A humanistic theory of economic behavior

The Journal of Socio-Economics 41 (2012) 222–234

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A humanistic theory of economic behavior Bernard C. Beaudreau ∗ Department of Economics, Université Laval, Québec, Canada G1K7P4

a r t i c l e

i n f o

Article history: Received 9 August 2011 Received in revised form 1 November 2011 Accepted 13 December 2011 JEL classifications: D01 D11 J22 Keywords: Utility theory Humanistic psychology Self-actualization

a b s t r a c t The past two decades have witnessed a growing interest in the humanistic approach to economics. In general, this has manifested itself in two ways, namely the development of humanistic models of behavior per se and secondly, in the form of addenda to the core utility model (CUM) such as identity, reciprocity, and warm glows. While promising, each suffers from major shortcomings—the former from its lack of a formal structure (mostly descriptive) and the latter from the lack of a “general” theory of behavior. This paper addresses these issues. Specifically, it presents a unifying humanistic theory of economic behavior which is consistent with basic humanistic principles (e.g. self-realization) and which is amenable to the study of economic issues. Agents are assumed to have a series of needs/identities/motives (NIMs) which they seek to fulfill. Moreover, each one of these needs corresponds to a specific set of neural mechanisms (frontal lobe, parietal lobe, etc.). Goods/services/activities are defined in hedonic terms and are assumed to address one or more NIMs. The corresponding optimization problem is presented and solved. The results are then used to rationalize various phenomena, including the Easterlin Paradox, Set-Point Theory, the Voter Paradox, among others. © 2011 Elsevier Inc. All rights reserved.

1. Introduction The past two decades have witnessed numerous attempts on the part of researchers to provide a more complete, all-encompassing view of Homo œconomicus, a move that has manifested itself in two ways, namely with the emergence of humanistic economics on the one hand, and with a series of refinements to the core utility model. Humanistic economics emerged in the 1980s with the goal of broadening the specter of human motives with particular emphasis on socialization.1 While its effects have been marginal at best, a more promising approach has come from mainstream economics with the introduction of new dimensions in economic behavior, ranging from identity, to peer-groups, to warm glows, to altruism and to reciprocity. Once seen as a purely materialistic, wealth maximizer and effort minimizer, Homo œconomicus is now seen as a more complete human being, a view that is more in keeping with the views found in the related fields of psychology, sociology and anthropology. In many ways, these advances are complementary to Kenneth Lutz and Mark Lux’s early work on humanistic economics (Lutz and Lux, 1979, 1988). In fact, they contribute to furthering the analysis by going beyond simple socialization, and in this regard, are more in keeping with the humanistic school of thought in psychology. The downside of this literature,

∗ Tel.: +1 418 656 2131x5433. E-mail address: [email protected] 1 See Frey (1998), Frey and Stutzer (2007), and Kirschgässner (2008). 1053-5357/$ – see front matter © 2011 Elsevier Inc. All rights reserved. doi:10.1016/j.socec.2011.12.002

however, lies with its disparate nature. Methodologically, each new dimension is examined in isolation. For example, altruism is introduced as an argument in the standard utility function alongside the standard goods and services and effort levels, as are peer-groups, warm-glows, trust, etc.2 What is lacking is the “big picture.” How do these arguments interact with standard arguments (goods and services) and with each other? For example, what is the relationship between warm glows and reciprocity? And what is the relationship between these new dimensions and those found in the early humanistic literature. This paper attempts to address this and related questions by presenting a unifying humanistic theory of the economic behavior which combines the elements of humanistic psychology and basic optimization theory. Agents are assumed to self-actualize over a series of identities that are based in large measure on Abraham Maslow’s concepts of lower- and upper-level needs and the corresponding hierarchy, subject to the relevant budget constraint. Accordingly, agents do not maximize “utility,” but rather make life decisions (goods, services, activities) in such a way so as to selfactualize. The latter requires that they arbitrage across their various

2 For example, in 2000, Akerlof and Kranton introduced the concept of identity into standard utility analysis. Andreoni (1989) introduced the concept of “warm glow” in reference to the payoff agents receive from giving to private charities. Fehr and Schmidt (1999) introduced the notion of fairness arguing that agents have preferences defined over equitable and inequitable outcomes.

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identities, and in so doing, make what are the “right” choices for themselves. The need for such a theory, we argue, is pressing owing in large measure to the development of several new, exciting sub-fields in economics, including neuroeconomics, network economics, happiness economics and experimental economics, all of which explore new dimensions of economic behavior—that is, go beyond the standard view of Homo œconomicus. It is our view that each would stand to benefit greatly from a consistent, all-encompassing theory of economic behavior. Take, for example, the case of neuroeconomics. In their rebuttal of neuroeconomics, Gul and Pesendorfer (2008) argue that the actual machinery by which choice is accomplished is unimportant and, to a certain extent, irrelevant. Their argument is twofold, namely that neurobiological measurements lie outside the “province of economics” and secondly that reductionist approaches that link mechanistic insights to larger theoretical frameworks are unlikely to be able or capable of relating natural scientific phenomena to social scientific theory, leading them to conclude that neuroscience is “unlikely” to have much of an impact on economic theory. As is apparent by both the nature of the arguments presented and the overall tone of the paper, neuroeconomics and mainstream economic analysis got off to a bad start, with allegations that the former would somehow invalidate the latter. While it is true that economics does not make predictions about the brain and neural processes, there is no reason to believe that neuroeconomics cannot improve our understanding of choice. However, to improve it, it must make a positive contribution (as opposed to wanting to invalidate it). And, the only way it can do so, in our view, is in the presence of a broader, more encompassing view of Homo-œconomicus.3 Only by mapping out the neural architecture of agents’ multi-dimensional identities/preferences, it can begin to examine the relationships between them and in so doing, provide clues to understanding several paradoxes in economics, such as the Easterlin Paradox or Set-Point Theory. This paper is organized as follows. We begin with a review of the relevant literature, both in economics and psychology. This is then followed by the presentation of the formal model. According to the latter, individuals seek to fulfill a series of needs, running from lower-level needs (goods and services) to higherlevel ones (altruism, equity, warm glows, social networks). This is formalized in terms of an objective function defined over n NIMs (need/identity/motive), themselves defined over Lancasterian good/service/activity characteristic space. More specifically, agents are assumed to “self-actualize” by choosing a set of Lancasterian characteristics (Lancaster, 1966). In so doing, it dispenses with the awkward—and ill-defined—notion of utility, replacing it with the notion of “self-actualization.” The result is a more structured approach to behavior than provided by the core utility model. One that incorporates the findings of the identity, altruism, reciprocity literatures. And one that provides neuroeconomics with a more appropriate starting point, namely a richer theory of Homo œconomicus. The resulting model is then used to examine a number of puzzles in applied microeconomics, including Set-Point Theory, the Easterlin Paradox, and the Voting Paradox among others.

of moral philosophy, it would stand to reason that early contributions would, by default, have been broader in scope. In this section, we argue that humanistic dimensions of economic behavior are as old as economics itself, dating back to the 18th century. Analytical tractability in the latter 19th century, we argue, preempted this literature, reducing Homo œconomicus to a single dimension, namely wealth accumulation. For example, consider Jeremy Bentham who defined the “principle of utility” as “That principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question.” What is noteworthy is the list of “causes of pleasure and pains” affecting utility. Included are “pleasures of a good name,” “of peity,” and “of benevolence.”4 In fact, as Gowdy (1985) has pointed out, the Humanistic notion of “need hierarchy” can be found throughout 19th and even 20th century writings.

2. Humanism in early economic thought

4 Bentham’s fourteen pleasures and twelve pains include: The several simple pleasures of which human nature is susceptible, seem to be as follows: (i) The pleasures of sense, (ii) The pleasures of wealth, (iii) The pleasures of skill, (iv) The pleasures of amity, (v) The pleasures of a good name, (vi) The pleasures of power, (vii) The pleasures of piety, (viii) The pleasures of benevolence, (ix) The pleasures of malevolence, (x) The pleasures of memory, (xi) The pleasures of imagination, (xii) The pleasures of expectation, (xiii) The pleasures dependent on association and (xiv) The pleasures of relief. The several simple pains seem to be as follows: (i) The pains of privation, (ii) The pains of the senses, (iii) The pains of awkwardness, (iv) The pains of enmity, (v) The pains of an ill name, (vi) The pains of piety, (vii) The pains of benevolence, (viii) The pains of malevolence, (ix) The pains of the memory, (x) The pains of the imagination, (xi) The pains of expectation and (xii) The pains dependent on association (Bentham, 1789).

