Behavioral Economics: Social Interaction, Values, and Organizational Performance

Robert Akerlof's research delves into the formation of individual values, positing that they are shaped by a tension between the desire for self-esteem and peer esteem. This dynamic can lead individuals to either conform to peer values or differentiate themselves to achieve a unique source of esteem. Using high school archetypes (nerds, burnouts) as a running example, the model demonstrates how moving between social environments can lead to non-monotonic peer effects, where academic performance might initially improve in a slightly better school due to positive peer influence, but then decline in an even more competitive environment as individuals differentiate to maintain self-esteem, potentially adopting an 'oppositional culture'.

The paper distinguishes between a 'first generation' of behavioral economics, primarily influenced by cognitive psychology and focused on individual decision-making processes, and a 'second generation' that Akerlof's work represents. This newer wave is deeply rooted in social psychology and sociology, emphasizing that individual thoughts, values, and actions are profoundly shaped by social interactions, cultural contexts, and shared narratives. This shift highlights the critical role of social dynamics in understanding economic behavior, moving beyond purely internal cognitive processes to incorporate external social influences.

The model offers practical insights into various societal phenomena. It explains the success of Catholic schools in reducing dropout rates among at-risk students by forcing interaction between academically diverse groups, thereby compelling lower-performing students to seek esteem from academically-oriented peers. Conversely, it sheds light on the decline of inner cities, as described by William Julius Wilson, attributing it to shocks like deindustrialization and middle-class flight. These events fostered a shift in community values, leading to the formation of 'oppositional cultures' where academic success might be stigmatized as 'acting white,' creating peer pressure against traditional 'nerd values.'

Broadly, Akerlof's research has significant implications for understanding organizational success and failure, community development, and the propagation of cultural norms. It suggests that internal conflicts and antagonism within organizations often stem from differing subcultures and a lack of mutual respect for values. The concept that people interpret the world through 'stories' (e.g., zero-sum, just world) that are socially propagated underscores the profound impact of collective narratives on individual behavior and economic outcomes, setting a key agenda for future research in this 'second generation' of behavioral economics.

I assume that people choose their values they care about they care both about self-esteem and they also care about peer esteem and and self esteem and peers team lead to kind of conflicting desires for people.

on the one hand this desire to obtain an esteem from peers leads to conformity you want to take on the same values as your peers on the other hand this desire for self esteem might lead to differentiation.

you can have sort of positive peer effects over one range and negative peer effects over another range and this you know this explains the kind of puzzle in the peer effects empirical peer effects literature in economics.

what the Catholic schools do very successfully is they they force interaction between students who are better academically students who are worse academically and other schools tend to give people more choice.

both of these shocks kind of lead to a switch in values toward the formation of void sociologists sometimes call an oppositional culture forming in in these neighborhoods.

there's a large literature and sociology on acting white the idea here is that you know if you say or earn one of these schools you're academically successful that you're you're you know you're given the moniker of acting white.

this is all about a problem of values and so you know I think there's a more general problem of organizations that you can have subcultures that form with different values within the organization then people don't respect each other.

this sort of you could think of it as a second generation of behavioral economics is is it's really influenced by the social social psychology and sociology and so it's motivated by this sense that actually what's running through our heads what we think about really depends upon our interactions with other people.

people are always thinking in terms of stories you always have a sort of story for what you're doing a story that allows you to interpret the world our values are part of our story.