Ernst Fehr

University of Zurich | UZH · Department of Economics - IVW

Generous behaviour is known to increase happiness, which could thereby motivate generosity. In this study, we use functional magnetic resonance imaging and a public pledge for future generosity to investigate the brain mechanisms that link generous behaviour with increases in happiness. Participants promised to spend money over the next 4 weeks eit...

Brain activity shows underlying motives In humans, two completely different motives may nevertheless lead to exactly the same behavior. Because we can't directly observe motives, modern economists often completely disregard them. However, Hein et al. , using fMRI, show that different human motives can yield observable responses in the brain (see th...

Until the late 1980s, textbooks portrayed economics as a nonexperimental science because it was thought that “Economists…cannot perform the controlled experiments of chemists or biologists.…Like astronomers or meteorologists, they generally must be content largely to observe” ( 1 ). Since then, economics has experienced an experimental revolution (...

Do people intuitively favour certain actions over others? In some dual-process research, reaction-time (RT) data have been used to infer that certain choices are intuitive. However, the use of behavioural or biological measures to infer mental function, popularly known as 'reverse inference', is problematic because it does not take into account oth...

Significance How do selfish and prosocial brains function differently with regard to valuing the welfare of others? The present study addresses this question by combining neuroimaging, computational modeling, and an instrumental conditioning paradigm. Contrary to the conventional notion of the dorsal medial prefrontal cortex (MPFC) implicated in me...

The probability triangle (also called the Marschak-Machina triangle) allows for compact and intuitive depictions of risk preferences. Here, we develop an analogous tool for choice under uncertainty - the ambiguity triangle - and show that indifference curves in this triangle capture preferences for unknown probabilities. In particular, the ambiguit...

In this paper we conduct a laboratory experiment to test the extent to which Moore and Repullo's subgame perfect implementation mechanism induces truth-telling in practice, both in a setting with perfect information and in a setting where buyers and sellers face a small amount of uncertainty regarding the good's value. We find that Moore-Repullo me...

In this paper we conduct a laboratory experiment to test the extent to which Moore and Repullo’s subgame perfect implementation mechanism induces truth-telling in practice, both in a setting with perfect information and in a setting where buyers and sellers face a small amount of uncertainty regarding the good’s value. We nd that Moore-Repullo mech...

The joint understanding of the cross section of individuals' total and equity savings is crucial regarding various policy issues. In particular, it is important to understand why lower-income households do not participate in the stock market, which reflects the so-called stock market participation puzzle. As it is demonstrated in the first part of...

Many studies document failures of expected utility’s key assumption, the independence axiom. Here, we show that independence can be decomposed into two distinct axioms – betweenness and homotheticity – and that these two axioms are necessary and sufficient for independence. Thus, independence can fail because homotheticity, betweenness, or both are...

Humans will incur costs to punish others who violate social norms. Theories of justice highlight 2 motives for punishment: a forward-looking deterrence of future norm violations and a backward-looking retributive desire to harm. Previous studies of costly punishment have not isolated how much people are willing to pay for retribution alone, because...

We aimed to predict how hard subjects work for financial rewards from their general trait and state reward-motivation. We specifically asked 1) whether individuals high in general trait "reward responsiveness" work harder 2) whether task-irrelevant cues can make people work harder, by increasing general motivation. Each trial of our task contained...

Human and nonhuman animals respond asymmetrically to predicted punishments and rewards (Dayan & Seymour, 2008; Kahneman, 2011). In human decision making, for example, people pay more to avoid losses than to gain equivalent rewards. Because such loss aversion counterproductively diminishes an individual’s expected payoffs, it has become one of the m...

Surprise drives learning. Various neural “prediction error” signals are believed to underpin surprise-based reinforcement learning. Here, we report a surprise signal that reflects reinforcement learning but is neither un/signed reward prediction error (RPE) nor un/signed state prediction error (SPE). To exclude these alternatives, we measured surpr...

The assumption that payoff-relevant information is observable but not verifiable is important for many core results in contract, organizational and institutional economics. However, subgame-perfect implementation (SPI) mechanisms - which are based on off-equilibrium arbitration clauses that impose fines for lying and the inappropriate use of arbitr...

How does our brain choose the best course of action? Choices between material goods are thought to be steered by neural value signals that encode the rewarding properties of the choice options. Social decisions, by contrast, are traditionally thought to rely on neural representations of the self and others. However, recent studies show that many ty...

Healthy individuals tend to consume available rewards like food and sex. This tendency is attenuated or amplified in most stress-related psychiatric conditions, so we asked if it depends on endogenous levels of the ‘canonical stress hormone’ cortisol. We unobtrusively quantified how hard healthy heterosexual men would work to consume erotic images...