This section attempts to answer an important methodological question, namely is the recent interest the humanistic dimensions of economic behavior a new phenomenon? Or does it have a history in economics? As economics—or political economy—is an off-shoot

3 Unlike Delgado et al. (2008) who argue that neurobiological data can shape economic theories of behavior, we argue that neurobiological data in combination with a more complete theory of behavior, per se, can.

Even when utility is assumed to derive solely from the consumption of commodities, serious questions can be raised. One of the most important omissions of neoclassical theory is that of the hierarchy of needs. The simple idea is that certain basic needs have to be met before other types of consumption are feasible. This was recognized long ago by Menger. According to him the individual has several distinct categories of general needs which can only be satisfied in succession. This implies a lexicographic ordering of needs. Such a formulation leads to the denial of the integrability of the utility function and thus to a host of other problems for the modern theory. If the idea of a hierarchy of needs is accepted there is not necessarily an area of indifference between all commodities. Nor can the doctrine of revealed preference allow the problem to be sidestepped, as GeorgescuRoegen has demonstrated. In fact, the notion of a hierarchy of needs is behind the concept of diminishing marginal utility. Economists, from Menger to Knight, have resorted to examples which imply such a hierarchy in explaining diminishing marginal utility. The shift from diminishing marginal utility to the concept of diminishing marginal rate of substitution was an attempt to move economics from subjective valuation to a behavioralist orientation. (Gowdy, 1985, 105) As early as 1855, the idea of “need hierarchy” was formalized by Richard Jennings who classified commodities as being either “primary” or “secondary” (Jennings, 1855). Primary commodities are necessities which can confer utility in the absence of secondary commodities or luxuries. Secondary commodities are goods that cannot be enjoyed without primary commodities. Gowdy (1985) also points to the writings of Alfred Marshall who recognized the notion of a hierarchical conception of human needs. The hierarchical conception of human needs contains an implicit notion that it is possible to make interpersonal comparisons of welfare. The hierarchy reveals the order in which needs are satisfied as income increases. In broad terms, at least, this order

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is the same for all individuals. Interestingly, Alfred Marshall implicitly accepted this idea when he saw the role of economics as being the development of policies to alleviate poverty and thus to free humans for the development of their “higher nature”. (Gowdy, 1985, 106) This then raises the question, what happened? How was the debate over the fundamental nature of Homo-œconomicus sidetracked? How did the richness of the 19th and early 20th centuries give way to the paucity of the CUM? We submit that there were at least two reasons, namely the increasing formalization of the latterpart of the 19th century and the energy metaphor in neoclassical thought.5 Formalization abhors complexity and discontinuities. As need hierarchies are often discontinuous in nature, it stands to reason that in the name of analytical tractability, simplicity was preferred over complexity. Add to this the energy metaphor where utility was equated to energy (Lagrangian and Hamiltonians) and the result was the CUM (Mirowski, 1989).6 Put differently, Menger or Jennings’ theories of human behavior could not be easily formalized mathematically, nor easily compared to potential and kinetic energy, resulting in a watered-down, almost facile model of human behavior. Thus theoretical complexity (and realism) was sacrificed on the alter of formalization (Veblen, 1909).7 This was not without consequence. Having reduced Homoœconomicus’ behavior to mere commodity and wealth acquisition, the CUM was soon confronted with a number of paradoxes, not the least of which was the debate over corporate governance, a debate that began in earnest with the publication of Adolph Berle and Gardiner Means’ The Modern Corporation and Private Property in 1932. According to their findings, contrary to the predictions of classical and neoclassical economics, firms/managers did not maximize profits. Instead, they maximized market share, sales, firm size, etc. (upper-level Maslowian needs). And so began a debate over executive/manager motives that, to this very day, has not been settled (Shleifer and Vishny, 1997). As we have shown, 19th century writings on the underlying motives of economic behavior were infinitely richer than the SUM. Early writers viewed human behavior as being more complex and more rich than that implied by the CUM. Unfortunately, however, the exigencies of mathematical formalization and the rise of the energy metaphor exacted a heavy toll, reducing Homo œconomicus to a single dimension, namely wealth accumulation. The humanistic theory of economic behavior presented next should be seen as a rehabilitation, a formalization and an extension of this earlier work. 3. Potential suitors In this section, we examine various theories of behavior in search of the underpinnings of a “general” theory of economic behavior, one that encompasses private as well as social dimensions. Ideally, a theory of human behavior should be both general and specific—general in so far as its breadth is concerned (i.e. across the social sciences) and specific to economics. We consider two sets of alternatives, namely psychological theories of behavior and secondly, theories of motivation. It is important to keep

5

For more on this, see Witt (2005). For more on the role of psychology in consumer choice theory, see Hands (2010). 7 Higher-order needs entered what Veblen referred to as “institutions.” Lamenting the paucity of such “institutions” in “marginal utility economics,” he noted: “It is characteristic of the school that whatever an element of the cultural fabric, an institution or any institutional phenomenon, is involved in the facts with which the theory of occupied, such institutional facts are taken for granted, denied, or explained away.” (Veblen, 1909). 6

Table 1 Theories of motivation. Theory

Description

Acquired Needs Theory Affect Perseverance Attitude-Behavior Consistency Attribution Theory

We seek power, achievement or affiliation. Preference persists after disconfirmation. Factors that align attitude and behavior. We need to attribute cause that supports our ego. Non-alignment is uncomfortable. We select tasks based on how doable they are. We seek the comfort of internal alignment. We seek to control the world around us. Agreeing with what supports beliefs and vice versa. We seek to fulfill needs of existence, relatedness and growth. We seek to escape uncomfortable realities. We are motivated by desirable things we expect we can achieve. External tangible rewards. Different types of goals motivate us differently. Internal value-based rewards. Our commitment depends on what we have invested. Opposite emotions interact. Discomfort when freedom is threatened. External and internal motivation. We need beliefs to be consistent. Aligned side-bets increase commitment to a main bet. Stages in changing oneself.

Cognitive Dissonance Cognitive Evaluation Theory Consistency Theory Control Theory Disconfirmation Bias ERG Theory Escape Theory Expectancy Theory Extrinsic Motivation Goal-Setting Theory Intrinsic Motivation Investment Model Opponent-Process Theory Reactance Theory Self-Determination Theory Self-Discrepancy Theory Side Bet Theory The Trans-theoretical Model of Change

Source: http://changingminds.org/explanations/theories/amotivation.htm.

in mind that there is a considerable amount of overlap in the various theories presented. Psychological theories can be classified according to three sub-categories, namely Cognitive, Freudian and Humanistic. The first examines the cognitive bases of human behavior, while the second examines behavior within the context of Freud’s id, ego and superego. Both seek to understand human behavior. However, the downside to both is their focus on abnormal behavior and mental illness. As Abraham Maslow pointed out, their origins were in mental illness, not in mental health. The lack of such a theory lies at the very base of humanistic psychology which focuses on healthy subjects. According to Maslow, human beings are endowed with a “life force” which drives and motivates them. As it turns out, Maslow’s work led to the creation of a new sub-field in psychology, namely motivation studies. Starting from the premise that individuals have a “life force,” the question then became describing it? In other words, what motivates individuals’ actions? Table 1 presents a non-exhaustive list of the various theories of motivation. As can be readily observed, these are either refinements, extensions or reformulations of the Maslowian “Needs Hierarchy.” For example, Clayton Alderfer’s ERG theory is a reformulation of the “Needs Hierarchy” with existence, relatedness and growth capturing basic needs, belonging needs and self-actualization. SelfDetermination Theory refines the Needs Hierarchy by delineating external and internal motivations. is multi-faceted-compartmentalized (SelfBehavior Determination) and/or sequential/hierarchical (ERG, Transtheoretical). Moreover, it is state-related, as opposed to being hedonic in the Benthamite sense (i.e. potentially measurable in terms of Bentham’s intensity, duration, certainty and nearness.) Actions contribute to cognitive-emotional states (Schachter and

