“A substantial number of people exhibit social preferences, which means they are not solely motivated by material self-interest but also care positively or negatively for the material payoffs of relevant reference agents. We show empirically that economists can fail to understand fundamental economic questions when they disregard social preferences, in particular, that without taking social preferences into account, it is not possible to understand adequately (i) effects of competition on market outcomes, (ii) laws governing cooperation and collective action, (iii) effects and the determinants of material incentives, (iv) which contracts and property rights arrangements are optimal, and (v) important forces shaping social norms and market failures.
He conjectures that we could call economics “the dismal science” because it consistently assumes the worst in human motives, which contrasts sharply with the pervasive idea that consumer tastes are heterogeneous. He attacks the idea on two fronts. First, because a great amount of evidence has contradicted the selfishness hypothesis; second, because failure to regard other-concerning behavior ignores central market activities.
Indeed, human altruism extends far beyond reciprocal altruism and reputation-based cooperation, taking the form of strong reciprocity. Strong reciprocity is a combination of altruistic rewarding, which is a predisposition to reward others for cooperative, norm-abiding behaviors, and altruistic punishment, which is a propensity to impose sanctions on others for norm violations.
Strong reciprocators bear the cost of rewarding or punishing even if they gain no individual economic benefit whatsoever from their acts. In contrast, reciprocal altruists, as they have been defined in the biological literature, reward and punish only if this is in their long-term self-interest. Strong reciprocity thus constitutes a powerful incentive for cooperation even in non-repeated interactions and when reputation gains are absent, because strong reciprocators will reward those who cooperate and punish those who defect.