In this essay, I want to illustrate the power of Sentiments to bring order to contemporary experiments where the traditional game-theoretic models failed decisively to predict human action even under the conditions of anonymity. Sentiments is about sympathy, an undefined primitive human characteristic known and identified through the work it does in enabling the emergence of the human capacity for fellow feeling (in: Smith (ed) The theory of moral sentiments, Oxford, Oxford University Press, p. 10, 1759). Fellow feeling provides the experiential foundation for our rule-following conduct, and constitutes the evolutionary basis for human sociality. Similarly, gravity in Newtonian physics was a primitive concept known by the work it does in governing the orderly motion of all bodies in the observable universe, as it was known in Newton’s time. Both systems sought to explain and understand observations by means of postulated forces at work in nature, but insensible to human awareness.
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As an economics graduate student in 1950, I read Wealth. Nowhere in Wealth does he cite Adam Smith (1759), leaving the student-consumer without a clue as to its importance as a prolegomenon to understanding his second work.
Ross (1995, p. 177).
In Sentiments, proper attention to self is a virtue to be respected: “We are not ready to suspect any person of being defective in selfishness...Carelessness and want of oeconomy are universally disapproved of, not, however, as proceeding from a want of benevolence, but from a want of the proper attention to the objects of self-interest” (S, p. 304).
Kahneman (2002) was cited by the Nobel committee for his contributions “concerning human judgement and decision making under uncertainty.” The asymmetry between gains and losses, particularly as it is manifest in decision under uncertainty, is perhaps one of the most persistent and well-documented regularities established since the 1970s in the decision and judgement literature by experimental psychologists, behavioral, and experimental economists. It is significant that none of this literature was influenced by Smith (1759), whose contribution was not so much lost to modern thinking and research, as never found. It is equally significant that the subsequent literature independently discovered many of the principal elements that Smith articulated, reproducing, if less comprehensively, important aspects of his analysis and its implications 200 odd years later.
This passage explains why innovation is relatively rare; why so few penetrate the boundaries of tradition to risk failure.
Although this property of law clearly reflects Smith’s proposition on the asymmetry between gains and losses, he does not explicitly make that cross reference. Elsewhere, for example in the quotation on page 213, Smith cross references page 45 where he first develops the idea of gain-loss asymmetry. I do not see that omission as significant in terms of his understanding.
As we will see below in applying Smith’s framework to a two-person extensive form game, circumstances–the set of moves and resulting payoffs–all matter because intentions are conveyed not just in the action taken but in the available action that could have been taken at each decision node. The situation as read by others help form the rules-as-conventions or cultural norms that we follow.
This section was added after my referee justifiably reprimanded me for not recognizing more prominently that Smith’s model of sociability relates to “the love of what is honorable” (Smith 1759, p. 137) and thus to our natural desire for praise-praiseworthiness, and to avoid blame-blameworthiness, especially worthiness. Accordingly, in the text I review our treatment in Smith and Wilson (2017a) wherein the rules we follow derive directly from these motivations.
Obviously PR and PW could be arguments of monotone increasing functions, but treating them as dichotomous, but weighted in defining the individual’s social state, most clearly represents Smith’s logical structure.
Some such formulation is further indicated by McCabe et al. (2003) who compare voluntary and involuntary versions of a trust game in which one/third of Player 2s choose to share as if cooperative even where they cannot infer the intentions of their counterpart Player 1s.
“The love of praise-worthiness is by no means derived altogether from the love of praise. Those two principles, though they resemble one another, though they are connected, and often blended with one another, are yet, in many respects, distinct and independent of one another.” (Smith 1759, p. 114)
Here in brief is an example from my personal experience. In the Tucson suburbs, homeless individuals occupy the center islands of major intersections, and offer newspapers for sale. The same individual regularly occupies a particular island, suggesting well-defined property rights emerging by mutual voluntary consent. I occasionally buy a paper from the man who occupies an island near my home, giving him $5 for a $2 newspaper. But I rarely read media newsprint anymore; so approaching the island one day, I see the familiar man at his station. Approaching the island for a left turn I stop, roll the window down, reaching out with a $5 bill in my right hand. He reaches for the bill with his left, and extends his right hand to me holding the newspaper. I say, “That’s ok, you can keep the paper.” He instantly pulled back both hands, replying matter-of-factly, “I only sell newspapers.” Although startled, I recovered, and say, “I’ll take the newspaper.” He looked at me and smiled; we had a contract. Notice the detailed circumstances. My intention had been to be doubly generous, let him sell the paper to somebody else. He corrected my error. He was a business man. It was entirely acceptable for me to show my gratitude for his service by giving him $5 for a $2 newspaper, but there was no way I could refuse the paper while he accepted the bill without those actions giving the lie to his work-ethic integrity. He would not allow me to be an instrument of his corruption. I corrected my error, and in a later encounter saw more evidence of his devotion to his customers. Observe that neither of us doubted that the other preferred more money to less. The monetary stakes were minor; what mattered was our conduct in a relationship. After another year his post was empty for a time, but eventually was taken by another person. There are rules for acquisition and occupation, rules for maintaining orderly vender-customer relations, and, we can suppose, rules for accession.
See Osborn et al. (2015) who imbed a previous extensive form game tree in a narrative which causes a substantial change in the results.
