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When Matrix came out, all of this was a dream--the ability to change the perceived reality with a pill. Remember when Morpheus opened his palms to offer Neo a choice: Take the blue pill, upon which "the story ends, you wake up in your bed and believe whatever you want to believe." Or take the red pill, where "you stay in Wonderland, and I show you how deep the rabbit hole goes."
What if there are economists out there (social planners?) who have drugs that change the way you make economic decisions? Think of a scenario where you take a drug and your likelihood of investing in a start-up company increases.
In a research study, Kosfeld and colleagues administered Oxytocin to participants, a neuropeptide that is shown to increase social attachment in non-human mammals. The participants then proceeded to play the Trust Game, which goes as follows: There are two people, A and B. You can think of A as the investor, B as the start-up company. A is given $10 and is told to transfer any amount he wants to person B. During the transfer, the experimenter triples the amount transferred. In other words, there might be returns to investment. Then it is person B's turn. B gets the tripled amount, and can send as much of the amount he received back to person A, and the game ends.
For example, if A decides to keep $5 and transfers $5, person B would receive $15. B then might keep all of it, or might transfer some of it back to A. If B keeps all of it, A would end up with $5, B would end up with $15. If B sends back $7, A would end up with $12 and B would end up with $8, etc. As we can see, in order for the players to get the most out of this game, A should send B all of the $10, so that the social profit will be $30, which the players should then find a way to share. However, as in real life, one reason why socially beneficial exchanges fail to take place in the laboratory is lack of trust between people. Player A knows, at least algebraically, that any amount sent is going to be tripled so that the higher the amount sent, the higher the social payoff will be. However, there is uncertainty about whether B will transfer anything back.
Kosfeld and colleagues thought about Oxytocin: If this drug is able to increase pro-social behavior in non-humans, it might as well increase social risk taking in humans. So they gathered participants in the laboratory, administered the drug to some of them, leaving the control group to play the game without the drug. They find that those who took the drug were more trusting in the Trust Game (i.e. the original transfer from A to B was higher).
In this particular study, authors show that the reason why people are more trusting is not that their overall readiness to bear risk increases, but their behavior becomes more pro-social: It is the other person that A trusts. In other words, if A were playing this game with a computer that randomly chose what the returns to investment would be, A wouldn't have sent more money after the drug. Somehow the drug increased A's belief in his fellow humans, and he sent more money in good faith.
In light of this research, I want to think about what might happen in the future. If there is a drug that increases our propensity to take social risks, there might as well be a pharmacological mix that will increase our risk tolerance in general. If that happens, the allocations in the economy will change because most of our decisions depend on our ability to take risk; such as whether we buy life insurance or whether we choose consumption instead of saving. The decisions in life that don't relate to economics would also be affected. If you weren't as afraid (of failure, of ridicule, of rejection), imagine the things you could have done. You'd have asked that girl out, would have submitted your second short story, or would have invested in the stock market more aggressively. As the motto goes, high risk equals high return.
Moreover, we know that the marketplace favors those who can accommodate more risk. Research shows that taller people do take more risk for instance. Men take more risk, as well as younger people rather than older people. Labor market research, independent of these risk studies, has repeatedly shown a premium for height and also for men. Everything else equal, men make more money than women. Therefore some researchers now think that the premium might not be due to discrimination per se. Instead, the wage differential might be reflecting inherent differences among risk preferences. Here is a hypothesis to be tested then: Men can tolerate more risk, therefore they more aggressively go after the jobs they want, or they are less afraid to ask for a raise, and therefore they make more money than women. (Of course there might be several arguments as to why this differential exists. Here is one: Men were expected to try their hand at things, whereas women were expected to sit at home and wait for their fate, hence the differential development of risk attitudes over time). But no matter what the reasons behind risk preferences are, those who are able to tolerate more risk consistently have higher returns in the marketplace, and maybe even in life.
So the question becomes: Would you take the drug that will make you less averse to risk? Imagine that before you make an economic decision; someone (Bernanke?) stops you and opens his palms. "Take the blue pill, the story ends here, nothing in your life will change. Take the red pill, you stay in the economics wonderland and tolerate more risk and go to places you didn't dare go before." What would you, the neo-economic agent, do?
