the ultimatum stage game.

49 Adam Smith, TMS, 78.

50 The conditionals in these propositions are all subject to error: for example, if the game context allows me to punish your defection on a trusting action by me, you may not find my trusting action credible (it is coercive), whereas my action was not dependent on my having the option to punish you (I would have trusted you in any case).

51 Kevin McCabe and Vernon L. Smith, “A Comparison of Naïve and Sophisticated Subject Behavior with Game Theoretic Predictions,” Proceedings of the National Academy of Arts and Sciences 97 (2000): 37770–81.

52 Cox James C. and Deck Cary A., “On the Nature of Reciprocal Motives,” Economic Inquiry 43 (2005): 623–35.

53 Anthony S. Gillies and Mary L. Rigdon, “Epistemic Conditions and Social Preferences in Trust Games,” (Working paper, University of Michigan, 2008).

54 See also Smith and Wilson, “Fair and Impartial Spectators in Experimental Economic Behavior.”

55 Extensive form trust games yield results quite different than their strategic or normal game-theoretic form representations; in particular people are less trusting and less trustworthy in the latter, and we study only the former noted in McCabe Kevin, Smith Vernon L., and LePore Michael, “Intentionality Detection and ‘Mindreading’: Why Does Game Form Matter,” Proceedings of the National Academy of Sciences 97, no. 8 (2000): 44044409. You get choice data at every decision node from the strategic form given 2N subjects, but — once having established these findings — from the perspective of TMS the strategic form represents a context that increases error in the interpretation of actions as signals that convey the meaning in outcomes. We choose the extensive form to reduce that noise.

56 See, for example, Vernon L. Smith, Rationality in Economics: Constructivist and Ecological Forms (Cambridge: Cambridge University Press, 2008), 269–70.

57 Wilson Bart J., “Language Games of Reciprocity” Journal of Economic Behavior and Organization 68, no. 2 (2008): 365–77.

58 F. A. Hayek, Law, Legislation, and Liberty, Rules and Order Volume I (Chicago: University of Chicago Press, 1973), 17.

59 We can imagine all sorts of beneficence in our favor, but punishing the want of it invites resentment from those whose circumstances we do not fully know. They might not agree that their beneficence to us is appropriate given the context, or we might not know that they are incapable of being beneficent to us.

60 Knight Frank H., “Economic Psychology and the Value Problem,” Quarterly Journal of Economics 39, no. 3 (1925): 372409.

61 Frank H. Knight, “Ethics and the Economics Interpretation,” 459.

* We thank Jeffrey Kirchner for his software programming par excellence; Jennifer Cunningham for diligently recruiting our subjects; Chapman University for financial support; Sean Crockett, Ryan Hanley, and Sigve Tjøtta for constructive comments; and finally the many students with whom we have read and discussed the ideas in Adam Smith’s two great books. The essay has benefitted from seminar presentations at five universities (George Mason, Alaska Anchorage, Simon Fraser, Baylor, and Wofford College), and from interaction with the other contributors to the present volume.

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Social Philosophy and Policy
  • ISSN: 0265-0525
  • EISSN: 1471-6437
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