“Other-regarding behavior” was a term introduced in Hoffman et al. (1994) in their study of ultimatum and dictator games, to guard against the presumption that the behavior was necessarily explained by and due to other regarding preferences, specifically “fairness” in the sense of outcomes, as distinct from fair-play rules which are modelled in Sentiments. But that cautionary language failed to prevent the leap captured in the above quotation, which reflects a common mis-perception.
The axiom is sufficient, and does not rule out social preference functions. But each agent’s social preference must be compatible with the other. You and I have a potential conflict if we each prefer to transfer money to the other. Smith handles this problem elegantly by assuming strictly self-interested individuals who learn to control its expression because they are in a relationship with others. Modelling relationships–what it means to be social–becomes the challenge to socio-economic theory, not refitting utility functions to new observations.
Cox et al. (2016) ingeniously examine various motives for Player 2s to be trustworthy in a variation on the original Berg et al. (1995) game. The most important motive empirically is what they call vulnerability-responsiveness in which Player 2 avoids any action that would hurt Player 1. But this is explained by Smith’s model as a weak form of Beneficence Proposition 1: not to hurt is for Player 2 not to play down.
My referee points out, however, that Smith himself disclaims any special biological role for natural affection. “What is called affection, is in reality nothing but habitual sympathy... The general rule is established, that persons related to one another in a certain degree, ought always to be affected towards one another in a certain manner... A parent without parental tenderness, a child devoid of all filial reverence, appear monsters, the objects, not of hatred only, but of horror” (Smith 1759, p. 220).
In the Ultimatum game people are randomized into Proposers who are offered a split of say $10 ($100) and Responders who accept or reject the offer, giving zero to each. Many Responders refuse offers of $3 ($30) or less. Yet $1 ($10) is better than nothing and is predicted not be rejected in one’s self-interest. In the standard ultimatum game, play is not optional, is thereby coercive (extortionist), and by Proposition 2 the outcomes cannot be analyzed in terms of utilitarian benefits. Smith and Wilson (2017b) report new “voluntary” versions of the ultimatum game recording the highest frequency of support for equilibrium that have been recorded in the literature.
The quotation from page 25 has far deeper meaning and implications than I can explore here. For example see Schliesser (2011).
Smith used language with precision. Every word counts. For example he says “free to pursue his own interest his own way.” Most today would read, even misquote this as, “pursue his self-interest”.
Berg, J., Dickhaut, J., & McCabe, K. (1995). Trust, reciprocity and social history. Games and Economic Behavior, 10, 122–42.
Cox, J. C., & Deck, C. A. (2005). On the nature of reciprocal motives. Economic Inquiry, 43, 623–635.
Cox, J. C., Kerschbamer, R., & Neururer, D. (2016). What is trustworthiness and what drives it? Games and Economic Behavior, 98, 197–218.
Fehr, E., & Fischbacher, U. (2002). Why social preferences matter—The impact of non-selfish motives on competition, cooperation and incentives. The Economic Journal, 112, C1–C33.
Hoffman, E., McCabe, K., Smith, V. L., & Shachat, K. (1994). Preferences, property rights and anonymity in bargaining games. Games and Economic Behavior, 7, 346–380.
Kahneman, D. (2002). Maps of bounded rationality: A perspective on intuitive judgment and choice., Prize lecture Stockholm: The Nobel Foundation.
McCabe, K., & Smith, V. L. (2000). A comparison of naïve and sophisticated subject behavior with game theoretic predictions. Proceedings of the National Academy of Arts and Sciences, 97, 3777–3781.
McCabe, K., Rigdon, M. L., & Smith, V. L. (2003). Positive reciprocity and intentions in trust games. Journal of Economic Behavior and Organization, 52(2), 267–275.
Osborn, J., Wilson, B. J., & Sherwood, B. R. (2015). Conduct in narrativized trust games. Southern Economic Journal, 81, 562–597.
Ross, I. S. (1995). The life of Adam Smith. Oxford: Clarendon Press.
Schliesser, Eric. (2011). Reading Adam Smith after Darwin: On the evolution of propensities, institutions, and sentiments. Journal of Economic Behavior & Organization, 77, 14–22.
Smith, A. (1759). The theory of moral sentiments. D. D. Raphael & A. L. Macfie (Eds.). Oxford: Oxford University Press, 1976.
Smith, A. (1795). Essays on philosophical subjects. W. P. D. Wightman & J. C. Bryce. Oxford: Oxford University Press, 1980
Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations, (Vol. 1 and 2). R. H. Campbell & A. S. Skinner (Eds.). Oxford: Oxford University Press, 1976.
Smith, Vernon L., & Wilson, Bart J. (2014). Fair and impartial spectators in experimental economic behavior. Review of Behavioral Economics, 1(1–2), 1–26. https://doi.org/10.1561/105.00000001.
Smith, V. L., & Wilson, B. J. (2017a). Sentiments, conduct, and trust in the laboratory. Social Philosophy and Policy, 34(1), 25–55. https://doi.org/10.1017/S0265052517000024.
Smith, V. L., & Wilson, B. J. (2017b). Equilibrium play in voluntary ultimatum games: Beneficence cannot be extorted. Smith Institute for Political Economy and Philosophy, Chapman University. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3026357.
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Smith, V.L. Adam Smith, scientist and evolutionist: modelling other-regarding behavior without social preferences. J Bioecon 20, 7–21 (2018). https://doi.org/10.1007/s10818-017-9256-9
- Adam Smith
- Experimental economics
- Cultural evolution
- Economic psychology