Have you ever thought, while watching a sport event and the camera showing the fans of the rival team: ‘Gosh, how can they be such animals! Look at our supporters, how well they behave!’ (chances are they behave just the same). Have you ever wondered why you always look favourably to members of parliament close to your political affiliation, while you almost always disagree with the other party? If you did, then this is the blog for you.

Us and Them

Orthodox economics has a tendency to concentrate only on the individual, disregarding the environment. However, the economic environment can have powerful effects on the individual’s preferences as well as their perceived utility. One could argue that there are two parts to your well-being. The first one is earned happiness or well-being that you get from – in economic terms – consumption of certain goods, let them be food, services, or just your free-time. The second one is more abstract, it being the perceived well-being with respect to others. What this means is that you compare yourself (occasionally, regularly or constantly) to others. This can lead to many outcomes, including jealousy or envy, but it can also lead to altruism.

From the point of social sciences though, we can identify ourselves as part of groups, organizations and social classes, respectively to our endowments or our ideologies. We have an urge to belong somewhere, because – as Aristotle elegantly put it – “Man is by nature a social animal”. In the event of transactions by social categorizations, however, we no longer think of people as individuals, but as members of groups or embodiments of moral codes. By this, we often disregard other people’s individual traits and the available information that we previously obtained from them. If your friend supports FC Barcelona, and you are a hard-core Real Madrid fan, then come game day and you are sworn enemies; for a short time, you put aside your personal friendship, and by identifying as parts of a football club, you two are also competing.

From this comes the concept of in-group favouritism: “the tendency to respond more positively to people from our in-groups than we do to people from out-groups” (Stangor, 2011). In other words: We become more receptive to the needs of the groups we belong, while disregarding or even taking a stance against the other groups.

In an experiment designed by Tajfel et al. (1971), boys were assigned to two groups based on their preferences on paintings by two artists. Subjects had information on which groups they were assigned to, but not of the memberships of any of the other boys. Following the division, they had to divide payoff matrices between two individuals. They were told whether the division was between two ‘out-group’ members, two ‘in-group’ members or between one in-group and one out-group member. The results showed that between two individuals from the same group, the subjects tended to divide the payoffs more evenly. However, when the boys were from different groups, fairness was not the predominant choice; instead, the decision-maker gave larger endowments to the in-group members. The subjects not only displayed in-group favoritism, but they did so by having such a marginal distinction as taste in paintings. This can be shown in groups created on ad hoc, trivial, and random basis as well (Hogg et al. 1986).

Is this good or bad?

As any economist would say: “it depends”. While at first, we would think of the negative effects to be more severe, it is useful to take into account the possible positive effects as well.

It most certainly leads to more emotionally-driven decision-making, both in transactions inside the group and outside of it. In these cases, we use heuristics to define our level of trust to individuals. You are more likely to prefer doing business with an ‘insider’. This of course comes from a supposed feeling of connection with and understanding of the other person: you theorize that because the other person is in the same social group as you are, he must share some of the same traits, values, or preferences with you, thus making transactions seem easier!

As stated earlier, in-group favouritism can also have negative effects, even only on the level of possible transactions. You can squander mutually beneficial transactions by regarding your own group as superior to others and reject any kind of interaction with people from other groups. From a rational point of view, this is a net loss, at least as options go. It can also lead to institutionalized distrust.

It can also disrupt seemingly easy decisions. In an experiment conducted by Gneezy et. al. (2010), they asked people trivial questions framed in two different ways. The control group was asked: “Camels are bigger than dogs. Do you agree?”, while the other group received a framed question: “According to the Democrats, camels are bigger than dogs. Do you agree?”. From the first group, 100% of the people agreed that yes, indeed, camels are bigger than dogs. However – as you probably guessed by now – people from the second group started asking questions. “It depends – what kind of dog are we talking about?” “Maybe the dog is a Saint Bernard, while the camel is only a baby!” People began to question trivial things – which can be harmful, as far as decision-making is considered.

There can also be cases where individuals do not look at certain people favorably from their own groups. This is called the black sheep effect, where a particular individual is at stake of threatening the values of the group in question (Pinto, Marques, Levine, & Abrams, 2010). In other words: in order to reduce cognitive dissonance within the group, members disregard these ‘rebel members’. Alternatively, they can act according to the sociocentric bias, where they only credit the group for its successes, but in cases of failure, members blame external factors, leading to self-justification. Sounds familiar?

Can we avoid these kinds of distinctions? Hardly. Some argue that it is in our nature to make comparisons and to make distinctions based on ideologies, ideas and convictions, let them be political, religious, or just unquestioned fanaticism towards a football club. What we can do is to be aware of these biases and flaws and try to be more open to opinions from other groups. After all, who knows? Maybe having universal healthcare is the way to go in economic policy, the dress is in fact blue and not gold, and maybe Messi is the greatest football player in the world.