Human nature and institutions Benito ARRUADA UPF Based

Human nature and institutions Benito ARRUÑADA (UPF) Based on Arruñada, Benito (2008), “Human Nature and Institutions, ” in E. Brousseau and J. -M. Glachant, eds. , New Institutional Economics: A Guidebook, Cambridge University Press, Cambridge, 81 -99.

The mind had been off limits for evolutionary analysis

Overview ▪ Evolutionary psychology—A Copernican revolution ♦ Reverse engineering of our mind ♦ Consequences for: rationality, cooperation and institutions ▪ Applications ♦ ‘Farsighted contracting’ in TCE ♦ Understanding management & policymaking

First part: Our mind & our institutions Cognitive specialists Rationality Cooperation (decisional mechanism) (main ambit of interest) Institutions Modular mind Instinctive Co-opt instincts Maladapted mind Ecological Fill adaptation gap

Mind & institutions (I): Consequences of cognitive specialization Cognitive specialists Rationality Cooperation Institutions Modular mind Instinctive Co-opt instincts Maladapted mind Ecological Fill adaptation gap

Consequences of cognitive specialization. Example: ▪ ▪ Physiological: ♦ ♦ big brains big hips born helpless, learning; and But also institutional: ♦ Family ♦ Responsible fatherhood

More general consequences of our cognitive specialization: ▪ Modular mind ♦ More efficient in using information that presents different structures in different environments ♦ Content-full with innate solutions—instincts: ▪ • grammar acquisition, sex attraction, fear, social exchange, etc. • See http: //www. msnbc. msn. com/id/10401930 Maladapted mind ♦ Cognition technological change faster than evolution success & maladaptation • • Success because animals only adapt biologically Maladaptation b/c we modify our environment faster than our instincts

Cognition Maladaptation. Both paintings have the same age: (one minute)

Our mind evolved to cope with this environment: “Environment of Evolutionary Adaptation: ” hunter-gatherers near subsistence level during the Pleistocene (1, 800, 000 to 10, 000 years ago)

Neanderthal yuppie

Genetic determinism? ▪ Nature and nurture are complements, no substitutes ♦ Discussion on relative weight is fallacious ♦ Nature needs nurture and vice versa ▪ Explaining conduct does not justifies it ♦ The possible existence of an instinct (now mal adapted) to, e. g. , violence does not excuse violence. On the contrary, it should be punished more, not less, to get the same deterrence.

Mind & institutions (II): Rationality Cognitive specialists Rationality Cooperation Institutions Modular mind Instinctive Co-opt instincts Maladapted mind Ecological Fill adaptation gap

Rationality ▪ Instinctive means “Better than rational”: ♦ Our mind solves ‘ill-posed’ problems ♦ Using automatic instincts, heuristics, emotions ▪ Economically ecological rationality ♦ Solves well survival-relevant problems (e. g. , food gathering, status, reproduction) ♦ Does not care for trivial problems (e. g. , science)

Instinctive rationality ▪ ▪ ▪ Hunger search of food feeding ♦ Has the environment changed? Happiness effort ♦ Why does it not last? Sex drive reproduction ♦ In the interest of whom? Fear mobilization of resources Disgust poisoning avoidance Etc.

Instinctive rationality is better than rational ▪ ▪ ▪ Vision = 2 D 3 D Is the horse coming or going? Presence of several heuristics noticeable when only one is present ♦ poor perception ♦ “anomalies” (often, no more than tricks)

Instinctive rationality is better than rational ▪ Vision is much more than a camera

Vision is mainly a software suite

“Real-time visual servoing for object grasping” § Visit the Institute of Robotics and Mechanotronics and the “First humanoid that will open doors“

Avoiding mechanical harvesting: Why software does not read? Source: registration form for. NET Passport Web Site (http: //registernet. passport. net/reg. srf? lc=3082&sl=1, visited August 28 th, 2003).

