Behavioural economics attempts to explain why a standard economic model no matter how complex can sometimes be wrong, even if all possibilities are accounted for. A neoclassical economist would tell you that as rational beings, humans do what is necessary to maximise their own wealth and utility. However, human behaviour is not as logical as we wish it could be. We often allow our emotions to overpower the decisions made by our brain.

A perfect example of this is Altruism. A general definition of altruism is ‘selfless concern for the well-being of others. In economics, an example of this would be a consumer deciding to spend £2.00 on fair trade bananas instead of £1.00 on a cheaper substitute as the consumer is willing to pay extra for a product that they know has been ethically sourced.

Altruism can often be linked to ‘inequity aversion’ – the avoidance of being unfair and unjust. While this is most looked on as a good thing, inequity aversion can lead to controversy. For example, person A foregoing a reward to stop person B getting something better (spite).

A fun way of exploring this topic is through game theory which is a mathematical approach to economic modelling of the consequences of behaviour. The ultimatum game for example, where person A proposes a division of resources and person B can accept or reject. If B rejects, then neither person receives anything. If there was £100 to divide rationally and person A offered person B £10 then person B should accept the offer as it makes them £10 better off.

However, researchers found that person B nearly always rejects the offer because it does not seem fair, even though Person B will then be worse off than they could have been. This is called spite as B sacrifices his potential gain to stop A receiving any money. Therefore, it can demonstrate how people are not always “rational”.

Thus, from the table, we can see that altruism leads to person B gaining and person A losing. However, this table is very small scale and specific if we widened our view to aggregate economic terms what would altruism look like?

It can be viewed in some cases as mutualistic if two parties in an economic transaction are both altruistic (a.k.a. reciprocal altruism). It is only altruistic if the altruist is interacting with a ‘selfish’ economic agent. However, most mutualistic acts have an uneven distribution of benefits and so could be defined as altruistic.

Altruism is intuitively thought of as beneficial to the group the altruistic individual belongs to. The majority of people feel that in economic terms (total aggregate wealth), a specific society would economically improve if altruism was extremely prevalent. An example of this is when in an international meeting in 2001, 127 scientists were asked the question “Would society be better off, in aggregate economic terms, if altruism was more widely practiced?”. Their answer was yes in 97.6% of cases.

Economic improvement can be defined in 3 possible ways: a Pareto, Kaldor-Hicks or Marshall improvement. A pareto improvement is when the change occurred will cause a benefit to one party but no harm to the other. A Kaldor-Hicks improvement is like a Pareto improvement but instead one person gains a benefit, and one person is made worse off but is then compensated for their losses. A Marshall improvement is one in which there is a net improvement (net benefit) to the two parties so even if there is a loss to one party there is a greater gain to the other party resulting in an overall (net) gain. So, altruism will likely lead to a Marshall economic improvement but may not lead to a Pareto or Kaldor-Hicks improvement. This makes it more difficult to prove if altruism can lead to an economic improvement in a society as we must first decide on a definition.

I will use the Marshall definition as it makes the most ‘real world’ sense, I will now explain why. If, hypothetically, person A is transferring X pounds to person B. Person A is trying to maximise their utility. Person A will gain utility from their own consumption; however, they would also gain nearly as much utility from person B’s consumption (e.g. a parent-child relationship). Person A will transfer the exact amount to B where the utility gained from transferring one extra pound roughly balances with the loss. We can call this amount X. Transferring an additional pound beyond X would not be a Pareto improvement because it would not maximise person A’s utility and person A would therefore be worse off as the cost in utility to A from transferring an extra pound after X would be higher than the utility gained. However, transferring an extra pound would be a Marshall improvement as there would be a loss of utility to person A and a gain to person B, but person A also gains utility from Person B’s consumption (using X). Thus, B gains quite a lot of utility, and A will only lose a small amount of utility (A loses the potential utility of their own consumption of the additional pound but would gain most of it back because B is consuming). So, there would be a net gain of utility and therefore a Marshall improvement.

An example of real-world altruism is charity. If we use the standard idea of an economic agent who is rational and self-interested, it would be difficult for us to imagine them making a large anonymous donation to charity. This is where behavioural economics comes in. An altruist may gain utility (satisfaction) from the “joyful feeling” they get when they contribute to making other people’s living standards better. This is especially true for those living on higher incomes who live very comfortable lives as they will gain more utility from helping others than they would from watching their money sit in their bank account or perhaps spending it on luxury items. However, in some cases it may not be that the economic agent gains utility but instead they help those less fortunate because they believe it is the “right thing to do”. This also explains why people vote for welfare spending because the benefit of each additional pound spent on welfare programs is counted twice – once for the benefit of the recipient and once for the benefit to the altruist who paid for it. In this case altruism has led to economic improvement and likely an improvement in living standards.

Another example of real-world altruism is when firms unnecessarily employ workers. This can be because they want to avoid creating unemployment. Firms may sacrifice some of their potential profit in order to achieve other objectives such as environmental sustainability, supporting charitable causes or ethical responsibilities. While it could be argued that by spending more on charity and being environmentally friendly what a firm is actually doing is a very smart marketing ploy that they hope will increase demand for their product, it could also be argued they decided to do so for ethical reasons. In this case the firm may or may not be acting altruistically but even though their intentions are uncertain, their altruistic acts do lead to economic improvement and likely an improvement in living standards. For example, B Corps (Benefit Corporations) are normal for-profit companies which ensure they create a public benefit (positive externalities). B corps are to companies what Fairtrade is to coffee. They’re companies that care just as much about their environmental and social impacts as they do their profits.

As I have argued here a society that acts more altruistically (potentially regardless of their actual intentions) will lead to economic improvement and a ‘better off’ society.