Behavioural economics is a relatively new field that combines insights from psychology and economics to understand how people make decisions. It challenges the traditional economic assumption that individuals are rational and always act in their own self-interest. Instead, it recognizes that human behavior is often influenced by cognitive biases, emotions, and social norms.
The Role of Fairness in Decision Making
One of the key concepts in behavioural economics is fairness. Fairness refers to the perception of what is just and equitable.It is a subjective concept that varies from person to person and can be influenced by cultural, social, and personal factors. In traditional economics, fairness is often overlooked as a factor in decision making. However, behavioural economics recognizes that fairness plays a significant role in how individuals make choices. People are not only motivated by their own self-interest but also by a desire for fairness.
The Ultimatum Game
A classic example used to study fairness in decision making is the Ultimatum Game. In this game, two players are given a sum of money, let's say $100.The first player proposes how to divide the money between them. The second player can either accept or reject the offer. If they accept, both players get the proposed amount. If they reject, neither player gets any money. In traditional economics, the second player should accept any offer since getting something is better than nothing.
However, in reality, most people reject offers that they perceive as unfair. For example, if the first player offers $10 and keeps $90 for themselves, the second player may reject the offer out of a sense of unfairness. This experiment shows that people are willing to sacrifice their own self-interest to punish those who they perceive as unfair. This behavior cannot be explained by traditional economic theories, but it aligns with the concept of fairness in behavioural economics.
Theories of Fairness in Behavioural Economics
There are two main theories of fairness in behavioural economics: inequity aversion and social preferences. Inequity aversion refers to the tendency to reject unequal distributions of resources. People are willing to give up their own gains to prevent others from getting more than them.This theory is based on the idea that individuals have a strong desire for fairness and equality. Social preferences, on the other hand, refer to the idea that people care about the outcomes of others and are willing to make sacrifices for the greater good. This theory is based on the belief that individuals have a sense of altruism and empathy towards others.
The Impact of Fairness on Economic Decisions
Fairness can have a significant impact on economic decisions, both at an individual and societal level. In terms of individual decisions, people may be willing to pay more for a product or service if they perceive it as fair. For example, consumers may be willing to pay a higher price for products that are ethically sourced or produced in fair working conditions. At a societal level, fairness can influence policies and regulations.For instance, governments may implement progressive taxation systems to reduce income inequality and promote fairness. Similarly, companies may adopt fair labor practices to improve employee satisfaction and productivity.
The Dark Side of Fairness
While fairness is generally seen as a positive concept, it can also have negative consequences. In some cases, people's desire for fairness can lead to irrational decision making. For example, individuals may reject a job offer if they feel that their salary is not fair compared to their colleagues' salaries, even if the offer is higher than their current salary. Fairness can also be manipulated by individuals or organizations for their own benefit.For instance, companies may use the concept of fairness to justify unequal pay or discriminatory practices. Similarly, politicians may use appeals to fairness to gain support for policies that may not be in the best interest of the majority.
The Role of Behavioural Economics in Promoting Fairness
Behavioural economics can play a crucial role in promoting fairness in decision making. By understanding how people perceive fairness and make decisions, policymakers and organizations can design interventions that promote fair outcomes. For example, behavioural economics can be used to design fairer incentive structures in organizations. By taking into account people's social preferences and inequity aversion, companies can create reward systems that are perceived as fair by employees. Behavioural economics can also be used to promote fairness in public policies.By understanding how people respond to different policies, policymakers can design interventions that promote fairness and reduce inequality.