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Singer, 1962), self-actualization being one.8 As such, in keeping with the literature on self-actualization and emotions, the model developed in the next section focuses on agents’ state of mind. That is, agents maximize a state-of-mind metric where their actions and behavior contribute to the ultimate goal of “self-realization.” 4. Understanding self and identity While the concepts of self and identity in are relatively new to economics, they are fixtures in psychology, sociology and anthropology. For example, in psychology they are a key component in the various schools of thought, including behaviorism, Freudian analysis, cognitive psychology, humanism, and functionalism. Questions relating to self and identity lie at the core of developmental psychology and social psychology. For example, Harke Bosma identified three main streams in the self, self-concept and identity literature, namely developmental, personality, and social psychology (Bosma, 1995). Developmental, best associated with the work of Ericson and Marcia, focuses on identity and self in childhood, specifically on the “ego synthesis” which is established in childhood. According to Bosma, it is “a configuration of gradually integrating constitutional givens, idiosyncratic libinal needs, favored capacities, significant identifications, effective defenses, successful subliminations and consistent roles’ (Erikson, 1968, 208).” Personality focuses on identity, self and self concept. Typically, a distinction is drawn between identity as a cumulative concept of self, and identity as it is situated or conceived of in relation to particular other people in particular situations. Put differently, identity has a personal and social component. Oosterwegel and Wicklund (1995) proposed looking at “identity” as a “multidimensional and dynamic self-system” which refers to both the product of self-conception as well as the active process of perception and organization of information about the self (Oosterwegel and Wicklund, 1995, 1). The third stream, social identity theory, focuses on the group-based determinants of self and identity. According to Turner and Oakes (1988), its main hypothesis is that “individuals define themselves in terms of their social group memberships, and that the group-defined self perception produces psychologically distinctive effects in social behavior.” Others have defined social identity as “that part of the individual’s self concept which derives from their knowledge of membership of a social group (or groups) together with the value and emotional significance attached to that membership.” Bosma distinguished between two distinct streams of work in this literature, namely work dealing with identity structure and content and second, work dealing with processes, specifically the process of identity formation. The three approaches described above focus mainly on content and structure, paying little attention to underlying processes-that is, the processing of individual and social information. On the other hand, Glynnis Breakwell studied “how people cope with threats to their identity.” In her work, identity is described both in terms of structure and content, as well as in terms of the set of underlying processes. As our brief history of the CUM showed, early 19th century writers were quite aware of the multi-dimensional nature of Homoœconomicus. In many ways, their work is consistent with the self and identity literature. That is, an individual’s identity influences his/her choices. Akerlof and Kranton were among the first to integrate identity into consumer theory by including it as an argument in the utility function. Mark Lutz and Kenneth Lux did likewise, albeit indirectly (Lutz and Lux, 1979, 1988). Without referring to

8 Maslow defined self actualization in terms of the” frequency of peak experiences. Here, we implicitly redefine such experiences in terms of the Schachter–Singer Theory of Emotion which combines both physiological and cognitive elements.

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Table 2 Humanistic need/identity/motive states (NIMs). Physiological NIM Safety and Security NIM Belongingness and Love NIM Esteem NIM Cognitive NIM Aesthetic NIM

them by name, they focused on individuals’ many identities, ranging from material to social to self-actualization. In the next section, a unifying humanistic model of Homo œconomicus is presented that is consistent with both. However, unlike Akerlof and Kranton, identity is not an argument in the utility function, but rather is the basis of and starting point for understanding behavior. Agents are defined in terms of n needs/identities/motives (NIMs) each defined over Lancasterian good/service/activity characteristics (Lancaster, 1966). As such, the much-maligned concept of utility is dispensed with in favor of the humanistic concept of self-realization. 5. The HMEB In this section, we attempt to incorporate the basic tenets of humanism (humanistic psychology and theories of motivation) into an optimization model of economic behavior (Gintis, 2007).9 Specifically, we formalize the humanistic concept of idealized self and actual self into an analytical model of human behavior.10 Idealized self and actual self are defined in terms of a series of n needs/identities/motives (hereafter NIMs) (j ; j = 1, 2, 3, . . ., n) defined over +R Lancasterian characteristic space.11 These include humanistic needs/identities/motives such as physiological needs, esteem needs, and aesthetic needs. For example, physiological needs refer to a state function which, when at its maximum, implies that the state of being physiologically satiated is attained. Table 2 presents a non-exhaustive list of “humanistic NIMs.” Formally, they are defined as j = j [ ; ˛, ˇ] ∀ j = 1, 2, 3, . . . n where  is a 1 × m vector of Lancasterian good/service/activity characteristics, ˛ is a genetic/hormonal scaler (vector), and ˇ is a cultural information scaler (vector).12 j = j [ ; ˛, ˇ] ∀ j = 1, 2, 3, . . . n is continuously differentiable, non-decreasing and strictly concave in . Lastly, ˆ ˛, ˇ] defines the jth idealized NIM while j = j [ ; ˛, ˇ] j = j [; defines the jth actual identity. As such, the individual agent’s genetic and hormonal makeup (i.e. genome, hormones) as well as his or her cultural baggage (Breakwell, 1986; Wexler, 2006; Gintis, 2007) are assumed to affect his/her NIMs.13 Clearly, not all NIMs are equal. Some will be culturally invariant, while others will be genetically invariant. ˆ corresponds to the vector of m characteristics that maximizes each of the n NIMs, taken individually. In keeping with the underlying tenets of the humanistic approach to behavior, satisfaction (utility) is defined as an increasing function of an agent’s ability

9 Other attempts at a broader model of human behavior include Frederich Hayek’s Sensory Order and Kelly’s Psychology of Personal Constructs. All of these have one thing in common, namely a desire to go beyond the CUM and probe into the cognitive foundations of behavior. 10 Henceforth, the concepts of identity, need and motive will be used interchangeably. 11 This corresponds to what Bosma (1995) refers to as “content and structure.” 12 For our immediate purposes, both ˛ and ˇ are scalers. However, from an operational point of view, they are vectors consisting of various genes/hormones and cultural values, respectively. 13 This is consistent with the Schachter–Singer Theory of Emotions according to which both physiological (i.e. genes and hormones) and cognitive factors (i.e. culture) play a role in determining emotion. In other words, cultural information can be seen as defining the context in which various stimuli (i.e. ) affect general autonomic arousal (emotion). For more on this, see Wexler (2006).

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to self-actualize, that is, the extent to which s/he becomes his/her idealized self.14 Abraham Maslow referred to this as the process of self-actualization. To capture this process, Eq. (1) defines the agent’s objective function in terms of self-actualization, referred to as . Specifically, self-actualization is the process of minimizing the gradient defined as the sum of the weighted differences between the n idealized and actual NIMs, defined here as j .15 The weights are given as  j and are such that [0 ≤  j ≤ 1 ;  j = 1]. 16 Eq. (2) defines the set of n idealized NIMs, each defined over ˆ the corresponding vector of “idealized” Lancasterian characteristics. That is, those that allow the individual to achieve the corresponding “idealized” NIM. For example, a writer may “dream” about owning his/her own publishing company, or an immigrant may “dream” about one day becoming an American citizen, or a doctor may “dream” about making a difference in his/her community. Accordingly, the process of achieving self actualization consists of minimizing a quadratic loss function defined over the weighted sum of the n idealized and actual NIMs. The smaller is the gap between individual n idealized and actual NIMs, the smaller is the corresponding level of , and the greater is the level of self actualization. min  = {}

n 

ˆ ˛, ˇ] − j [; ˛, ˇ]]2 j ()[j [;

(1)

j=1

where: ˆ = argmax j [; ˛, ˇ]

(2)

In keeping with Maslow’s notion of need hierarchy, we assume that identities are not equal, but, instead, are rank ordered (e.g. lexicographic).17 Individuals will close the gap between their idealized and actual basic need (material) NIMs, before turning to higher-order NIMs.18 Wealthy individuals (i.e. high ) will, as such, place more emphasis on higher-order NIMs. To capture this, statecontingent weights (scalers) are introduced.19 Specifically, each NIM is scaled by  j (), where  j () ∀ j = 1, 2, 3, . . . , n. Further, we assume  j () is a function of , the vector of characteristics consumed by the individually. Consequently, lower-order  j ()s are increasing then relatively constant in , while higher-order  j ()s are increasing in .20 A good example of this is philanthropy,