Neuroeconomics strives to use knowledge from neuroscience to improve models of decisionmaking. Here we introduce a biologically plausible, drift-diffusion model that is able to jointly predict choice behavior and response times across different choice environments. The model has both normative and positive implications for economics. First, we cons...

The present study investigated the influence of facial expressions on fairness considerations in the multiple one-shot ultimatum game. Consistent with the facial feedback hypothesis, activation of the corrugator supercilii was associated with increased rejection of unfair offers.

This paper shows that a small amount of individual-level money illusion may cause considerable aggregate nominal inertia after a negative nominal shock. In addition, our results indicate that negative and positive nominal shocks have asymmetric effects because of money illusion. While nominal inertia is quite substantial and long lasting after a ne...

Many studies document failures of expected utility’s key assumption, the independence axiom. Here, we show that independence can be decomposed into two distinct axioms – betweenness and homotheticity – and that these two axioms are necessary and sufficient for independence. Thus, independence can fail because homotheticity, betweenness, or both are...

Animals approach rewards and cues associated with reward, even when this behavior is irrelevant or detrimental to the attainment of these rewards. Motivated by these findings we study the biology of financially-costly approach behavior in humans. Our subjects passively learned to predict the occurrence of erotic rewards. We show that neuronal respo...

We study how the distribution of other-regarding preferences develops with age. Based on a set of allocation choices, we classify each of 717 subjects, aged 8–17 years, as either egalitarian, altruistic, or spiteful. We find a strong decrease in spitefulness with increasing age. Egalitarianism becomes less frequent, and altruism much more prominent...

Conform to the Norm Human societies have always enforced compliance with norms of acceptable behavior among their members by threatening punishment. It has been proposed that the human brain may have developed neural processes that support norm enforcement behavior and generate appropriate behavioral responses to social punishment threats. However,...

In this chapter we present a survey of studies employing pharmacological manipulations in humans to elucidate the psychological and neural mechanisms underlying the neuromodulation of economic and social preferences. We will review research examining the effects of changes in neurotransmitters (including serotonin, dopamine, and noradrenaline) and...

In the years since it first published, Neuroeconomics: Decision Making and the Brain has become the standard reference and textbook in the burgeoning field of neuroeconomics. The second edition, a nearly complete revision of this landmark book, will set a new standard. This new edition features five sections designed to serve as both classroom-frie...

Neuromodulators such as serotonin, oxytocin and testosterone play an important role in social behavior. Studies examining the effects of these neuromodulators and others on social cognition and behavior (and their neural underpinnings) are becoming increasingly common. Here, we provide an overview of methodological considerations for those wishing...

van Honk and colleagues have taken our findings on the role of testosterone in ultimatum gamebargaining1 a step forward by showing that the hormone has important prosocial effects beyondthe ultimatum game by increasing cooperation in the public goods game (PGG)2. In contrast to theultimatum game, participants in the PGG decide simultaneously about...

Adaptive behavior often exploits generalizations from past experience by applying them judiciously in new situations. This requires a means of quantifying the relative importance of prior experience and current information, so they can be balanced optimally. In this study, we ask whether the brain generalizes in an optimal way. Specifically, we use...

Neuroeconomics combines methods and theories from neuroscience psychology, economics, and computer science in an effort to produce detailed computational and neurobiological accounts of the decision-making process that can serve as a common foundation for understanding human behavior across the natural and social sciences. Because neuroeconomics is...

Well-functioning groups enforce social norms that restrain opportunism, but the social structure of a society may encourage or inhibit norm enforcement. Here we study how the exogenous assignment to different positions in an extreme social hierarchy - the caste system - affects individuals' willingness to punish violations of a cooperation norm. Al...

Economics and game theory are based on the assumption that people are capable of pre- dicting others' actions. The most fundamental solution concepts in game theory (Nash equi- librium, backward induction, and iterated elim- ination of dominated strategies) are based on this assumption. These concepts require people to be able to view the game from...

Gift giving is common practice in many cultures and industries. This is prob-lematic if the gift biases decisions of the receiver to the detriment of third par-ties. Examples include pharmaceutical companies affecting doctors' prescrip-tion choices, or lobbyists affecting politicians' behavior on behalf of their elec-torate. We show experimentally...

Gender gaps in the workplace are widespread. One explanation for gender inequality stems from the e¤ects of the interaction between competition and two pressure sources, namely, task stereotypes and time constraints. This study uses a laboratory experiment to …nd that the gender gap in performance under competition and preferences for competition c...

Authority and power permeate political, social, and economic life but there is lim-ited empirical knowledge about the motivational origins and consequences of author-ity. We experimentally study the motivation and incentive effects of authority in an authority-delegation game. Individuals exhibit a strong tendency to retain authority even when its...

