Traditional economic models often assume individuals are purely self-interested, seeking to maximize their own utility. However, behavioral economics recognizes that human decisions are influenced by a complex interplay of psychological, social, and emotional factors. Among these, social preferences—our concern for the well-being and actions of others—play a crucial role in shaping economic behavior. This module explores three key social preferences: fairness, reciprocity, and altruism.

Fairness refers to an individual's desire for equitable outcomes and processes. People often care not just about their own payoff, but also about how that payoff compares to others, and whether the distribution of resources or treatment is perceived as just. This can lead individuals to reject unfair offers, even if accepting them would result in a positive payoff for themselves.

Reciprocity is the tendency to respond to a positive action with another positive action, and to a negative action with another negative action. This can manifest as 'strong reciprocity' (willingness to reward kindness and punish unkindness, even at a cost) or 'weak reciprocity' (responding in kind to actions, but without incurring a cost).

Experiments like the Trust Game illustrate reciprocity. In this game, an investor is given a sum of money and can choose to send any portion of it to a trustee. The amount sent is multiplied, and the trustee then decides how much to return to the investor. A positive return from the trustee demonstrates reciprocity, rewarding the investor's trust. Conversely, a low or zero return can be seen as a failure of reciprocity.

Altruism involves acting out of concern for the well-being of others, even at a cost to oneself. This is distinct from reciprocity, as it doesn't necessarily require a prior positive action from the recipient. Pure altruism means deriving utility from another person's increased well-being, regardless of one's own outcome or any exchange.

Evidence for altruism can be found in charitable giving, volunteering, and situations where individuals incur costs to help strangers. Behavioral economists often use dictator games to study altruism, where one person (the dictator) decides how to split a sum of money with another person (the recipient), who has no say in the matter. While some dictators keep all the money, many give a portion, suggesting a concern for the recipient's welfare.

These social preferences—fairness, reciprocity, and altruism—are not mutually exclusive and often interact. Experimental design in behavioral economics is crucial for isolating and measuring these preferences. By carefully constructing games and controlling for confounding factors, researchers can gain insights into the underlying motivations driving economic decisions.