1.1 Social Norms
Individual attitudes and behaviors are influenced by the presence of others in social life. Individuals join together to achieve a goal, and try to satisfy a need through their joint association. They influence each other in group interactions that are structured by a set of social norms. People incorporate in themselves a set of social norms from their surroundings. They conform to, or are regulated by, social norms. Sometimes people deviate from conventional economic predictions. Many anomalies in human behavior can be explained by reference to social norms.
An understanding of social norms is critical to predict and explain human behavior. Social norms can impact our judgments. For example, according to Cialdini et al. (1990), people are more likely to litter when the floor is already littered. That is, when the apparent social norm is to litter (i.e., the floor is covered with trash in public places), people are more likely to conform to that apparent social norm by throwing their trash on the floor. When the apparent social norm is not to litter (i.e., the floor is nearly spotless in public places), people are more likely to conform to that norm by refraining from littering. This difference is magnified when the norm is made more salient.
What is a social norm? First, social norms can be thought of as a shared belief system of rules and standards in a given group. There are widespread expectations of proper and acceptable behavior within the group. A social norm is a behavior characterized by its being prevalent among group members. Second, social norms emerge out of interpersonal interaction with others. People conform if they choose to follow the norms of the society to which they belong. The norms are social rules which reflect a historical trial-and-error process. Through this bottom-up process, the norm-produced social rules tend to reflect peoplesā diverse and specialized situations. As the number of people complying with a norm increases over time, the expectation leads the norm to continue into the future. Third, social norms guide peoplesā behavior without the force of laws. Laws are promulgated by public institutions, such as legislatures, regulatory agencies, and courts, after deliberate procedures, and are enforced by the power of the state. Social norms are, on the other hand, enforced privately in a decentralized way. Norm violators are punished through nonlegal sanctions from social networks.
The importance of norms is highlighted, for example, in Posner (2000):
Why tax compliance? A widespread view among tax scholars holds that law enforcement does not explain why people pay taxes. The penalty for ordinary tax convictions is small; the probability of detection is trivial; so the expected sanction is small. Yet large numbers of Americans pay their taxes. This pattern contradicts the standard economic model of law enforcement, which holds that people violate a law if the benefit exceeds the expected sanction. Some scholars therefore conclude that the explanation for the tendency to pay taxes must be that people are obeying a normāpresumably a norm of tax payment or a more general norm of law-abiding behavior. (Posner 2000, p. 1782)
Law is conceptualized as a top-down mechanism to bring order and control violence through coercive enforcement. In the case of legal compliance, individual incentives most often refer to deterrence (Becker 1968). Individuals are deterred from criminal activities by a higher fine and by a higher probability of conviction. This asserts that people respond significantly to the deterring incentives created by the criminal justice system. If so, punishment of criminals may be the best way to reduce the amount of crime. In general, the choice of crime is more appealing when crime is less punishing. People obey the law only when their expected compliance utility (i.e., the payoffs expected to be obtained when they obey the law) is greater than their expected violation utility (i.e., the expected payoffs when they violate the law).
The literature of law has devoted considerable research effort to two main issues: the modeling of criminal behavior using the utility function framework and the policy design of optimal law enforcement. In the rational choice approach, legal compliance is accounted for by standard economic incentives of self-utility maximization; compliance is in oneās self-interest. Thus, the rational choice approach predicts that the frequency of crimes will decrease if the perceived benefits associated with offending decisions are reduced, and the perceived costs associated with offending decisions are increased. Unlike legal rules, social norms are not supported by formal sanctions. Individuals may care about how their decision to comply with norms is perceived by others, creating a role for social interaction. Norms are then understood as sets of expectations from others. Norms make people stick to prescribed behavior even if new and apparently better options become available (Elster 1989).
