Sunday, May 9, 2010

"Ernst Fehr: How I found what's wrong with economics" from New Scientist

"Traditionally, economic theory assumes that people care only about themselves, pursuing their own self-interest. Even when people cooperate, the theory goes, this is really only pursuing their own interests by harnessing others' efforts. That may seem cynical, but it is a mainstay of economic thinking that has taken painstaking research by Fehr and his colleagues to refute.

Suppose, for example, you approach a stranger on the street and hand them $20. You tell them they can keep the money or give some to an unknown person. Whatever they choose to do, they will never meet that person, nor will anyone learn of their decision. Will the stranger keep it all or give some away? If you think like a "hard-headed" economist, you'll assume that everyone short of the late Mother Teresa would pocket the lot. But when Fehr and his colleagues did this a few years ago they found that a significant proportion of people gave away close to 50 per cent of the money.

. . .

At a conference on compassion in economics in Zurich last month, people from the fields of economics, psychology, philosophy and religion gathered to discuss the extent to which the crisis was enabled and even amplified by traditional thinking in economics. According to Fehr this is exactly what has steered us down the wrong path. "I think this kind of thinking played a fundamental role in the recent crisis," he says, "as this notion that people are strictly self-interested has been the dominant mindset for decades. Almost everyone in business, finance or government studies some economics along the way and this is what they think is the norm. It's a biased way of perceiving the world."

The paradox is that it's the economists' supposedly "hard-headed" thinking that has turned out to be profoundly naive. Getting that message out is now one of Fehr's most urgent aims." --Mark Buchanan