14 Here, self-actualization is defined in Maslowian terms (i.e. NIMs). Recently, Vyncke et al. (2003) have reexamined the empirical bases of Maslow’s motives and suggested a new set of evolutionary motives. This points to an important feature of our model, namely its robustness with regard to the actual NIMs. Any number of NIMs can be included. For more on the debate surrounding the empirical foundations of Maslow’s Need Hierarchy, see Lea et al. (1987), Chapters 15 and 16. 15 Neuroscientists have shown that when animals are tested in a repeated trial setting with variable reward, dopamine neurons appear to encode the difference between the reward that an animal expected to receive and the reward an animal actually received on a particular trial (Schultz et al., 1997; Sutton and Barto, 2000). 16 In many regards, Eq. (1) is consistent with the spirit of F.Y. Edgeworth’s notion of Mathematical Psychics where, borrowing from physics, he outlined the “Calculus of Pleasure.” 17 It is important to note that identities and not goods (Encarnacion, 1964; Drakopoulos, 1994) that are ranked here (e.g. lexicographically). Within individual identities, gross substitutability still holds (i.e. relative to the elements of ). Preferences are as such non-homothetic. 18 Studies show that once individuals reach a minimum standard of calorie intake and physical security, further increases in material affluence do not increase happiness very much. This is captured by strict concavity of the NIMs functions. 19 As pointed out earlier, the concept of marginal utility is consistent with the hierarchy of needs. As an individual becomes wealthier, additional lower-level good/service/activity characteristics yield less satisfaction. The weights used here capture this phenomenon. 20 An age factor could also be included. For example, as an individual ages, his/her need to self-actualize higher-order NIMs increases. Put differently, material-based NIMs diminish in importance in favor of social NIMs with age.

practiced for the most part by wealthy, generally older individuals (e.g. Bill and Melinda Gates, John D. Rockefeller, Warren Buffett). 5.1. The process of NIM formation As presented, the process of NIM formation (ideal and actual) is a combination of genetics/hormones and culture which corresponds to the nature-nurture dichotomy found in the social sciences (Lewontin et al., 1984).21 Lower-order NIMs, one could argue, are predominantly genetically/hormonally determined (programmed), while higher-order ones are culturally (i.e. social norms) determined.22 Genetics/hormones and culture determine an individual’s NIMs.23 For example, they influence purchases of goods and services, as well as the definition of higher-order NIMs such as belongingness and love NIMs, esteem NIMs, and cognitive NIMs. According to Raj Isar, Director in UNESCO’s Culture Sector, cultural industries play a key role in ˇ: “Cultural industries play a crucial role in shaping people’s tastes, interests and consumer preferences, and constitutes an important part of a people’s cultural identity” (Ishar, 1998, 14).24 Genes and hormones play a similar role (Silber, 1999). For example, recent findings show that variations in risk-taking behavior across individuals have a biological basis (Carpenter et al., 2011; Crisan et al., 2009; Dreber et al., 2009; Kuhnen and Chiao, 2009; Roe et al., 2009; Roiser et al., 2009; Zhong et al., 2009a,b). However, relatively little is known about the specific genetic determinants of individual variation in risk preferences, although a number of recent studies explore possible associations between specific genetic loci involved in chemical signaling in the brain. One neurotransmitter that has received particular attention is dopamine, due to its relation with reward processing in the brain. Activation of the dopaminergic reward pathways, and thus the release of dopamine neurotransmitters, can generate feelings of pleasure and well-being that become associated with the behaviors that triggered the activation.25 ˛ in our model is intended to capture these differences. 5.2. The representative agent’s problem For given values of ˛ and ˇ, the individual agent’s problem is described in terms of Eqs. (3) and (4), the first corresponding to the objective function, and the second to the budget constraint. p is the characteristics price vector (hedonic prices). Prices can be either positive or negative, with wages being an example of the latter. In this framework, wages are paid in return for work (which can be broken down into the corresponding Lancasterian

21 ˛ and ˇ correspond to genes and memes in the evolutionary biology/psychology literature. 22 One could argue, as do paleoanthropologists, that higher-order needs are also genetically/hormonally determined, specifically in the wiring of the human brain. See Barkow et al. (1995). 23 Included in culture (i.e. ˇ) is what George Akerlof refers to as social norms, defined as an individual’s “views regarding how others should, or should not, behave.” (Akerlof, 2007, 4). See also, Gintis (2007). 24 Take, for example, the case of television, where the relevant information flows (images and sound) act, consciously and subconsciously, on individuals’ NIMcreating processes. Many, especially young adults, will come to define themselves in terms of a television character. The same is true of other media. The printed word, while increasingly marginalized by electronic media, also acts on individual’s identity-creating processes. Magazines, newspapers, and books, all affect the way individuals look at the world, and consequently the way they look at themselves. 25 Such genetic variation in response to dopamine may thus contribute to individual differences in those personality and behavioral traits that are associated with the dopamine system. Such traits include novelty seeking, pathological gambling, attention deficit/hyperactivity disorder, behavioral disinhibition, alcoholism, impulsivity, sexual promiscuity, and many other behaviors.

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characteristics—time spent on the job, physical effort, decisional skills, responsibility, etc.). min  =

n 

{}

ˆ ˛, ˇ] − j [; ˛, ˇ]]2 j ()[j [;

(3)

j=1

s.t. p  = 0

(4)

The solution to this problem is analogous to the solution to the classical CUM-based consumer problem, namely (i) that the marginal rate of substitution between Lancasterian characteristics (i.e. the  i ’s) be equal to their relative prices, and (ii) that the budget constraint be met. The marginal rate of substitution between characteristics is defined as the ratio of marginal rates of selfactualization, the latter being the derivatives of self actualization () with respect to the m elements of . That is, a measure of a characteristic’s (i.e.  i ) contribution to overall self actualization, shown as (5). ı = ıi

n 

ˆ ˛, ˇ] − j [; ˛, ˇ]]2 [j [;

j=1

+

n 

ıj () ıi

 ˆ ˛, ˇ] + 2j [; ˛, ˇ] j () −2j [;

j=1

ıj () ıi

 (5)

The first expression measures the effect of an increase in  i on each of the relative weights (i.e. the  j ()  s) of the various NIMs (s) and as such, on the overall level of self-actualization, while the second measures the combined effect of an increase in  i on each of the individual NIMs (j s) that together define , self-actualization. Note that the effect on an individual NIM (i.e. j ) of a change in  i will depend, in large measure, on whether  i is equal to, less than, or greater than ˆi . That is, on whether the individual has realized the relevant “idealized” NIM or not. If  i is less than ˆi , then it will contribute to increasing self-actualization and vice versa.26 A defining feature of the model and results is the synthetic nature of marginal self-actualization (5). For example, an increase in  i can be welfare improving even if it has a negative effect on an individual NIM. This owes to the fact that marginal self-actualization is by definition a weighted average of the marginal effect that an increase in  i has on each of the n NIMs.27 In the end, what matters is that an increase in  i increases overall self-actualization, not its effect on any one individual NIM. For example, an individual might accept a lower-paying, but more fulfilling job, weighing the loss of income against the gain in terms of upper-level NIMs. Or, s/he may go heavily into debt to belong to particular peer-group, or put his/her financial security at risk in order to start the company of his/her dreams. The reduced-form solution to this problem can be written as (6) where the agent’s choice of  * is a function of three parameters, namely ˛, ˇ, and p . That is, genes/hormones scaler, the cultural information scaler and lastly, the vector of Lancasterian characteristic prices (hedonic prices), respectively. By assuming strict concavity of the n NIM functions, we are assured that the solution is unique.  ∗ = [˛, ˇ, p ]

(6)

26 Assuming strict concavity of the NIMs and hence of the corresponding quadratic loss function. 27 Put differently, characteristics are like public goods (non-exclusive), providing “satisfaction” to more than one individual, or in this case, more than one identity. Like with public goods, optimality dictates that the sum of marginal effects should be equal to the relevant price.

