Question

ii) What are beliefs? What role do beliefs play in actions that human beings take?

iii) What are constraints? What is the role of constraints in actions taken by human beings?

iv) Who is a Homo Economicus? What happens to homo economicus when we take social rather than self-interested preferences into account?

v) What is the ultimatum game? How have results of the ultimatum game challenged the assumptions of standard textbook neoclassical economics?

Answer 1

Beliefs

Assumptions and convictions that are held to be true, by an individual or a group, regarding concepts, events, people, and things.

Belief is the state of mind in which a person thinks something to be the case with or without there being empirical evidence to prove that something is the case with factual certainty. Another way of defining belief sees it as a mental representation of an attitude positively oriented towards the likelihood of something being true.

Belief is the beginning of what should be an ongoing process related to understanding how the world works. As the philosopher Ludwig Wittgenstein points out in On Certainty “The child learns by believing the adult.” But, soon the child needs to learn that beliefs can differ, be wrong, and need to be validated by reason and evidence.

Religion and philosophy is the more extreme for of belief of order. The concept of religious or philosophical beliefs is what helps many people make choices that encourage order in their lives. An ethical belief of "though shall not kill" is one such religious belief that keeps order in society. On one hand a theist may believe that a god keeps things ordered, giving them a feeling of security, whereas an atheist may think that a god in charge of everything would remove the security of their ordered world. Belief therefore is essential not just philosophically, religiously, but also just to maintain our sanity.

Beliefs do increase the likelihood of virtuous behavior.  In some cases the primary role of the beliefs is to trigger particular feelings and emotions, as in the case of role models. In other cases the primary role of the beliefs is to structure a person’s worldview or outlook on life, such as with the moral and religious beliefs. Furthermore, it is important to stress that the four answers offered above are not unrelated to each other – a positive role model, for instance, can influence what moral and religious beliefs we might have, and vice versa.

Constraints

Constraints are conditions that we need to happen or would like to happen with a design. In the early stages of a design task they may tend to be negative. For example, a car engine cannot exceed the size the space in which it fits, yet it cannot produce less than a specified power. As a design proceeds, they may become more positive. For example, a bearing must have the same diameter as the shaft it supports.

Each constraint defines a subset of the set of all possible designs in which it is satisfied. When several constraints are specified, it is only the possibilities within the intersection of all the subsets that we are interested in. This intersection becomes smaller as more constraints are added. If it becomes empty, then there is no design which satisfies all the constraints. The designer’s skill is now in deciding which constraints it is safe to relax.

The theory of constraints (TOC) is a management paradigm that views any manageable system as being limited in achieving more of its goals by a very small number of constraints. There is always at least one constraint, and TOC uses a focusing process to identify the constraint and restructure the rest of the organization around it. TOC adopts the common idiom "a chain is no stronger than its weakest link". This means that processes, organizations, etc., are vulnerable because the weakest person or part can always damage or break them or at least adversely affect the outcome.

The role of constraints

To create and enhance thinking and learning skills
To make better decisions
To develop responsibility for one’s own actions through understanding their consequences
To handle conflicts with more confidence and win-win outcomes
To correct behavior with undesirable consequences
Assist in evaluating conditions for achieving a desired outcome
To assist in peer mediation
To assist in relationship between subordinates and bosses

Homo Economicus

Homo Economicus is a term that describes the rational human being assumed by some economists when deriving, explaining and verifying theories and models. Homo economicus, or economic human, is the figurative human being characterized by the infinite ability to make rational decisions. Certain economic models have traditionally relied on the assumption that humans are rational and will attempt to maximize their utility for both monetary and non-monetary gains. Modern behavioral economists and neuroeconomists, however, have demonstrated that human beings are, in fact, not rational in their decision making, and argue a "more human" subject (that makes somewhat predictable irrational decisions) would provide a more accurate tool for modeling human behavior.

The term homo economicus, or ‘economic man’, denotes a view of humans in the social sciences, particularly economics, as self-interested agents who seek optimal, utility-maximizing outcomes. Behavioral economists and most psychologists, sociologists, and anthropologists are critical of the concept. People are not always self-interested, nor do they have consistent preferences or be mainly concerned about maximizing benefits and minimizing costs. We may make decisions with insufficient knowledge, feedback, and processing capability (bounded rationality); we overlook and are constrained by uncertainty; and our preferences change, often in response to changes in context and to noting others’ preferences.

Homo economicus hypothesis assumes human behaviors are motivated by instrumental rationality and self-interest. On the one hand, individuals make decisions not intuitively and blindly, but on the basis of the deliberate judgment and calculation of costs and benefits. On the other hand, individuals are self-interested in interactions, and their sole objective is the maximization of self interest. Although late economists made some adjustments about the homo economicus assumption, these adjustments did not make major deviations from homo economicus, and which is still the most essential humanity hypothesis of economics. According to the homo economicus assumption, human is rational and self-interested, and individuals make decisions on the basis of cost-benefit analysis.

People's attitudes regarding risks associated with gains are different from those concerning losses. Homo economicus and the idea that humans always act rationally, is challenged by risk aversion.

The Ultimatum Game

The ultimatum game is a game in economic experiments. The first player (the proposer) conditionally receives a sum of money and proposes how to divide the sum between the proposer and the other player. The second player (the responder) chooses to either accept or reject this proposal. If the second player accepts, the money is split according to the proposal. If the second player rejects, neither player receives any money. The game is typically played only once so that reciprocation is not an issue.

Assumptions of neoclassical economics do have a normative basis which results from the definition of its fundamental problem: the allocation of scarce resources. Neoclassical economics assumes that humans have the goal to maximize their utility and that this maximization can be modelled. Since only individuals know their own preferences, the market is considered to be the best instrument to satisfy them. State intervention is only considered to be economically reasonable in case of a market failure, while the perfect market is taken as the normal case and perfect competition as ideal state. NIE assumes utility maximizing and individual actors, who structure and reduce uncertainty and transaction costs by building institutions, these assumptions do not necessarily imply an optimal resource allocation. Even if some core assumptions and ideas from classical economics were incorporated and modified, the current state of neoclassical economics can only partially be seen as a new edition of classical economics; hence, the name can be misleading.

The highly mixed results (along with similar results in the Dictator game) have been taken to be both evidence for and against the so-called "Homo economicus" assumptions of rational, utility-maximizing, individual decisions. Since an individual who rejects a positive offer is choosing to get nothing rather than something, that individual must not be acting solely to maximize his economic gain, unless one incorporates economic applications of social, psychological, and methodological factors (such as the observer effect). The classical explanation of the ultimatum game as a well-formed experiment approximating general behaviour often leads to a conclusion that the rational behavior in assumption is accurate to a degree, but must encompass additional vectors of decision making.