Authority structures are a key determinant of incentives and efficiency in organi-zations. However, little is known empirically about how individuals allocate authority within organizations and how they respond to authority assignment. We conducted a laboratory experiment to study the interplay between authority, the delegation of authority and eff...

In recent decades, many firms offered more discretion to their employees, often increasing the productivity of effort but also leaving more opportunities for shirking. These “high-performance work systems” are difficult to understand in terms of standard moral hazard models. We show experimentally that complementarities between high effort discreti...

High-performance work systems give workers more discretion, thereby increasing effort productivity but also shirking opportunities. We show experimentally that screening for work attitude and labor market competition are causal determinants of the viability of high-performance work systems, and we identify the complementarities between discretion,...

Social preference theories and the knowledge about the relative strength of the different motivational forces in different environments can be useful in interpreting neural data. Research on the emotional underpinnings of social preferences, and the neural networks involved in social preference emotions, may also be useful for economics, because it...

Both biosociological and psychological models, as well as animal research, suggest that testosterone has a key role in social interactions. Evidence from animal studies in rodents shows that testosterone causes aggressive behaviour towards conspecifics. Folk wisdom generalizes and adapts these findings to humans, suggesting that testosterone induce...

American Publishers Award for Professional & Scholarly Excellence (PROSE) Winner-Award for Excellence in Social Sciences (2009) Neuroeconomics is a new highly promising approach to understanding the neurobiology of decision making and how it affects cognitive social interactions between humans and societies/economies. This book is the first edited...

Neuroeconomics is a new highly promising approach to understanding the neurobiology of decision making and how it affects cognitive social interactions between humans and societies/economies. This book is the first edited reference to examine the science behind neuroeconomics, including how it influences human behavior and societal decision making...

Low-frequency "off-line" repetitive transcranial magnetic stimulation (rTMS) over the course of several minutes has attained considerable attention as a research tool in cognitive neuroscience due to its ability to induce functional disruptions of brain areas. This disruptive rTMS effect is highly valuable for revealing a causal relationship betwee...

When should a principal control an agent? Control limits shirking but reduces the agent's productivity. We analyze experimentally how an imperfect signal about the agent's past performance affects optimal contract design. Without signal all principals control and pay low wages. If agents can acquire a reputation, many principals do not control and...

Neuroeconomics merges methods from neuroscience and economics to better understand how the human brain generates decisions in economic and social contexts. The emerging neuroeconomic approach (Camerer et al. 2005; Fehr et al. 2005; Glimcher and Rustichini 2004; Sanfey et al. 2006) seeks a microfoundation behind social and economic activity in neura...

In a wide variety of settings, spiteful preferences would constitute an obstacle to cooperation, trade, and thus economic development. This paper shows that spiteful preferences - the desire to reduce another's material payoff for the mere purpose of increasing one's relative payoff - are surprisingly widespread in experiments conducted in one of t...

Much evidence suggests that people are heterogeneous with regard to their abilities to make rational, forward-looking decisions. This raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results. We examine this question in the context of a long-standing and impo...

In recent years, many social scientists have claimed that trust plays an important role in economic and social transactions. Despite its proposed importance, the measurement and the definition of trust seem to be not fully settled, and the identification of the exact role of trust in economic interactions has proven to be elusive. It is still not c...

Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effect...

Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effect...

In this paper we show that subtle forms of deceit undermine the effectiveness of incentives. We design an experiment in which the principal has an interest in underreporting the true performance difference between the agents in a dynamic tournament. According to the standard approach, rational agents should completely disregard the performance feed...

Combining the methods of neuroscience and economics generates powerful tools for studying the brain processes behind human social interaction. We argue that hedonic interpretations of theories of social preferences provide a useful framework that generates interesting predictions and helps interpret brain activations involved in altruistic, fair an...

Combining the methods of neuroscience and economics generates powerful tools for studying the brain processes behind human social interaction. We argue that hedonic interpretations of theories of social preferences provide a useful framework that generates interesting predictions and helps interpret brain activations involved in altruistic, fair an...

Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to inve...

Is the monopoly face of unions, i.e. their ability to enforce wages above what non-unionised firms would pay, harmful to employment and output? It is shown that a positive answer to this question is far less compelling than commonly held views based on a negatively sloped labour demand curve suggest. First, the labour demand curve may be irrelevant...

This paper presents experimental evidence about how individuals learn from information that comes from inside versus outside their ethnic group. In the experiment, Thai subjects observed information that came from Americans and other Thais that they could use to help them answer a series of questions. The subjects achieved optimality in how they we...