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The demand for Lancasterian characteristics is, as such, a function of genes/hormones, culture and relative prices (including the price of work-related characteristics).28 The standard comparativestatic results all hold given strict concavity. An increase in the price of a characteristic, ceteris paribus, will decrease the demand for that characteristic. Similarly, characteristics (i.e. ’s) can be either complements or substitutes. Furthermore, the demand for characteristics continues to be a function of wealth (hedonic price of work characteristics (e.g. hours) multiplied by the number of hours worked). However, in the HMEB, the income effect can be decomposed into two distinct effects, namely (i) the standard income effect and (ii) the income-NIM shift effect. The latter refers to the effect of income/wealth on the weights agents attach to the j NIMs. As agents become wealthier, more weight is given to upper-level NIMs. As such, certain characteristics (inferior goods) are less relevant to the individual as s/he goes about self-actualizing. 6. Advantages of The HMEB Relative to the CUM, the humanistic model of economic behavior (HMEB) has a number of advantages. It provides a richer theory of behavior, begins the bridge-building process between economics, psychology, neurology, sociology and genetics (Wilson, 1999; Barkow et al., 1995), and in the process, offers a more complete framework for the study of behavior. Formally, it provides a non-utility-based theory of individual preferences which is continuous and differentiable. Accordingly, goods, services, and activities (e.g. work), by way of their Lancasterian characteristics, fulfill the various needs/identities/motives (genetic and cultural) we, as a species, have, and, in the process, contribute to our emotionalcognitive state (Schachter and Singer, 1962).29 Maslow’s notion of need/identity hierarchies is formalized analytically by way of variable  j values. The wealthier the individual, the more likely s/he is to have realized (attained) lower-level idealized identities, and, the more likely is s/he to allocate resources (Lancasterian characteristics) to upper-level NIMs, and vice-versa. Within this framework, goods, services and activities via their Lancasterian characteristics cases speak to/fulfill the individual agent’s many NIMs, including altruism, reciprocity, warm glows, etc. For example, dinner at an upscale restaurant will address an agent’s basic physiological NIM (calories) as well as his/her esteem, belongingness and aesthetic NIMs. Purchasing fair-trade coffee speaks to the same basic physiological NIM as well as to one’s cognitive NIM. Jobs provide agents with income as well as a vector of workplace-related characteristics that speak to higher-level NIMs (e.g. belongingness and love, cognitive), providing a richer framework for the study of labor supply than the CUM where work is simply assumed to yield negative utility. Moreover, as presented, this approach provides an attractive, consilient alternative to the Benthamite notion of utility, replacing it with a state-variable in the form of self-actualization, defined in terms of the multidimensional actual-idealized NIM gradient. Lancasterian characteristics, as such, do not yield “utility” per se, but rather, are “useful” in that they allow individuals to reach higher levels of self-actualization. Yet, it preserves what we feel is the strength of optimization theory, namely the arbitrage process across goods and identities, making it consistent with both psychology and economics. Also, it improves on Mark Lutz and Kenneth Lux’s pioneering work by extending the dimensionality of the agent’s problem and

28

This result is consistent (Gintis, 2007). In this regard, the model and its results are consistent with Self-Determination Theory (SDT) which is based on a set of universal, basic psychological needs. See Deci and Ryan (2000) for more on this. 29

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by formalizing the problem of self-actualization. As a result, NIMs can be compared and contrasted across agents. Furthermore, differences across agents can be understood in terms of genetic and/or cultural factors, thus providing a rich framework for the study of behavior (Gintis, 2007). Lastly, it provides a convenient framework in which to examine the various addenda proposed to standard utility theory (reciprocity, warm-glows, altruism) and the relationship between them and conventional utility arguments (goods and services, effort).

6.1. SSSM versus evolutionary psychology Another advantage of the HTEB is the endogeneity of the j NIMs. According to Eq. (1), need/identity/motive states are determined by genes/hormones (˛) and/or in cultural factors (ˇ) (Lewontin et al., 1984). This we feel is an attractive feature for a number of reasons, not the least of which is the fact that it can accommodate both the Standard Social Science Model (SSSM) view of behavior according to which behavior is primarily culturally determined as well as the evolutionary psychology view according to which some behaviors are inherited (Barkow et al., 1995). The former is sometimes referred to as the “blank slate” theory according to which culture, not genes/hormones, affect behavior. The latter, on the other hand, holds that the brain is not a blank slate, but rather comes with hardware such as language (Chomsky, 1966; Pinker, 1994). The model does not, however, pretend to address nor resolve the debate over Homo-sapiens sapiens’ fundamental nature, but rather seeks to provide a framework in which to conceptualize the effects of both genes/hormones (i.e. ˛ and culture (i.e. ˇ) on economic behavior.30 It also allows for the study of potential conflict across genes/hormones (via the ˛ scaler in the individual NIMs) and culture (via the corresponding ˇ scaler). Specifically, it could be argued that in the presence of conflict, identity and self (i.e. NIMs) are rendered more unstable, leading to more inconsistent and unpredictable behavior on the part of agents.31

7. Applications We now turn to the question of applications. Our goal here is not to empirically prove the validity of the HTEB, but rather to show how a broader, more encompassing theory of economic behavior can be used to shed light on a number of paradoxes and puzzles in economics and the behavioral sciences in general. While not its intention, the CUM has nonetheless resulted in a particularly “narrow” view of human behavior.32 Specifically, Homo œconomicus is motivated by two things, namely the accumulation of material wealth and the minimization of effort. Behavior that is not consistent with the CUM is viewed as “suspect” and more importantly sub-optimal. Anything outside of material aggrandizement is, as such, “suspect.” While convenient analytically speaking, this has had an unfortunate effect on economics, namely that of narrowing its purview. Moreover, it has affected negatively the very way in which economics is perceived of outside of the profession. Not surprisingly, this is reflected in the fact that the CUM has not

30 In this regard, it improves on Lutz and Lux (1979, 1988) who failed to address the question of the origins of needs. 31 This parallels Sigmund Freud’s theory of behavior as involving the id (genes/hormones), the ego (culture) and the super-ego (culture). 32 On a personal note, I can attest to the fact that my training as an economist has de facto affected my view of human nature, in what I consider to be a “negative” way. That is, I have seen them and continue to see them in a narrower light.

migrated outside of the profession (i.e. been adopted by theorists in psychology, sociology or anthropology).33 The HMEB presented here is one of what we hope are/will be numerous attempts at improving upon the CUM by allowing for a whole host of new, optimal behaviors, ranging from charity, to mid-life crisis, to income-reducing career/job changes, to volunteer work. As value (to agents) is synthetic in nature, the HMEB allows for the attribution of value according to a series of individual NIMs. For example, charity reduces lower-level needs, but increases upper-level needs. Its very presence, however, reveals that the latter dominate the former. In short, what according to the CUM would appear to be sub-optimal behavior is now perfectly consistent with optimizing behavior. 7.1. Endogenizing framing effects Framing effects are common in the CUM, especially in cases involving risk and uncertainty (Ellingsen et al., 2008). For example, Tversky and Kahneman (1981) demonstrated systematic reversal of preference when the same problem is presented (i.e. framed) in different ways. The presence of such effects is seen by many as a violation of rationality. While the CUM is at a loss to explain such effects, the HMEB provides a convenient framework in which to study them. More specifically, framing effects can be endogenized by considering the relevant, multi-dimensional objective function. As we have argued throughout this paper, the CUM is a special case of the HMEB where n = 1 (i.e. lower-level NIMs). That is, self-actualization is an increasing function of material wealth. When the n − 1 other NIMs are included, framing effects can be endogenized by invoking the relevant upper-level NIMs, including “safety and security,” “belongingness and love,” “cognitive” and “aesthetic” NIMs. The frames used by Tversky and Kahneman (1981) and others are typically cast in one or more of these. For example, it is well known that individuals generally prefer the absolute certainty inherent in a positive framing-effect, which offers an assurance of gains. When decision-options appear framed as a likely gain, risk-averse choices typically predominate. Formally, frames affect the relevant first-order conditions (Eq. (5)), thus altering the individual agent’s choice. It is important to note that the associated choices/decisions are entirely rational when the objective function is correctly specified. While such notions are relatively new to economics, they are the proverbial bread and butter, so to speak, of framing theory, frame analysis and social theory (Johnson-Cartee, 2005).34 One advantage of the HMEB over the CUM, in so far as framing effects are concerned, is in terms of rationality, namely, it is preserved. What appears to be irrational behavior in the context of the CUM can be perfectly rational. 7.2. Marketing applications The CUM is not particularly amenable to marketing analysis for the simple reason that tastes are assumed to be parametric.35 As such, there is little formal structure other than that imposed by

33 The obvious exception is Gary Becker’s work which has enjoyed some support in sociology and applied sociology. However, it has not advanced the cause of the CUM as a theoretical construct in sociology, nor in psychology. 34 A frame in social theory consists of a schema of interpretation that is, a collection of anecdotes and stereotypes-that individuals rely on to understand and respond to events. In simpler terms, people have, through their lifetimes, built series of mental emotional filters. They use these filters to make sense of the world. The choices they then make are influenced by their frame or emotional filters. 35 See Earl (2004) for more on the role of economics in marketing.

