H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34 7
there are limits to decision making costs that can be borne, a resulting decision mechanism will be of a simple kind.
Assume, for a moment, that there are neuron locations in human brains to process in- formation and that two kinds of information occupy such locations: a decision rules and
transformation, and b data about choice objects and internal states of a decision maker. Naturally, an economizing problem arises over such locations. The more complex are the
problem-solving algorithms, the less room is available for data, and the more complete are the data, the less room is available for complex algorithms. The total computational capacity
has an upper limit that is short of global optimization. Given costs of obtaining data and given time constraints on how long is permitted to solve a problem, further limits are placed
on the complexity of problem solving. After all, the costs of decision making should not exceed the net value of choices made.
Once costs of reaching a decision are taken into account, the need for a simple-choice mechanism that relies on low-cost heuristics cannot be ignored. Given social capital that
has been accumulated in the form of life styles and given social and cultural order that has transformed the environment into a well-directed social field so that socially desirable
ends and means can be identified, it is only natural for individuals to search for low-cost heuristics in the life styles of their relevant social groups.
Viewing the consumer choice process as one of utilizing low-cost heuristics is not an escape from the conventional rationality hypothesis. Rather, it is best viewed as an extension
of this hypothesis when the decision-making environment is imperfect. The central issue is still one of cutting costs of problem solving as we focus on the use of socially desirable,
cost-saving means see Vriend, 1996 for a much broader interpretation of rationality as pursuance of self-interest. What is novel of this view is that it interprets the life styles of
social groups as social capital that has been accumulated through error-learning processes and relates this capital to human behavior of bounded rationality.
3. Social capital as sources of low-cost heuristics
Choice decisions made by an individual depend crucially on the organization of his perceptions of choice objects. To the extent that such perceptions are affected by social and
cultural elements, they cannot be independent of a particular social and cultural environment in which decisions are made. An individual participates in the economy not simply as
an economic abstract with idiosyncratic tastes but as a whole person with a variety of legitimate social and cultural concerns and motivations that are very much part of his
economic choices. For this reason, it is important to deal with the full complexity of choice behavior.
An individual occupies certain positions and plays certain roles in a society in which he lives. He also takes part in the life-worlds of social groups through many activities. This
entails that his behavior reflects a web of reciprocal role expectations and obligations as well as social sanctions positive or negative of various kinds and strengths see Parsons
and Shils, 1951 for the notion of double contingency of social action or order. It, therefore, follows that human behavior is, to a large extent, a social behavior. Culture then provides
a framework of value orientation shared by the majority of the society, without which
8 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
reciprocal expectations on the responses of different individuals would break down, and coherent perceptions of choice objects in the context of a social environment would not
emerge. Among many functions that society performs, we pay attention to its function as the provider of socially desirable heuristics to complex choice problems through clusters
of activities that mediate life styles of social groups and through commonly shared cultural values that make adoption of such heuristics a socially desirable act to follow. Thus, the
totality of life styles developed by social groups can be viewed as social capital, and a commonly shared cultural value orientation that guides the use of this capital can be viewed
as social order.
There are at least four aspects to this capital: economic, psychological, social, and cultural. If a decision maker in a social setting makes use of this capital, we need to know, on top of
his usual budget constraint, his psychological motives, the social sanctions pressures for conformity and sanctions against deviations that are at work on his choices, and the cultural
values shared by members of his society. These aspects are not independent of one another as, e.g., the success-oriented cultural values will give rise to the psychological motives to
gain upper status identification as a moral claim to success.
Economists often say that choice theory is or should be independent in explanatory power of choice objects. It is the same regardless of what individuals want. It is, therefore,
often concluded that a decision maker’s motivations are irrelevant to choice theory. This would be the case if it were true that his motivations applied only to the goods bundle’s
constituent list of commodities. However, the matter of motivation may apply to the safety of a choice as of neighborhood or brand of car, to the status gains, to the costs of han-
dling uncertainty, to the appropriateness of a chosen list of goods to life style activities, or to the handing of high information costs. To the extent that these motivations may
play important roles in decision making, they should not be swept aside and branded as irrelevant.
To summarize, social and cultural arrangements of the decision-making environment affect an individual’s organization of his perceptions of choice objects, therefore, his choice
behavior. The society is not simply a collection of isolated individuals acting on their own idiosyncratic preferences with little interdependence among themselves. It is best viewed
as a coherent whole organized around social norms and cultural values that constitute social capital and order of powerful economic significance. An individual’s behavior is then part
of his entire living in this totality of socio-economic realities.
With this general view, we note that the modern society places high moral values on achievement and success. Moreover, the structure of differentiated social roles and positions
is integrated around a system of pecuniary rewards and social prestige based on these values. Therefore, it makes up a very significant part of an individual’s motivation to be
regarded as a winner and to be respected as worthwhile in his society. Such motivation normally manifests itself in status seeking and emulation of higher status groups. It seizes
upon consumption behavior for an obvious reason that it is the best, impersonal way of demonstrating to the society the extent of one’s success as a moral claim to the social
prestige.
