Friday, January 23, 2009

Looking Good

This post incorporates the following Keystone Economic Principles
1. We all make choices.
4. Economic systems influence choices.
5. Incentives produce “predictable” responses.

There is a very interesting article in The Economist magazine that asks why people are involved in philanthropy. The article asks whether economics can explain why people engage in charitable behavior. It cites research that attempts to explain the behavior. The findings are interesting. It seems that image is an important factor, and monetary incentives may actually be counter-productive in encouraging philanthropic behavior. Some of us may be more charitable if we're not paid to be.

But while some may find this puzzling, I do not. In The Theory of Moral Sentiments, Adam Smith postulated that much of our behavior is based on how we wish to be seen by others. You can call it what you will, but I see it as a return on a choice. If we believe we are better off (image-wise) because of a charitable choice; I don't see where that differs significantly because we think we're better off (materially) because we paid for goods or services.

I think this even has implications in a personal finance environment. Should a personal budget include charity? For those who believe in a cause, definitely. This even applies to our time budgets. We may not give money but we may volunteer extensively for causes we believe in. But there is an economic motive behind it. We see an image improvement for ourselves and for others who observe us. Part of participating is that others will see. For those who believe as we do, it may be less important that they see us. For those who do not believe as we do; it may not be important that see us individually, but that they see broad support. Either way, it is still a return on a choice as I see it.

Are our beliefs and personal values part of the institutional structure - the rules - that influence our choices? I look forward to your thoughts or the thoughts of your students on this question.

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