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the functional form one chooses (e.g. Cobb-Douglas, CES, Translog). For example, if one works with homothetic preferences, then there are no inferior or superior goods. Further, goods are categorized as being either inferior, normal of superior simply in terms of their income elasticity. The HMEB we feel represents a significant improvement. For example, it provides a convenient framework in which to examine in detail the characteristics of goods and services and the corresponding NIMs that they address/fulfill. One could argue that marketing is the art of appealing to consumers’ higherorder NIMs in order to sell what is otherwise a “functional” product. For example, beer marketeers typically pair/associate their brand of beer with the Belonging and Love NIM as well as the Esteem NIM. Similarly, luxury-car marketeers will frame their product as one that meets lower-level and well as (in fact, principally) higherlevel NIMs, providing basic transportation services all the while addressing the owners Esteem, Cognitive, and Aesthetic NIMs. As the latter are increasing in overall agent wealth, proxied here by , it stands to reason that as wealth increases, so does the demand. Further, it should be pointed out that Maslow’s Need Hierarchy is a staple in most Marketing text books. The HMEB, it therefore follows, provides a convenient bridge between the two fields, one that formalizes the Need Hierarchy thus rendering it more amenable to analysis. For example, Eq. (5) provides a convenient bridge between economics and marketing, emphasizing the nonmaterialistic/attributes characteristics of goods and services. That is, goods and service, via their characteristics, speak to multiple NIMs. Among its attributes, in so far as marketing is concerned, is the link between genetics/hormones (i.e. via the ˛ scaler) and NIMs and secondly the link between culture and NIMs (via the ˇ scaler). As a considerable amount of effort in marketing is deployed in the area of culture and its effects on tastes, it stands to reason that the HMEB provides a more suitable framework than the CUM.

7.3. Set-point experimental findings Why do lottery winners fail to experience a permanent increase in happiness (Brickman et al., 1978; Costa and McCrae, 1980)? The CUM is at a loss to rationalize this finding. After all, subjective well-being is an increasing function of wealth. According to the HMEB, this can be explained in terms of two factors: (i) the concavity of the NIM functions and (ii) the non-homotheticity of tastes (NIMs). What gives the majority of “self-made” millionaires happiness/satisfaction is the pride (esteem and cognitive identities) they feel from having earned a million dollars, not the million dollars itself. Conceptually, the actual million dollars should be seen as a state variable which, in turn, is a function of their control variable, namely their effort. With this in minds, consider the case of the typical lottery winner. Suppose that s/he uses his/winnings to move to a new neighborhood, buy a Rolls-Royce and become a member at an exclusive country club. Would s/he be better off? We would argue in the negative, as s/he would now find him/herself in the company of self-made millionaires. However, s/he would lack the esteem and cognitive NIMs, thus putting him/her at a comparative disadvantage vis-a-vis the peer group. Combined with the strict concavity of lower-level NIMs would result in a case in which overall self-actualization might decrease as a result. A similar argument can be invoked in the case of individuals that become paraplegic as the result of an accident. Here again, the research shows that their levels of satisfaction return to previous levels six months to a year after. The HMEB provides another rationale, namely that agent well-being is multidimensional and that notwithstanding a change in one identity, the other identities

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remain virtually intact.36 Put differently, the HMEB predicts that happiness is more stable than does the CUM.

7.4. The Easterlin Paradox According to the Easterlin Paradox, there appears to be no link between the level of economic development of a society and average levels of happiness (Easterlin, 1974). Once again, an argument could be made that the paradox owes, in large measure, to the relevant starting point, namely the CUM where utility is an increasing function of income/wealth. Seen in terms of the HMEB, the fact that there is no link between economic development and average levels of happiness is perfectly understandable. Once lower-level needs are met, increases in self-actualization are less income-elastic, so to speak. In short, economic development does not necessarily imply self-actualization as defined here. In fact, to argue that there is a one-to-one relationship between the two is to deny our fundamental nature as complex beings. For example, if economic development is achieved at the expense of all other human NIMs, both lower-level and upper-level, then Richard Easterlin’s results follow suit. More specifically, if economic development comes at the expense of social cohesion, environmental degradation and political stability, then reported levels of well-being may be no higher than in poorer countries.37

7.5. Peer-group effects Peer-group effects have been shown to have an important effect on both consumption patterns and effort levels in general (e.g. work, education) (Summers and Wolfe, 1977; Henderson et al., 1978; Brueckner and Lee, 1989; de Bartolome, 1990). Until now, they have been modeled in the CUM as preference “shifters.” That is, the consumption of the peer group, or the effort level of the relevant peer group has altered preferences. While this is acceptable, it fails to capture fully the role of peer groups in human behavior. The HMEB, we believe, addresses these issues by identifying separate NIMs. Specifically, agents have an individual-specific identity and a social identity. That is, they have individual needs as well as social needs. Both are important and both underlie individual choice. Just how the agent’s social NIM will affect his/her choices will depend on preferences and on the relevant rank-ordering (). For example, predicating one’s behavior on that of the peer group as a way to realize one’s belongingness and love NIM makes perfect sense, as does being charitable towards others.38 . While both are prima facie violations of the CUM, they are consistent with the HMEB. This approach to peer-groups differs markedly from gametheoretical ones. In the latter, specific peer-group effects are analyzed/formalized. While this is useful, it ignores what we believe is the essence of peer-groups, namely that agents belong to peer-groups. In other words, peer-groups are a gestalt phenomenon, affecting all of the individual’s behaviors (choice of characteristics). This raises the question, why? Why do peer-groups matter for Homo œconomicus? This is a question that is, in our view, beyond the purview of economics, one that has and continues to be studied by evolutionary psychologists/biologists. However, the

36 The HMEB predicts that changes to subjective well-being will be minor at the very best, which is what the research in general shows. 37 Easterlin explained the “paradox” in terms of aspirations which are revised upwards in the presence of income gains, making for a situation in which the individual is no more satisfied than before. 38 The HMEB assumes the existence of higher-level NIMs without deriving them either biological or psychological first principles. In other words, its starting point is Homo-sapiens sapiens, not a lower-order species

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belongingness and love NIM in the HMEB serves as a proxy for these evolutionary factors. 7.6. Do we really want firms to (just) maximize profits? In 1932, Adolph Berle and Gardiner Means published the results of their exhaustive survey of U.S. corporate behavior which showed that contrary to common belief, corporate executives did not maximize profits as evidenced by the sticky wages and prices throughout the Great Depression (Berle and Means, 1932). Their results showed that CEOs maximized sales, market share and firm assets. Since, the profession has wrestled with the question, what do firms actually do? The CUM predicts that firms (shareholders and managers) will maximize profits. This follows directly from non-satiation. That firms have been found not to do so is seen by most as a violation of the basic tenets of capitalism, not to mention, a serious blow to overall economic efficacy as defined by neoclassical welfare economics. We disagree. In fact, we are of the view that non-profitmaximizing behavior can be viewed as socially optimal when framed in terms of the HMEB. Our argument is simple, namely that profit maximization is consistent with lower-level NIM-type behavior. However, a quick review of the founders and CEO’s of America’s blue-chip corporations reveals a vastly different picture. Specifically, most large, successful corporations were founded by visionaries who pursued and continue to pursue higher-level NIMs (cognitive, esteem) over lower-level NIMs (profits). Take for example, Henry Ford whose goal it was to put every American in an automobile. Like other pioneering giants of U.S. industry, it could be argued that his main NIMs were esteem and cognitive. Specifically, bring modernity to the average American. Highlighting the motivational disconnect between Ford and others was the highly publicized trial pitting John and Horace Dodge, two important shareholders and subcontractors who in 1917 sued him on the grounds that lowering the price of the Model-T unduly reduced profits.39 One could go as far as to argue that, historically speaking, advances in material civilization have been the result of individuals pursuing higher-level—and not lower-level-NIMs.40 Another good example is Bill Gates, founder and CEO of Microsoft. Clearly, esteem and cognitive NIMs were and continue to be the prime NIMs underlying the growth of Microsoft. The list goes on and on and includes William Hewlett and David Packard, the founders of Hewlett Packard, Thomas Edison, the founder of General Electric, Steve Wozniak and Stephen Jobs, founders of Apple. Almost without exception, the founders of the thirty blue-chip corporations that make up the Dow Jones Industrial Average were motivated by a desire to “realize their vision,” not make money per se. Does this mean that profits did not and do not matter? No, as profits (profitability) can be seen as the corresponding state variable, signaling success or failure. High profits (above-average) signal success. As Donald Trump pointed out: “Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.” Firms in general do not maximize profits per se; rather, they maximize the likelihood of success which, in turn, will guarantee profitability. In other words, profits reinforce good visions and discourage weak ones. For example, Bill Gates wants Microsoft to