Such an idea is not new in economics. Veblen 1899, writing on the theme of human proclivity to emulation, expounded the notion of pecuniary emulation and conspicuous
consumption as a means to an invidious comparison. He writes:
H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34 9
The accepted standard of expenditure in the community or in the class to which a person belongs largely determines what his standard of living will be. It does this directly by
commending itself to his common sense as right and good, through his habitually con- templating it and assimilating the scheme of life in which it belongs; but it does so also
indirectly as a matter of propriety, under pain of disesteem and ostracism. To accept and praise the standard of living which is vogue is both agreeable and expedient, commonly to
the point of being indispensable to personal comfort and to success in life. The standard of living of any class, so far as concerns the element of conspicuous waste, is commonly
as high as the earning capacity of the class will permit — with a constant tendency to go higher . . . . . . Veblen, 1899, pp. 111–112.
Pigou was also among the first to point out the importance of this achievement-oriented
moral value as reflected in consumers’ constant quest for reputation and distinction bearing goods. He writes:
. . . . . . the essential matter is that people do, in fact, desire many things, not merely for their own sake, but, in the main, on account of the reputation or distinction which
the possession of them confers. . . . . . . The quantity of a distinction-bearing article that anyone demands at a given price depends, not merely on the price, but also on the extent
to which it is “the thing” to buy that article, and thus, indirectly upon the quantity that people in general are buying . . . . . . .
. . . . . . In fact, however, distinction is usually to be found, not in being in the swim in general, nor yet in being out of the swim in general, but in a combination of resemblance
to certain persons and of difference from certain other persons. . . . . . . Furthermore, both among the persons whom a man wishes to resemble, and among those from whom he
wishes to separate himself, some are usually much more important to him than others. . . . . . . Pigou, 1913, pp. 20–24.
Thus, given the human proclivity to emulation and avoidance and given a social status
scale that has evolved over time with success-oriented moral values, people of higher or equal social statuses tend to have positive effects and those of lower statuses negative effects
on one’s consumption behavior. Since an individual emulates or avoids behavior of other individuals to the extent they are representative of the social classes or groups of their
orientation, Veblen and Pigou’s insight can be best abstracted in terms of interdependence via reference groups Hayakawa and Venieris, 1977.
More precisely, an individual orients his behavior to a number of his reference groups. People in them constitute what social psychologist Miller 1963 calls significant others;
they are usually friends, neighbors, or associates. Some of them exert positive effects and others negative effects. Both among those groups to be emulated and among those to be
avoided, some have stronger positive or negative effects than others. Moreover, under a commonly shared cultural value orientation, it would be possible to rank these groups in
terms of their social statuses. It is conceivable that there may be more than one criterion for this ranking. If the ranking of social groups is comprehensive enough, the essential
feature of the interdependence via emulation and avoidance of reference groups may be captured by the notion of a reaction function defined on a set of well-ordered social reference
groups.
This formalization of social interdependence is to be distinguished from various models of social interdependence or consumption externalities that have been presented in the literature
10 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
to this day.
2
Most of such models have remained within the confine of interdependence via individuals or at the level of Millers’ significant others without considering social groups in
the background. This is understandable in the light of the fact that the hedonistic creature of the traditional utilitarian individualism has dominated economic theorizing. But, it is
useful to go beyond the individualistic level of social interdependence and to address the fundamental reason for it. In our view, an individual is affected by significant others because
they are representative of his reference groups targeted for emulation and avoidance along the social-status scale. Furthermore, if the social and cultural proclivities of human behavior
are to be linked to bounded rationality of attempting to reduce the cost of complex problem solving in an imperfect decision-making environment, social interdependence ought to be
abstracted by a scheme of interdependence via reference groups. For, after all, it is social groups, not individuals, that possess cost-saving heuristics for complex problems.
Some observations are in order: first, which social groups an individual targets in an invidious system is not random, but is very much guided by other groups’ social statuses.
Therefore, two individuals of different social statuses will orient their behaviors to dif- ferent social groups. Yet, to the extent that the same principles psychological, economic,
sociological, and communicational are likely to be operating within a given society, the general characteristics of emulation and avoidance patterns, hence, the general shape of a
reaction function will be similar among most individuals. In fact, it is this fact that supports the notion of social order an orderly pattern of social orientation in an invidious system.
Moreover, a reaction function is best viewed as a net summary of a psychological mo- tives to seek higher social statuses, b social pressures for conformity to group norms and
sanctions against deviations from such norms, c the amount of useful factual information about consumption patterns of different groups across society, and d the economic cost of
2
There have been many attempts to capture consumption externalities. Some old examples include: Leibenstein’s bandwagon, snob, and Veblen effects Leibenstein, 1950; Duesenberry’s relative income hypothesis Duesenberry,
1949; Clower, 195152; Johnson, 1952; Veblenian conspicuous consumption through prices or real income as separate arguments in the utility function Kalman, 1968; Allingham and Morishima, 1973; Hayakawa, 1976;
interdependence via reference groups based on emulation–avoidance motives Hayakawa and Venieris, 1977; dynamic modeling of consumer interdependence by way of a system of interdependent linear difference demand
equations Gaertner, 1973; Krelle, 1973; Becker’s 1974 theory of social interactions in which characteristics of other persons enter the production functions of the basic wants or commodities; Pollak’s 1976 model of
interdependent preferences via consumption of all individuals in the utility function; Frank’s 1984 model of wage differentials based on income hierarchies yielding within-group status, and his model Frank, 1985 of the
effect of Hirsch’s 1976 positional goods on the demand for non-positional goods; Granovetter and Soong’s 1986 threshold models of interpersonal effects in consumer demand. An interdependence model via reference
groups by Hayakawa and Venieris 1977 differs from these other models as it tries to derive indifference curves axiomatically from a life style hypothesis. The notion of social reference groups consisting of significant others
is also applied in Kapteyn 1980.
