Social preferences, also known as distributional preferences, describe the human tendency to not only care about one's own material payoff, but also the reference group's payoff or/and the intention that leads to the payoff. Social preferences are studied extensively in behavioral and experimental economics and social psychology. Types of social preferences include altruism, fairness, reciprocity, and inequity aversion. The field of economics originally assumed that humans were rational economic actors, and as it became apparent that this was not the case, the field began to change. The research of social preferences in economics started with lab experiments in 1980, where experimental economists found subjects' behavior deviated systematically from self-interest behavior in economic games such as ultimatum game and dictator game. These experimental findings then inspired various new economic models to characterize agent's altruism, fairness and reciprocity concern between 1990 and 2010. More recently, there are growing amounts of field experiments that study the shaping of social preference and its applications throughout society.
Determinants: nature vs. nurture Social preferences are thought to come about by two different methods: nature and nurture. Whilst nature encompasses biological makeup and genetics, nurture refers to the social environment in which one develops. The majority of literature would support that "nature" influences social preferences more strongly whereas there is still research to support the heavy influence of sociocultural factors. Some of these factors include social distance between economic agents, the distribution of economic resources, social norms, religion and ethnicity.
Importance An understanding of social preferences and the disparity that occurs across individuals and groups can help create models that better represent reality. Within the financial sector, research supports the existence of a positive relationship between the elements of trust and reciprocity to economic growth as observed in a reduction of defaults in lending programs as well as the effectiveness of government and central banking policy. The well-functioning of social preferences may assist society in paving the way to new developments through a decrease in the likelihood of market failures as well as a reduction in transaction costs. Society may also utilize social preferences to increase the flow of information, transparency and accountability.
Formation Biologists, social psychologists, and economists have proposed theories and documented evidence on the formation of social preferences over both the long run and the short run. The various theories explaining the formation and development of social preferences may be explained from a biological, cognitive and sociocultural perspective and are detailed as follows.
Biological evolution
Kin selection
Kin selection is an evolutionary strategy where some specific behavioral traits are favored to benefit close relatives' reproduction. Hence, behavior that appears altruistic can align with the theory of the selfish gene. Kin selection can explain altruistic behavior towards close relatives even at the cost of their own's survival, as long as one's sacrifice can help preserve a greater amount of the same genes in close relatives. For example, worker bees can die from attacking their predators in order to help preserve other bees' genes.
Reciprocity selection
Reciprocity selection suggests that one's altruistic act may evolve from the anticipation of future reciprocal altruistic behavior from others. An application of reciprocity selection in game theory is the Tit-For-Tat strategy in prisoner's dilemma, which is the strategy that the player cooperate at the initial encounter, and then follow the opponent's behavior on the previous encounter. Robert Axelrod and W. D. Hamilton showed that Tit-For-Tat strategy can be an evolutionary stable strategy in a population where the probability of repeated encounters between two persons in a population is above a certain threshold.
Social learning
Psychologist Albert Bandura proposed that children learn about pro-social and moral behavior by imitating other pro-social models, including parents, other adults, and peers. There are also economic models proposing that parents transmit their social preferences to their children by demonstrating their own pro-social behavior. Bandura conducted extensive psychological experimentation into the extent to which children will emulate aggressive behaviour by exposing them to models displaying behaviour before observing the child's behaviour once left alone. However, empirical support for parents' role in fostering pro-social behavior is mixed. For example, some researchers found a positive relation between the parent's use of induction and children's pro-social behavior, and others found no correlation between parent's adoption of punitive techniques and children's pro-social behavior. Regarding other sources of social learning, recent field experiments have provided causal evidences for positive effects of school program and mentoring program on forming social preferences, and these research suggested that social interaction, prosocial role models as well as cultural transmission from family and school are potential mechanisms.
Cognitive factors Psychologist Jean Piaget was among the first to propose that cognitive development is a prerequisite in moral judgment and behavior. He argued for the importance of social interaction with others rather than learning in moral development, which requires the understanding of both rules and others' behavior. Other important cognitive skills in fostering pro-social behavior include perspective taking and moral reasoning, which are supported by most empirical evidence.
Evidences of social preferences
Experimental evidences Many initial evidences of social preferences came from lab experiments where subjects play economic games with others. However, many research found that subjects' behavior robustly and systematically deviated from the prediction from self-interest hypothesis, but could be explained by social preferences including altruism, inequity aversion and reciprocity. The ultimatum game, the dictator game, the trust game and the gift-exchange game are exercises that used to understand social preferences and their implications.
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