Ecological rationality ▪ If bees are good Bayesian calculators, should not humans be also good? ♦ We are, instinctively: “Bayes Rules” (The Economist, 7 -12006: 70 -71).

Mind & institutions (III): Cooperation Cognitive specialists Rationality Cooperation Institutions Modular mind Instinctive Co-opt instincts Maladapted mind Ecological Fill adaptation gap

▪ Instinctive Cooperation ♦ Genetic relatedness nepotism ♦ Reciprocity: • • Based on continuity of exchange requires: – Identification of individuals and conducts Cheating detectors – Account memory Based on different types of individuals – Signaling and detection of cooperative types – Emotional commitments: » love, compassion, retaliatory drive, . . . » moral taboos and “moral instinct” ♦ For groupishness (? ): Conformity Herd behavior ▪ Ecological ♦ Relational frameworks

A map of cooperation instincts Transaction attributes: Quality of human types Fixed—can be Variable—therefore, committed to honesty potentially opportunistic - One-shot Facial expressions and their identifiers Strong reciprocity leading to “inefficient” retaliation - Repeated Genetic relatedness, Love, Compassion, Moral sense Cheater detectors, Recordkeeping Identification of types Detection and punishment of cheaters Purpose:

Instinctive cooperation (1): Cheating detectors ▪ We falsify abstract hypotheses badly. E. g. , cards with letters and numbers, “enforce rule ‘D 3’ D n F 3 7 Badly if concrete: “If X eats hot chilies (HC), X drinks beer”: Eats HC Eats SC Drinks beer Drinks Coke n Well if in terms of detecting cheaters: “enforce ‘If X drinks beer, X must be 18+’ by checking drink or age” Beer drinker Coke drinker 25 yr old 16 yr old

Instinctive cooperation (2): Lack of facial control help us trading ▪ ▪ Why is ‘acting’ so difficult? Why do we still have business meetings? Lie detectors? Lovers: plenty of eye contact, pupils open, etc.

Instinctive cooperation (3 a): Emotions produce commitment ▪ ▪ Deterrence in irrational violence Drive for status and killing for trivial reasons Crimes of passion and responsible fatherhood Rationality ♦ Ex ante ♦ Ex post

Outcomes in a joint venture Cooperator Defector 4 6 4 Defector 0 0 6 2 2

In population with both types ▪ ▪ ▪ Proportion of cooperators = h Expected outcome for cooperators = 4 h + 0 (1 -h) = 4 h Expected outcome for defectors = 6 h + 2 (1 -h) = 2 + 4 h Cooperator Defector 4 6 4 Defector 0 0 6 2 2

Average Payoffs when Cooperators and Defectors Look Alike

Average Payoffs when Cooperators Are Identifiable w/o Cost

Average Payoffs when Defectors are Identifiable at Identification Cost = 1

Multiple human types may coexist Commitment and identification strategies viable to achieve cooperation in human interaction

Mimicry ▪ Viceroy ▪ Monarch http: //www. kidzone. ws/animals/monarch_butterfly. htm

“The secret of success is sincerity. Once you can fake that, you've got it made”

Primates’ Brain Size Positively Correlates with Group Size

Instinctive cooperation (3 b): Strong reciprocity ▪ Humans are willing to incur costs to punish cheaters ▪ ▪ even when there is no prospect of further interaction. This propensity ends up achieving greater cooperation, however. In “ultimatum” games, A divides 1000 € between himself and B, but none of them gets a cent if B rejects the offer. Usually, A divides by half and B rejects offers below 30%

▪ In public good games, individuals contribute money to a common pool, expecting an equal share in a multiple of the pool ♦ People start contributing but their contributions decay with time and approach zero at the end ♦ When cooperators can punish free-riders even at a cost (“strong reciprocity”), they do it, motivating cooperation ♦ Depending on punishing circumstances, cheaters lead cooperators incapable to retaliate to cheat; or cooperators willing to incur costly retaliation lead cheaters to cooperate

Instinctive cooperation (4): Moral instincts ▪ ▪ ▪ Moral taboos—e. g. , even discussing sale of human organs makes people unpopular. Does this explain something about economists? What about free market politics?