More recently, the literature has witnessed a resurgence of interest in social interactions as sources of promising answers to some intriguing questions. Among them are the equity premium puzzle see Mehra and Prescott, 1985;
Abel, 1990; Gali, 1994; Kocherlakota, 1996, the convexity of the utility function in the controversy between the New Keynesian and the New Classical economics Mankiw et al., 1985; Hall, 1988; Ikeda, 1994, and the
concave–convex–concave utility function Robson, 1992; Coelho and McClure, 1998. Furthermore, with growing interest in new growth theory, some attempts have been made to relate status seeking and consumption externalities
to capital and wealth accumulation, economic growth and dynamics, and economic performance in general Cole et al., 1992; Fershtman and Weiss, 1993; Futagami and Shibata, 1995; Hof, 1997.
H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34 11
gathering information and experimenting something new at the risk of disturbing the com- plementarities among activities and goods that mediate particular life styles Ray, 1973,
pp. 284–288. Second, wants are not distributed randomly or evenly throughout the entire society. Most
likely they exist in clusters associated with different social groups. To the extent that indi- viduals select certain social groups as their reference groups, social wants of individuals will
reflect such clusters. Heuristically, there are islands of clustered wants of different social groups, which may be disjoint or overlapped. These clusters are then learned and acquired by
individuals through interactions with significant others. In this process, individuals acquire a collection of wants at a time lest their complementarities be lost.
One further observation: the notion of a life style introduces a parallelism between com- plementarities among goods and particular life styles. Some clusters of goods are better
than others in serving a particular life style. In this context, a social group can be thought of as having borne the cost of testing various consumption technologies and associated clus-
ters of goods for their serviceabilities to its life style. Such testing may be understood as follows: suppose that members of a social group are in continual contact with one another,
sharing common ideas, values, standards, information, etc., and learning from experiences of one another. Then, simple learning will set off an elementary hill-climbing process
of incremental adjustments of a life style and a cluster of goods serving that life style, and of similar adjustments of consumption technologies that mediate properties, activities,
and goods Day, 1967; Day and Tinney, 1968. What comes out over time, therefore, is a well-defined life style and an efficient cluster of goods to live that life style. The latter is
called complementary because of the interconnections among goods that are established by virtue of life style activities and related consumption technologies.
Thus, the society is best viewed as a social space in which various styles of living and consumption technologies have been tested and accumulated with their benefits being
shared by members of social groups and in which there is movement from one style of living to another as one seeks higher social prestige and status. The accumulated life styles
constitute social capital, and the cultural value orientation that drives upper social status seeking defines social order. Our scheme of social interdependence via reference groups
is based crucially on the existence of such capital and order. Faced with an imperfect decision-making environment, it is natural for individuals to turn to social capital as sources
of low-cost heuristics that not only save the cost of problem-solving but also meet their social needs, and to turn to social order for orientation of their emulation–avoidance behavior.
The question is, how do the social capital and order help reduce problem-solving costs borne by individuals? In our view, they do so by sending to individuals signals or directions
as to which reference groups ought to be emulated and which reference groups ought to be avoided, all as a function of their social statuses i.e., as a function of their positions
in the social field. Once their reference groups are identified, their attention turns to such non-functional attributes of choice objects as how popular they are among members of such
groups, hence how the acquisition of them helps achieve a desired social status identification. Each commodity bundle, therefore, comes with a set of non-functional attributes, some of
which are based on its popularity across the reference groups. If an individual seeks to emulate a particular group, those goods that are in vogue with that group have, in their
vectors of non-functional attributes, a component which gives him a sense of belonging
12 H. Hayakawa J. of Economic Behavior Org. 43 2000 1–34
to that group and of having attained the social status of that group. Hence, given a set of socially ranked reference groups and a vector of non-functional attributes of goods, one
may be able to contrive a measure that indicates to what extent any given commodity bundle satisfies one’s social want by taking the convolution of a reaction function and
vectors of non-functional attributes. The social want-satisfying property measured this way makes up an important part of the total serviceabilities of a commodity bundle. Thus, the
social capital and order we have identified reduce the burden of complex problem solving by substituting, in place of utilitarian psychologizing, learning of social norms called life
styles and by directing individuals to make use of these norms in the quest for higher social status identification.
4. A sequential satisficing of wants
