Economic-psychological reflections on custom in the economy

American Journal of Economics and Sociology, The, April, 2002 by Gerrit Antonides

GERRIT ANTONIDES *

I

Introduction

IT IS INTERESTING TO SEE how an economist uses psychology to understand the phenomenon of custom in regard to economic problems. In my opinion, Schlicht (1998) actually behaves like an economic psychologist. Since I am an economic psychologist myself, my economic-psychological reflections on custom in the economy will be in the same vein as what Schlicht already has done.

Schlicht shows a remarkably up-to-date knowledge of economic psychology and behavioral economics. He deals with topics such as schemata and categorization from cognitive psychology; commitment, cognitive dissonance and conformity from social psychology; and loss aversion and the cost of thinking from the theory of decision making. This way, he offers many interesting hypotheses explaining custom in the economy. This is already more than neoclassical economists are willing to accept. Hence, for most economists, his book may be considered provocative. Of course, I don't believe it is provocative because I have been teaching these kinds of ideas to economics students for 15 years.

In my commentary, I will raise a few philosophical issues and I will suggest some more psychological theories in relation to custom.

II

Philosophical Issues

LET ME START WITH a few philosophical issues. I don't understand why custom is such an important issue in economics. Schlicht deals with a great variety f customs and offers many explanations for them. However, the function of custom remains unclear to me. Why do we need the concept of custom? Does custom offer something beyond the psychological theories that are applied? For example, if we know from the idea of loss aversion that people don't like to change their habits, what does the concept of custom explain further than this? This point is similar to the economists' inability to explain people's behavior in ultimatum games. Camerer and Thaler (1995:218) end their overview of research on ultimatum games and dictator games by saying: "And if a theorist is wondering how someone will play a certain game and no experiment has been run, we suggest asking Miss Manners." In other words, "manners" is suggested as a new concept "explaining" behavior in ultimatum games. Schlicht goes one step further and offers hypo theses about why there are manners and how they develop. The next logical step would be to use Occam's razor and abandon the concept of custom. Parsimony requires the abandonment of superfluous concepts.

Another philosophical line of thought concerns the search for scientific laws that describe people's behavior. In a sense, such laws could also be viewed as describing regularities in behavior, or customs. For example, the law of demand describes the consumer's disposition to reduce demand in case of higher prices. This really can be considered a custom in a large part of the population, although certain groups, such as snobs, may react quite differently. Now, would Schlicht call this regularity a scientific law or a custom, and why exactly? The law of demand follows from the assumption of rationality and a set of other assumptions. This is not the case with people's behavior in ultimatum and dictator games, or with tipping, payment of taxi drivers and endowment effects, among other issues. It seems that unexplained regularities in behavior are called customs (or manners in some cases). Should customs, describing regularities in behavior, then be promoted to scientific laws? Again, are we dealing here with de fining custom, or defining scientific laws?

Further, it is not clear to me whether custom, or rather clarity, is an issue per se, an object to be studied scientifically, or a principle organizing people's behavior. There are many customs, but do they exist because people strive to develop customs? And would Schlicht consider such a principle a scientific theory? If so, there are several such organizing principles I would prefer. My favorite would be Heider's cognitive consistency principle as an alternative to the principle of rationality. Cognitive consistency assumes that people strive for harmony between their motives, emotions, cognitions and behavior. It is related to the theory of cognitive dissonance (see, for example, Akerlof and Dickens 1982) and attribution theory (see, for example, Van Raaij 1985). It is also related to judgments of equity concerning different people's payoffs.

Schlicht applies psychology to gain insight in a problem about which economics remains relatively silent. However, I found there was little connection between psychological insights and economic theory. For example, it would be useful for economists to know how custom would enter the utility function or how it would affect restrictions. The disconnection from economic theory suggests its abandonment. It seems that this book presents an entirely new research paradigm; I really hope that this will not further separate economists and psychologists. In my opinion, it would be more fruitful to integrate the two sciences on the issue of custom.