Moral circle ▪ ▪ Identical mechanisms triggered ♦ Precluding certain actions (e. g. , killing) or treatments (considering the costs and benefits of some actions) ♦ Reification of human beings no guilt when treating them as things or insects (killing enemies in war action) With circle borders culturally flexible ♦ Insects vs. pets, bulls in bullfighting or in meat production ♦ Human beings: strangers, enemies, race, etc. ▪ • Trust Mistrust Examples ♦ Forbidden markets: human organs, pollution rights ♦ Nazism, terrorism, war, etc.

Some nasty illustrations of moral circles

Do we choose what to look at?

“Blondi”

Instinctive cooperation (5): Conformity herd behavior

Ecological cooperation: Relational frameworks among hunter gatherers ▪ Limited social interaction ♦ Small group size (100 -150 people) known people, not strangers ▪ Limited specialization ♦ Sex: hunting, warfare, gathering, children ♦ Age: knowledge, grandmothers ♦ No government or military specialization ▪ No technical change ♦ Wealth accumulation caused by expropriation?

▪ Little capital ♦ Mobility limited use of capital goods to portable ones ▪ Distribution ♦ Sharing if predominant risk is exogenous • • Meat of big game Across-band insurance ♦ Private property if moral hazard is important: tools, fruits ▪ Trade ♦ Based on reciprocity ♦ Market relations are artificial, often counterintuitive

Mind & institutions (IV): Institutions Cognitive specialists Rationality Cooperation Institutions Modular mind Instinctive Co-opt instincts Maladapted mind Ecological Fill adaptation gap

Institutions’ inputs ▪ Use instincts as building blocks. Examples: ♦ Disgust food taboos close the group ♦ Christian theology • • Fear punishing God attrition Love contrition Shame and guilt confession Most sophisticated: Oral confession

Institutions’ function ▪ Fill the adaptation gap by controlling instincts poorly adapted to stable environments ♦ Rationality (self-control) • Postponing gratification ♦ Cooperation (control) • Violent anger Third-party enforcement ♦ Cultures as technologies: E. g. , genes & ethics of Romans, Christians & Modern Europeans, Puritans, oral confession • • Arruñada, Benito (in press), “Protestants and Catholics: Similar Work Ethic, Different Social Ethic, ” The Economic Journal. Arruñada, Benito (2009), “Specialization and Rent-Seeking in Moral Enforcement: The Case of Confession, ” Journal for the Scientific Study of Religion, 48(3), 443 -61.

Self-control’s goal: to postpone gratification

Self-control’s main problem ▪ The innate subjective discount rate is too high now (it is adapted to more unstable environment) Main function of education: to lower it

Managing Loss Aversion The Kahneman-Tversky “Value Function”

Social control: punishing free riders

Institutions and group selection ▪ Controversy: Group instead of genic selection ▪ at the cultural (institutional) level? In any case, ♦ Essential to control free riding • Groups are systems of indirect reciprocity, more than promoters of altruism—groups serve us ♦ Group selection no morally superior: Individual altruism leads to group selfishness: double moral standards in and out of group

Individual altruism often leads to group selfishness

Summing up: A new view of the human mind ▪ ‘Blank slate’ mind ♦ Content-free ♦ Decides by general rules (probability laws, etc. ) ♦ Cultural determinism • • Noble Savage Constructivism ▪ ‘Swiss Army knife’ mind ♦ Content-full ♦ Instincts essential for rationality ♦ Cultural interaction • • Preprogrammed learning Cultural universals

Evolution now reveals the weakness of two common myths ▪ No noble savage ▪ No ghost in the machine

Second Part: Business Applications ▪ Organization of exchange ♦ ‘Farsighted contracting’ in TCE ▪ Management ♦ ♦ General management Managing people Marketing Finance

Business consequences (I): Organizing exchange ▪ ▪ Assumptions in Transaction Cost Economics : bounded rationality & opportunism Solution: “farsighted contracting” ♦ use of calculative rationality ex ante to develop safeguards against ex post opportunism It often collides with instinctive “contractual heuristics” —mainly, with cheater detectors Schizophrenic (and impossible? ) palliative: do not explicitly safeguard in daily life, in marriage contract, etc.