39 The Dodge brothers won, which prompted Ford to buy out all shareholders and transform Ford Motor Company into a private company. 40 A similar argument could be made in the case of Matthew Bolton and Josiah Wedgewood, two of the architects of the first industrial revolution. Both were members of the Lunar Society and both had ambitions that transcended mere profit maximization/wealth accumulation.

be immensely profitable, not for the riches that would be bestowed upon him, but rather for the prestige (bragging rights) that would accompany it. Specifically, profits act as a state variable of sorts, imposing a market-based rank order on the set of self-actualizing founding CEOs of large corporations. It is important to point out that these are two fundamentally different arguments. This brings us to our main point, namely that in a dynamic setting, the welfare-maximizing social planner, faced with the choice between pure profit maximizers (e.g. the good agent in a principal-agent setting) and self-actualizing visionaries, would unequivocally opt for the latter. Self-actualizing visionaries have made America what it is as evidenced by the economic growth literature (Maddison, 1987) which shows post-WWII growth to have been fueled in large measure by technological change (i.e. The Solow Residual, total factor productivity). They have, through their visions, fueled unprecedented growth and progress, outperforming the proverbial “good agent.” It is our view that most of that which is referred to as the “manager irrationality” or the “bounded rationality” view of corporate governance can be understood as mistaken “manager self-actualization.” Rationality implies full information. Successful managers, as Harvey Leibenstein pointed out, operate outside of full-information contexts (Leibenstein, 1968). They often make markets whether by introducing new products or processes. Historically what appeared to be irrational in an ex-ante sense often turned out to be brilliant in an ex-post sense. Clearly, these findings have important implications for the current debate over corporate governance, especially in the wake of the Financial Meltdown of 2008. There is nothing wrong with profit maximization as long as it is part of bigger whole/picture that we refer to as “vision realization.” Industrial revival begins and ends with self-actualizing visionaries. 7.7. Social consciousness The past decades have witnessed the emergence of fairness in trade, known as “fair trade” (Frank, 1987; Diller, 1999; Heinemann, 2010). Analogously to the notion of paired association in marketing, small, third-world farmers have, through their advertising, tried to raise awareness in the West on issues ranging from fairness to sustainability. The HMEB predicts that fair trade is a luxury good owing in large measure to the rank ordering of the various NIMs. Ethical concerns including environmental ones are, according to the HMEB, consistent with higher-level NIMs (cognitive, esteem, aesthetic NIMs).41 According to our model, the greater is one’s wealth, the more likely is an agent to be concerned about the environment. Polluting the environment, it therefore follows, affects agents’ cognitive NIM adversely, and hence lowers his/her level of self-actualization. Which one could argue is the basis of what we refer to as the “market for conscience.” Over the course of the past decade, suppliers of conscience in the form of companies offering carbon credits have emerged. A good example is Responsibletravel.com which offers air travelers carbon offsets for a fee ranging from $5.00 to “$40.00. One could argue that the latter is a measure of the value travelers put on good conscience. 7.8. The voter paradox resolved? One of the most important concepts in public economics is the “median voter:” the person giving a majority to a proposal or to a political candidate. Given that the likelihood for anyone to be the median voter is very slim, and that voting involves some cost,

41 Higher-level NIMs in the model are consistent with and provide a direct formalization of Matthew Rabin’s notion of fairness.

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why do so many people vote? (Downs, 1957). The HMEB provides a compelling rationale, namely that people vote to fulfill/realize their several NIMs, including basic NIMs (i.e. material gain via private and public goods) as well as the “belongingness and love NIM.” In other words, while the outcome matters, the underlying process also matters. Voting is a overt manifestation of membership and belongingness—not to be confused with the notion of civic duty which is more of a social constraint. 7.9. The study of the culture-consumer choice and genetics/hormones-consumer choice relations One of the weaknesses of the CUM is the absence of culture as a determinant of consumer behavior. As Beaudreau (2006) pointed out, this has important consequences for the debate over the role of culture in behavior in general and in economic behavior in particular. For example, why do we as a species invest in culture? Why do we purchase cultural goods? To argue that they yield utility is, in our view, to say very little, if nothing. What is it about culture that distinguishes it from all other goods? The HMEB, we believe, provides a solid base with which to begin examining these and other questions. As shown in Eq. (1), culture, like genes/hormones, is a shift variable. As such, a change in culture, by altering the j NIMs, can be catastrophic for an agent (i.e. in terms of self-actualization). As Beaudreau (2006) pointed out, self-actualizing agents have an interest in upholding ˇ, their set of cultural beliefs (culture) as a major shift in ˇ will, by altering idealized NIMs, reduce an agent’s level of overall self-actualization. Beaudreau (2006) provided a definition of cultural goods as the set of goods and services whose characteristics affect ˇ. Formally, this can be written as ˇ( c ), consisting of a subset of . That is, characteristics that affect culture and hence behavior (Wexler, 2006; Gintis, 2007). By invoking information entropy (i.e. ˇ depreciates over time), he was able to generate a positive, recurrent demand for cultural products. Put differently, by consuming cultural goods, individuals renew their set of cultural beliefs, thus (via Eq. (1)) maintaining identity and hence, overall life satisfaction (Schimmack et al., 2002). 7.10. A theoretical framework for measuring human well-being In 2008, French president Nicolas Sarkozy struck a commission to study the question of human well-being and its measures. The upshot was relatively straightforward: the GDP metric, long used to gauge well-being, was an incomplete measure. Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi were recruited. Their report, published in 2009, concluded that human well-being is far more than the sum of our economic resources (Stiglitz et al., 2009), but that it also depends upon health, education, environment, housing, access to information, the ability to communicate, and the overall quality of our life experience. Reducing ideas of human progress to a single number, they argue, misses aspects of what human beings consider most important in their lives... “Rather than absolute levels of wealth, the distribution of income and the extent of inequality should also command our concern—as should the conditions in which we live and the capabilities we need in order to achieve what we see as critical to our happiness.” To define what well-being means a multidimensional definition has to be used. Based on academic research and a number of concrete initiatives developed around the world, the Commission has identified the following key dimension that should be taken into account. At least in principle, these dimensions should be considered simultaneously: (i) Material living standards (income, consumption and wealth); (ii) Health; (iii) Education; (iv) Personal activities including work; (v) Political voice and

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governance; (vi) Social connections and relationships; (vii) Environment (present and future conditions); (viii) Insecurity, of an economic as well as a physical nature. All these dimensions shape people’s well-being, and yet many of them are missed by conventional income measures. (Stiglitz et al., 2009, 15) The HTEB provides a theoretical analogue for such measures, one that is grounded in a theoretical model of human behavior. In fact, it could be argued that the problem with GDP as a measure of human well-being owes, in large measure, to economic theory per se, notably to the CUM. If it was an empirically accurate view of human motives/identities/needs (i.e. NIMs), then it would stand to reason that GDP would do the job, so to speak. That it is not an accurate view of human behavior raises the specter of alternatives. The disenchantment with the CUM as the relevant metric against which to measure well-being extends to the development literature. For example, in 1977, Michael P. Todaro defined development as “...a multidimensional process involving changes in structures, institutions, and attitudes as well as the acceleration of economic growth, the reduction of inequality, and the eradication of absolute poverty. Development must represent the entire gamut of changes by which an entire social system, tuned to the diverse basic needs and desires of individuals and social groups within that system, moves away from a condition of life widely perceived as unsatisfactory, and moves towards a situation or condition of life regarded as materially and spiritually better” (Todaro, 1977, 45).

