3. Preferences, Beliefs and Behavior

This chapter expands on traditional economic assumptions by exploring other-regarding preferences and their impact on behavior. It moves beyond the typical amoral and self-regarding "Homo economicus" to incorporate concepts such as altruism, inequality aversion, and reciprocity, which acknowledge that individuals often consider the well-being of others. The chapter also examines cases in which the preferences guiding an individual’s behavior are not exogenously given but instead depend on the situation, in this case on the nature of material incentives that are provided for the actions in question. Additionally, the chapter discusses control aversion, which is the value people place on self-determination.

The problems in this chapter (and their solutions) , demonstrate that incorporating these more empirically grounded preferences does not require a fundamentally new set of analytical methods. However, it notes that reciprocity, due to its dynamic nature, may lead to multiple equilibria and requires an explicit treatment of preference dynamics. The sections within this chapter reflect how taking account of other-regarding preferences expands the domains of economic problems, public policy analysis, and institutional design that economics can address.