Nearly all of economic theory depends on a key assumption: that individuals and organizations behave in their own self interest. This is the assumption that underlies Adam Smiths invisible hand and makes markets work. Without this assumption, rationality vanishes, and our ability to predict behaviors and their outcomes is lost.

But, under this assumption, some common human preferences and behavior do not make sense. For example, firms that practice racial or gender discrimination in hiring are foregoing profit to satisfy irrational preferences.

And under this assumption, altruism does not exist. For a long time, economists have explained away charitable giving as something people only do when it benefits themselves. People give to charities for the tax benefits. Or People give to charities that directly give back to them through their services. Or people give to charities because it makes them feel good or look good to do so.

At this time of year, especially, we see an up-tick in charitable giving. There is evidence that tax policy contributes to our giving. Forbes reported that charitable giving by individuals fell 3.4% in 2018 when the standard deduction for income taxes increased, lowering the incentive to donate to charity and itemize deductions.

However, tax incentives cannot explain why we give gifts to our families, friends and neighbors.

A few decades ago, economists began to try to reconcile economic theory with observed irrational behavior like gift-giving, and a new branch of economics was born behavioral economics, which brings psychology into our study of economic decision-making. Among behavioral economists are some who conduct experiments to better understand human behavior.

One experimental series in particular seeks to understand altruistic behavior. Dr. James Cox, who now is an economist at Georgia State University, conducted experiments in which each participant was given an endowment and assigned a partner, who would remain anonymous to the participant. The participant and his or her partner would play one of three short games. Each game involved allowing one or both players to choose to or not to give money to their anonymous partner in the game.

The three games were carefully designed so that observing players choices would allow the economists to distinguish among three types of giving: trust or reciprocity of trust, inequality-aversion and altruism.

Trust and reciprocity lead to conditional giving giving with the expectation of receiving something in return or giving in response to having received something.

But, the other two types of giving, inequality-aversion and altruism, are unconditional. These types of giving indicate that ones own happiness is dependent on minimizing inequality between oneself and another or simply on giving to another.

In Coxs experiments, he found evidence of all three types of giving.

Economic theory explains altruism and inequality aversion in the context of individuals preferences. Cox calls these other-regarding preferences. Simply put, someone with other-regarding preferences gains personal satisfaction from the increased satisfaction of others.

In this sense, charitable giving still fits the fundamental assumption that people behave in their own self interest. One will only give to another if that giving increases his own satisfaction.

But, these preferences are weird, and they took economists some time and some word-smithing to fit them into our traditional self-interest story.

With the holidays approaching, I am grateful for the weirdness of humanity. I am grateful for all of the non-profit organizations working tirelessly for the good of our community. I am grateful for the individuals and for-profit organizations that contribute to charitable causes. I am grateful for tax policies that encourage giving and for those who would give anyway.

The rest is here:
The economic search for why we give | Editorial Columns - Brunswick News