7.11. Rationalizing declining woman’s happiness In a recent survey, Betsey Stevenson and Justin Wolfers found woman’s happiness levels, both absolute and relative (to men), have surprisingly declined over the course of the past three decades (Stevenson and Wolfers, 2009). This raises a number of questions, notably why? After all, given the social, economic and technological changes that occurred over this period (feminism, birth control, labor participation rates), one would have expected just the reverse. That is, with the CUM as the relevant metric (e.g. higher income). The HMEB can be used to shed light on these developments. First, it bears reminding that NIMs are genetically/hormonally and culturally determined. Feminism is an example of the latter. However, the problem with feminism, we argue, lies in its incomplete nature as an alternative set of female NIMs (i.e. to traditional female NIMs). In our view, feminism was more about changing s than it was about changing the relevant NIMs (i.e. the n s).42 Put differently, it was more about getting a high-paying job and less about how a highpaying job, or a successful career would affect a women’s n NIMs and ultimately, her level of self-actualization. This would explain why, despite being successful (i.e. the idealized   s), increasingly more women report a sense of being unfulfilled. Then, there are the possible conflicts across NIMs that the new set of s presented. Given that career-building is dialectical (at the expense of other NIMs) in nature, it stands to reason that it will have non-negligible repercussions for women’s “belongingness and love” NIM which, given higher levels of wealth, weigh heavily in the balance so to speak (i.e. higher  j ()). Put differently, if career building is accomplished at the expense of family of friends, then well-being (self-actualization) will suffer.

42 This was apparent in the writings of early feminists. Take, for example, Betty Friedan who in The Feminine Mystique, argued that women were victims of a false belief system that requires them to find identity and meaning in their lives through their husbands and children causing them to completely lose their identity in that of their family. Cast in terms of our model, Friedan sought to lessen the social and belongingness NIMs in favor of higher-order cognitive and aesthetic NIMs.

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7.12. The water–diamond paradox refined According to the CUM, the water–diamond paradox owes to the abundance of water and the scarcity of diamonds. As such, the marginal utility of water is low (zero), while that of diamonds is high (infinite). The HMEB, we submit, provides another angle to this so-called paradox. Not all scarce minerals and/or objects command the same price as diamonds. In fact, today, diamonds are seen as a semi-precious stone. According to the HMEB, the water–diamond paradox owes to non-homotheticity and to the presence of higherlevel NIMs. As was made clear by early neoclassical economists, diamonds have no use value (lower-level NIMs). They do however have use values in so far as higher-level NIMs are concerned as a means to signal social standing. As not everyone has access to high-quality diamonds, ownership conveys social standing and rank (higher-level NIMs). In the absence of the latter, it is unlikely that diamonds would have any value whatsoever (other than as a costly abrasive). 7.13. The HTEB and the question of bounded rationality It is our view that the HTEB has important implications for the debate over whether Homo œconomicus is rational or not. More specifically, the HTEB speaks to the question of the relevant “model” of economic man. Clearly, if the starting point (i.e. the utility function) is misspecified, then it would stand to reason that regardless of the decision criteria that are used (e.g. rationality), the result will be less-than ideal. For example, if the CUM is used when in fact the true model is the HMEB, then there is little doubt that the agent’s behavior will “appear” to be irrational. Not because the agent is not rational, but because our understanding of his essential nature (i.e. his needs, identities and motives) is incomplete. In this sense, we see the concept of bounded rationality in the absence of a complete understanding and appreciation of human behavior as a red herring of sorts. For example, Herbert Simon has argued that agents are only partly rational and are emotional/irrational in the remaining part of their actions. Implicitly, he is arguing that emotions are not rational, begging the larger question, if emotions are irrational, then why do they exist—from an evolutionary standpoint. The upshot of our argument is simple, namely that the concept of bounded rationality should not be confused with the failure of a misspecified model of human behavior to explain observed behavior. Further, only when we can ascertain with certainty that our model is correctly specified can we begin to discuss, in a meaningful way, the question of whether rationality is bounded or not by our information-processing ability or by the complexity of the decision situations per se. 8. Implications for neuroeconomics The implications and applications for neuroeconomics are numerous. First, it bears noting that the HMEB is both tributary of neuroscience and tributary to neuroscience via neuroeconomics. The stratified approach to behavior (lexicographical identities) developed here is consistent with several theories of the brain, including Paul MacLean’s Triune theory according to which the human brain consists of three sub-brains (pallia), the reptilian complex, the limbic system and the large, folded human cortex. Lower-level NIMs, one could argue, map onto the primitive reptilian brain, while higher-level NIMs map onto the cortex (especially the orbito-frontal lobe).43 Further, it has been shown that the

43 On another level, the triune brain maps onto the genetic and cultural determinants of individual NIMs. That is, genes map onto the R-complex, while culture is associated with the higher executive functions of the cortex.

brain’s neural circuitry makes choices by internally representing the payoffs of various alternatives as neural firing rates. And when animals are tested in a repeated trial setting with variable reward, dopamine neurons appear to encode the difference between the reward that an animal expected to receive and the reward that the animal actually received on a particular trial (Schultz et al., 1997; Sutton and Barto, 2000), a result that is consistent with our approach to modeling individual behavior (i.e. Eq. (1)). Secondly, the HTEB provides a richer theory of economic behavior than the core wealth maximizing/effort minimizing model. Until now, the latter restricted the breadth of research that has been conducted in experimental economics as well as in neuroeconomics. Gul and Pesendorfer (2008)’s contention that insights into biological mechanisms are unlikely to have much impact on economic theory will continue to hold if the relevant starting point is simple wealth maximization/effort minimization. But will not hold in the presence of a more complex and complete models of behavior such as the HTEB. For example, starting with a more complete theory of behavior (e.g. HTEB), neuroeconomics could play a more important role in modeling the exact structure (hierarchical or other) of preferences. What is the exact relationship between lower- and upper-level NIMs? Are preferences symmetric over time? How does past success impact the preference structure?

9. Summary and conclusions As was pointed out in the Introduction, the humanistic approach to economics and economic behavior has over the course of the last three decades evolved in two ways, firstly via the development of humanistic economics per se and secondly, via addenda to the CUM. Each has contributed to our understanding of behavior in general and economic behavior in particular. Wanting to contribute to what we feel is an important and promising new field, this paper has presented a unifying humanistic model of economic behavior based on the notion of self-actualization. By formalizing self-actualization as a emotional-cognitive state (Schachter and Singer, 1962) defined over a series of idealized and actualized identities, a set of first-order conditions was derived and used as a basis for a more complete theory of economic behavior, one that is consistent with humanistic psychology as well as with the new literature in economics on well-being and its measures. In so doing, we believe that the paper makes a number of contributions, ranging from formalizing the humanistic approach to economic behavior in terms of a rigorous mathematical model, to providing a framework in which to integrate genetics and culture into economic behavior. Not only does this help to circumscribe the problem at hand, it also provides an important bridge between psychology and economics. Also, it refines the humanistic approach to economics, pioneered by Mark Lutz and Kenneth Lux by defining needs/identities/motives in terms of genetic and cultural influences, thus providing a convenient framework in which to study the role of genetics and culture in behavior in general and economic behavior in particular. Another important contribution is the formalization of the individual’s objective function per se, specifically, the notion of self actualization as a emotional-cognitive state. While there is nothing wrong with utility per se, we believe that any and all progress in terms of bridging psychology and economics will depend on the development of a common framework for analysis. The concept of utility rings hollow to psychologists, while the concept of self-actualization is virtually unknown in economics. Its greatest contribution, however, is scientific in nature, namely shedding light on a number of behavioral puzzles and paradoxes. The proof of the pudding, the expression goes, is in the eating. And we feel strongly that the HTEB performs admirably well. As we have

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shown, it sheds important light on both consumer and producer behavior, ranging from the Easterlin Paradox to the extremely important question of firm behavior per se. The upshot is simple: what appears to be paradoxical when examined in terms of the CUM turns out to be surprisingly rational when examined in terms of the HTEB. Also, it raises the bigger issue of rationality. By adding to the dimensionality of human behavior (multiple NIMs), new results follow. As pointed out in the historical section, the humanistic approach is as old as economics itself. As such, the contribution of this paper should be seen as lying in its formalization of age-old concepts. The model as presented provides a convenient framework for further analysis in the field of humanistic economics and economics in general. Clearly, much remains to be done, especially in terms of identifying the relevant NIMs, and furthermore, parameterizing each (i.e. identifying genetic/hormonal/cultural differences). Being accessible to both psychologists and economists, it opens up the possibility of a new era in the field of economic psychology, one based on a common language and a synoptic view of Homo œconomicus.

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