Developments in Economic Thinking: A Workshop in Memory of Gary Charness

Taken from "Gary Charness - On the border between economics and psychology" by Martin Dufwenberg and Francesco Passarelli.

The term "dismal science" was coined to describe economics by a Scottish nineteenth-century historian, Thomas Carlyle. Those who still use it today do so by thinking about how people are represented by economics: rational, cold, cynical, and selfish. However, many would change their minds if they looked at how economic science has developed in recent decades. Economists have increasingly begun to consider aspects of human behavior that are more nuanced and anchored in evidence from psychology and sociology. The outcome of this endeavor has been the emergence of a discipline - now known as Behavioral Economics. It is becoming increasingly sophisticated, comprehensive, and thought-provoking. And it is far from dismal. It studies how individuals care about the well-being of others, how emotions influence them, how they change their behavior when they feel they are members of a group, how they wish to be kind when they have been treated kindly, and how they punish misbehavior. It studies how people seek the cooperation of others or the reasons why people adhere to social norms. In short, behavioral economics studies the individual we know ourselves to be.

Economists who have contributed to developing this strand of economics have had challenges. They have had to transcend the safe boundaries of rationality, where everything is calculable and predictable, or the simplistic notion that all humans care about is money. They have had to conceive novel theories, often not easy to formalize, and have been compelled to subject them to empirical testing, often without reliable data. This last angle has made them close to the branch of economics that relies on experimental methods, known as Experimental Economics. Here, the behavior of individuals is studied in a laboratory setting, which is a controlled environment, where logic and methodologies are borrowed from the exact sciences, such as biology and physics. Behavioral economists often test their new theories using experiments, and experimental studies not focused initially on psychological aspects often reveal a need to consider psychological factors to explain the data.

Thanks to the work of pioneer behavioral economists who used experimental methods, we now know much more about how individuals make their economic choices and interact with others.

A giant among these pioneers was Gary Charness. Brilliant and creative, he packaged his research agenda around topics of social interaction. While other eminent figures in behavioral economics sought to identify the circumstances under which individuals diverge from the tenets of rationality, Gary was intrigued by the factors that compel individuals to engage in cooperative behavior with others. The program was fascinating and expansive, yielding significant results that gave thousands of young economists new perspectives.

Much of Gary’s work focused on so-called social preferences, meaning that people care for others' situations and react, sometimes in subtle ways, to the behavior and intentions of others. They may, for example, respond to the perceived kindness of others, care for the welfare of the left-behind, or feel guilt if they do not live up to the expectations of others.

They may enjoy or resent competing with others, and their goals and behavior may depend on communication with themselves or others. Gary was a great fountain of ideas and fascinating insights, using a combination of theory and experimental methods.

Here is an example: Guilt is an emotion that can explain many human behaviors that otherwise would not be explained by thinking of a rational, cold individual. We all know that Americans tip 15-20% at restaurants or bars, while Italians often do not tip at all. The reason is that, in this case, American waiters expect a tip because of a social norm, while Italian waiters do not. People feel guilty about disappointing others' expectations. So, Americans tip because American waiters are the ones who expect it.

One of us (Martin) and Gary studied how communication, particularly promises, can foster trust and cooperation among individuals. And the mechanism is precisely guilt. Promises raise the expectations of those who receive them and, if not kept, may cause a feeling of guilt in those who make them. So everything becomes simple: if I make a promise and the other person believes it, then the other person will be disappointed if I do not keep it, and I will feel guilty. This mechanism can create cooperation. 

It works: Lucia will have a birthday party, and Giovanni runs a catering company. Lucia would like a catering service; however, she fears that Giovanni will do a bad service and decides to give up the catering business. Both of them lose out. Suppose Giovanni makes Lucia a promise that sounds like, "Don't worry, I promise my service will be up to standard." If Lucia believes it and Giovanni knows it, he will feel guilty about not providing a service up to par. Lucia anticipates Giovanni’s aversion to feeling guilty and decides to entrust him with the catering service. What happened? The promise generated expectations. Those expectations fuel guilt if not met, so aversion to guilt generates trust. With guilt on the line, promises can become self-fulfilling. When one thinks of it, the example described can represent an extremely broad case history. Think about how many transactions have the characteristics of that example and how important trust is in business and cooperation between individuals. Just think of the relationship between worker and employer.

The example described can be formalized into an economic theory, an abstract scenario based on intriguing psychological ideas. Gary and Martin constructed this theory and then subjected it to an empirical test. In a laboratory experiment, students interacted in structured games such as the story with Lucia and Giovanni, in which real money was at stake. Students who played the role of Giovanni could send messages to those who played the role of Lucia. The data supported the theory.

Gary also made many highly influential contributions on topics that did not concern social preferences. For example, behavioral economists have been interested in how people form good habits that foster a healthy lifestyle. Together with Uri Gneezy, Gary explored whether financial incentives can be effective in this connection. They ran an experiment (this time outside the lab), paying people to regularly attend a gym for one month. They found that gym attendance was raised not only during that month; it continued at a high level after the month had passed. This effect was, moreover, largely driven by people who had yet to previously regularly attend any gym. Gary & Uri’s imaginative study invites reflection on whether financial incentives may be useful policy tools for inducing other good habits (think of an anti-smoking campaign or a drive to encourage waste sorting, for example). Why not just incentives for buying cars, then, but why not incentives for doing things that are good for one's physical and mental health and society?

Gary passed away on May 17, 2024. He bequeathed a huge scientific legacy yet left behind a profound sense of loss among the numerous economists who had the privilege to collaborate with him and the thousands of individuals who had the opportunity to interact with him. The authors of this article are among these two groups.