Norms must inform any methodology that studies behavior and incentives and takes account of how people follow norms in choosing actions. Kreps (1997) distinguishes intrinsic motivations from extrinsic incentives as potential factors giving rise to social norms. McAdams and Rasmusen (2007) define norms as behavioral regularities supported at least in part by normative attitudes. The norm of legal obedience provides intrinsic motivations to obey the law that is independent of extrinsic incentives (material sanctions). People suffer from guilt, disapproval, or shame from breaking the law. There are possibilities that an individual sanctions oneself. Guilt is disutility that violators feel, at least to some extent, about stealing, even though they believe they are certain not to be caught. Someone might lose utility from believing that other people disapprove of one, regardless of whether they take action that may materially affect one. Unlike utility from guilt, utility from disapproval arises only when one believes other people have formed beliefs about oneās behavior. Shame might arise when other people discover the violation and think badly of the violator. The violator can imagine what others would think if they discover the violation. The violator may also feel ashamed even though others do not discover it. The shamed person fails to meet standards set by the normative beliefs of others even though one lives up to oneās own principles. Unlike disapproval, the person feeling shame suffers disutility regardless of what others think.
In McAdams and Rasmusen (2007), behavioral regularities that lack normative attitudes are referred to as conventions. Furthermore, according to Voss (2001), norms can be distinguished from conventions in general by the necessity of sanctioning. In social psychology, norms consist of two major categories: they are both descriptive (āisā statements) and injunctive (āshouldā statements) (Cialdini and Trost 1998). Descriptive norms describe what people generally do in a situation, while inductive norms describe what people ought to do there. Conventions are thought of as descriptive norms that are simply what people do. Norms broadly encompass conventions. A specific convention is an actual behavioral regularity in a given group; it implies the behavioral pattern, or customary practice, actually followed by the group members in a recurrent situation of social interaction. In the theory of conventions, norms are considered as coordinating devices and one of several alternatives that enable people to achieve their goals (Young 1998). A convention is a stable solution to a recurrent coordination problem; it is arbitrary in the sense of being the realization of only one of multiple equilibria that a coordination game displays. An injunctive norm is, on the other hand, referred to as any norm that one is obliged to follow due to the threat of sanctioning its violation. It is considered a belief system about what constitutes morally approved and disapproved conduct.
There is now growing recognition that norms play a significant role in behavioral prediction and explanation. Norms govern behavior, and are self-sustaining in an interdependent system. Norms specify a limited range of behavior that is acceptable in a situation, and facilitate confidence in the course of action. Norms enable individuals to deal with the complexity and incompleteness of information, and make them stick to prescribed behavior (even if new and apparently better options become available). Norms, thus, describe the uniformities of behavior that characterize groups. While the independent decisions of individuals are shaped by narrow intentions, their consequences are unlimited; there exists a dimension of spontaneous social order. Norms come into existence as a product of group interactions. A norm is the behavior performed by the majority of the relevant group. It is construed as the central tendency of the distribution of a certain attribute within a group.1 People learn information about a social category that represents the collective, and this information is used to infer the distribution of the membersā attitudes within the collective. How these interactions, and the outcomes they give rise to, take shape depends upon the specific institutions of the society. Habits and traditions become āinstitutionalizedā behavior more or less in accordance with the norms of prior generations, which are again passed over to the next generations. Different norms provide the contours of different groups.
1.2 Economic Behavior
Economics is divided into some competing schools based upon views of human nature. In particular, behavioral economics, which has made significant advances in recent decades, demonstrates how neoclassical (or conventional) economics fails to represent the reality of human behavior. The concept of preference is fundamental in two schools, neoclassical and behavioral. A preference is a relation. Neoclassical economic theory identifies individuals as a set of āwell-definedā preferences. That is, in neoclassical economics, preferences are axiomatically required to be ārationalā so that choices are rational. Its core has been axiomatized in expected utility theory. More specifically, it treats individuals as choosing under risk, where outcomes of actions have a determined probability. Expected utility theory measures an individualās valuation of things called āprospects.ā Generally, any prospect is represen...