Please do not circulate without permission. Promotion tournaments play an important role for the provision of incentives in firms. In this paper we study behavior in such multi-stage elimination tournaments in a laboratory experiment. Our main treatment is a two-stage tournament that is incentive maintaining in the sense of Rosen (1986). We compare...

Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inferior equilibrium; however, if we lift the veil of money by representing payoffs in real terms, the Pareto efficient...

In a laboratory experiment we show that minimum wages have significant and lasting effects on subjects’ reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects’ reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the mi...

This paper addresses the question how individual saving rates and equity hold-ings vary with income. The joint understanding of the cross section of individuals' total and equity savings is crucial regarding various policy issues. In particular, it is important to understand why lower-income households do not participate in the stock market, which...

This paper develops a theoretical model of interim communication and information release in dynamic tournaments and tests the resulting empirical implications using data from laboratory experiments. Dynamic tournaments with interim information create endoge-nous asymmetries between contestants and incentives for untruthful information release for t...

If cooperative dispositions are associated with unique phenotypic features (’green beards’), cooperative individuals can be identified. Therefore, cooperative individuals can avoid exploitation by defectors by cooperating exclusively with other cooperative individuals; consequently, cooperators flourish and defectors die out. Experimental evidence...

In their personal lives, many economists recognize that they are surrounded by individuals who are less than fully rational. In their professional lives, however, economists often use models that examine the interactions of fully rational agents. To reduce the cognitive dissonance of this situation, many economists believe that interactions in mark...

This paper explores the consequences of cognitive dissonance, coupled with time-inconsistent preferences, in an intertemporal decision problem with two distinct goals: acting decisively on early information (vision) and adjusting flexibly to late information (flexibility). The decision maker considered here is capable of manipulating information to...

Social segregation is a ubiquitous feature of human life. People segregate along the lines of income, religion, ethnicity, language, race, and other characteristics. This study provides the first experimental examination of decentralized matching with search frictions and institutionalized segregation. The findings indicate that, without a segregat...

In a recent “pamphlet” Shaked (2005) harshly criticizes two of our papers, Fehr and Schmidt (1999, 2003). This reply shows that Shaked's charges are not substantiated in any way. It points out several logical flaws in his arguments,and shows that he grossly misquotes and misinterprets our papers. ,,,,,,,,,,,,

The most fundamental solution concepts in Game Theory - Nash equilibrium, backward induction, and iterated elimination of dominated strategies - are based on the assumption that people are capable of predicting others' actions. These concepts require people to be able to view the game from the other players' perspectives, i.e. to understand others'...

While the debate on how economic agents form expectations and how these expectations should be modelled has been key to modern macroeconomics, money illusion has been an anathema to macroeconomists until recently. The rational expectations revolution in the 1970s thoroughly banned the study of money illusion from economists’ research agendas. Ratio...

Collective action in large groups whose members are genetically unrelated is a distinguishing feature of the human species. Individual reputations may be a key to a satisfactory evolutionary explanation.

We examine experimentally how Chief Executive Officers (CEOs) respond to incentives and how they provide incentives in situations requiring trust and trustworthiness. As a control we compare the behavior of CEOs with the behavior of students. We find that CEOs are considerably more trusting and exhibit more trustworthiness than students – thus reac...

We examine experimentally how Chief Executive Officers (CEOs) respond to incentives and how they provide incentives in situations requiring trust and trustworthiness. As a control we compare the behavior of CEOs with the behavior of students. We find that CEOs are considerably more trusting and exhibit more trustworthiness than students—thus reachi...

We provide evidence that long-term relationships between trading parties emerge endogenously in the absence of third party enforcement of contracts and are associated with a fundamental change in the nature of market interactions. Without third party enforcement, the vast majority of trades are initiated with private offers and the parties share th...

We show experimentally that fairness concerns may have a decisive impact on both the actual and the optimal choice of contracts in a moral hazard context. Explicit incentive contracts that are optimal according to self-interest theory become inferior when some agents value fairness. Conversely, implicit bonus contracts that are doomed to fail among...

This study explores the ways in which information about other individual's action affects one's own behavior in a dictator game. The experimental design discriminates behaviorally between three possible effects of recipient's within-game reputation on the dictator's decision: Reputation causing indirect reciprocity, social influence, and identifica...

Over the last decades, there has been a steady increase in the use of experimental methods in economics. We discuss the advantages of experiments for labour economics in this paper. Control is the most important asset behind running experiments; no other empirical method allows a similarly tight control as do experiments. Moreover, experiments prod...

Typically, laboratory experiments suffer from homogeneous subject pools and self-selection biases. The usefulness of survey data is limited by measurement error and by the questionability of their behavioural relevance. Here we present a method integrating interactive experiments and representative surveys thereby overcoming crucial weaknesses of b...