Most important: Contextual contracting needed ▪ ▪ Need to identify relational frameworks to avoid applying ‘safeguarding’ approach wrongly. Examples: ♦ When invited for dinner, we reciprocate, we do not pay ♦ Length of contracts differs widely Applications ♦ Research: more crucial to study real problems ♦ Management: perhaps, need to distinguish explicitly: • • Real management: requires instincts and, probably, self-deception to interact effectively Business analysis: epistemological truth may help ♦ Politics: free-marketeers need emotional message ♦ Education: MBAs have bad fame. This may explain. . .

How behavioral assumptions may affect MBAs’ salaries Students’ quality (GMAT) Placement services Research quality MBA Graduates’ salaries Weight of behavioral assumptions in MBA courses Size of MBA core Controls (USA, EUR, et al. ) Arruñada, B. , and X. H. Vázquez (2009), “Behavioral Assumptions and Management Ability: A Tentative Test, ” Universitat Pompeu Fabra, Economics and Business Working Paper Series 1157, June. (http: //www. econ. upf. edu/en/research/onepaper. php? id=1157).

Do behavioral assumptions affect MBAs’ salaries? MBA Salary = 995*** + 168** + 253*** + 247** + 0. 66 *** + 24 *** + 12, 490*** + 9, 339*** - 144, 020*** % of courses assuming ‘Kind people’ Weight of Core in Total (%) Average GMAT (endogenous) Experience Annual Budget ($) Enrollment USA Europe (3 SLS , $000, N = 97, R 2 = 0. 82)

Business consequences (II): Management ▪ General management ▪ Managing people ▪ Marketing ▪ Finance

General consequences for management ▪ Rationality ♦ The rationalizing function of firms ♦ Specialization ▪ ▪ • Among humans: self-control • Between humans and computers Organizational structure ♦ “Natural” size of productive units: 100 -200 individuals ♦ Gossip, informal organization and “managing by walking around” Incentives ♦ Delicate use because: • • “Strong reciprocity” (Fehr) Crowding out (Frey)

Consequences for managing people ▪ “Biases” ♦ ♦ ♦ ▪ Loss aversion resistance to change Over-optimism and overvaluation Self-deception–necessary for leadership? Overvaluation of status Conformism • Herd behavior (of leaders) • Role of rituals to consolidate groups Detectors of human types and cheaters ♦ Importance of personal contact business travel ♦ Importance of cooperative climate for first interactions

Consequences at functional level ▪ Marketing ♦ Sexist advertising, no only in contents but in approach ♦ Brand management is grounded on personal, emotional relationships ♦ Product design based on • • Pleasure without pain: e. g. , artificial sweeteners (next slide) visual and oral symbols, no abstractions (commands versus Windows interface) ▪ Finance ♦ Possible biases: • • excessive confidence too low risk premiums herding speculative bubbles

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Conclusions ▪ Narrower and better aimed use of simplifications: ♦ Homo Economicus ♦ “Opportunism seeking with guile” ▪ Greater reliance on homo sapiens: ♦ Instinctively rational and cooperative ♦ Ecologically rational and cooperative ▪ Reasons for optimism. . .

Reasons for optimism ▪ We are more in control than ever: ♦ our institutional technology uses and enhances our biology ▪ We keep expanding our moral circle ♦ Band nation world, animals, … ▪ Institutions have performed nicer than genes: ♦ War deaths during 20 th century were 100 times lower than in hunter-gatherers’ bands