Adding Social Norms to the Usual Methodology Mix

The New York Times, "Economic Scene" , August 11, 2005

A restaurant on Honolulu's main drag is soliciting new workers. "Looking for Aloha Spirited People," says the help-wanted sign in the window.

The restaurant wants friendly employees who will make visitors feel welcome. But there is more to the job than that. The restaurant is hoping to hire people who do not have to pretend to be hospitable. They act hospitable because it is part of who they want to be. The "aloha spirit" helps define their identity.

Conforming to one's self-image, to social expectations, or to a combination of the two, is one of the important ways people seek to be happy - to "maximize utility" in economic jargon. But while economic models have no theoretical reason to exclude the concept, economists have rarely considered it.

"The standard methodology in economics is to say that people care about objective things, and they don't care about subjective things" like how a good woman or a good man or a good Hawaiian should behave, the economist George A. Akerlof said in an interview. Economists may consider goods that money cannot buy, like having friends, but they tend to ignore attitudes or states of mind.

Yet social norms "are things that people really have very, very strong views about," Mr. Akerlof said. "Not only do they think that they should do certain things and not do other things, but they also think that their friends and associates and relatives should do some things and not do other things. That's what you don't see in economists' utility functions."

In a series of articles published over the last few years, Professor Akerlof of the University of California, Berkeley, and a fellow economist, Rachel E. Kranton of the University of Maryland, have developed economic models that incorporate identity.

"Because identity is fundamental to behavior, choice of identity may be the most important 'economic' decision people make," they write in "Economics and Identity," published in the August 2000 Quarterly Journal of Economics, adding, "Limits on this choice may also be the most important determinant of an individual's economic well-being."

If taking an Advanced Placement class means being labeled a nerd, for example, a bright high school student may take an easier class, even though the A.P. track promises higher income down the road. Those identity trade-offs may be more extreme for working-class or minority students whose families, neighbors or peers may regard them as traitors to their heritage.

While other social scientists have long looked at identity, Professor Kranton said in an interview, economists take a different approach. They are more likely to think about trade-offs between identity and other goals, or between one identity (say, as a lawyer) and another (say, as a mother). "We think about how people strike these balances."

Bringing identity into economists' models adds another dimension to the usual trade-offs. In traditional models of schooling, for instance, economists calculate that students will stay in school as long as they believe that the benefits of education - its effect on future earnings - outweigh the costs in income lost by not working while in school.

But staying in school may also have psychological costs and benefits. Someone who feels alienated from school may drop out despite the economic cost, while someone who identifies with school, even as a purely social or athletic institution, may stay to graduate.

High schools with diverse student bodies, the economists argue, often avoid setting a single standard of course work or behavior, because they want to give students as many ways as possible to identify with the school.

This "shopping mall" approach makes more students happy in the short run. But it reduces academic achievement for at least some students.

"The outcome is more 'democratic' in that more students are engaged in the school, but some students acquire lower skills," the economists write in "Identity and Schooling: Some Lessons for the Economics of Education," published in the December 2002 Journal of Economic Literature.

The economists argue that schools should be freer to "invest" in shaping students' identities so that they value academic performance and do not feel alienated from school. Reforms that favor "small schools, with unified programs," they suggest, move in this direction.

In some cases, Professor Kranton said, parents may prefer a school with fewer resources if its environment encourages a certain identity. "They ultimately want their kid to be this kind of person," she said.

Effective workplaces take a similar tack. While an "aloha spirited" restaurant cashier brings an economically productive identity to the job, organizations in many cases work to instill organizational values.

So a Federal Express driver will do what it takes to get a package "absolutely, positively" to its destination overnight. A Southwest flight attendant will be funny and cheerful. A marine will be loyal and brave.

Building these identities is not cheap and can be more challenging than simply paying people more money. But it creates a resilient, self-motivated work force.

"Part of what a good firm does is make those expectations very clear," Professor Kranton said. "Then you want to live up to the expectations both of yourself and of yourself as part of the firm."