Stop me if you’ve heard this one. A subject (called the proposer) is placed in an isolation booth and given ten dollars to divide between himself and the stranger in the booth next door. The stranger (called the responder) can accept or reject the division. If he accepts, they each take their shares and go home. If he rejects, they each go home with nothing.
In experimental plays of this ultimatum game, responders tend to reject splits that are substantially worse than 50-50. This is offered as some kind of reproof to the principles of economics. After all, the responder is turning down free money.
But so what? People turn down free money all the time. Just this morning, I saw a $20 bill fall out of a guy’s pocket and I returned it to him. I did that because I don’t like taking things that aren’t mine—a sentiment that’s easy to incorporate into orthodox theory. Likewise, if you put me in the ultimatum game (at least as it’s usually run), I’ll turn down whatever I’m offered, whether it’s 50/50 or 20/80 or 80/20. That’s because I don’t feel any better about taking money from the taxpayers who are presumably funding this experiment than I am taking money from the guy in front of me in the checkout line.
Now, not everyone is as moralistic as I am on this point (as I am not as moralistic as some others on some other points), but most people are not psychopaths, so most people are going to feel at least a little squeamish about taking money nonconsensually from others. Some might be willing to overcome that squeamishness in exchange for a reasonable share of the bounty (but not for a smaller share). That doesn’t mean they’re irrational. Quite the contrary. It means everyone has his price. Just like your Principles of Economics teacher taught you.
What if you’re playing the Ultimatum Game at a psychology lab run at a private university, so the funds for the experiment presumably come from a private endowment that was freely given, instead of coming from taxpayers?
Plus, of course, some people get utility from living their concept of fairness, denying others undeserved rewards, getting a rise out of people, etc – and they’re willing to pay for this utility.
I think those who say this experiment refutes rationality are a bit narrow-sighted. This argument is similar to the argument that lottery players are stupid because the lotto has a negative net return. Like most gamblers, lottery players are almost always paying for the anticipation and excitement, not as an investment strategy.
How much would you offer if you were playing that role in the ultimatum game? Presumably you would either offer the whole lot to ensure that you don’t get any of the money, or would offer a really derisory amount to try to encourage the other person to refuse the offer so that nobody gets any of it.
You think you would really take none of the money? Remember that your actions won’t affect whether more of this research occurs (you’re just one person); it will just destroy the value of the research they’re trying to conduct. If you have a moral obligation to your marginal act of condemnation of research conducted with resources taken nonconsensually from others, wouldn’t you have a moral obligation to your marginal act of nudging society towards the correct leader by voting?
No offense, Dr., as I respect you greatly. But did you have the same qualms when you cashed your checks from Colorado St. University, or is this a recent conversion?
I ask this question seriously, as I am a (squishy) libertarian who also receives a grad school assistantship from a public university. I occasionally question the consistency of that position, before concluding that no individualist is actually consistent about their principles, so why should I be? No libertarian refuses to travel on public roads, for instance, or hesitates from calling 911 in an emergency. Rephrased, why should I act against my own interest when I am violating no law or empirically-established ethical principle?
The system we have is the system we have. Taking principled stands over $20 in a mock survey is one thing. As you say, everyone has their price, and I doubt you’d respond the same if the game was $100,000. As you recently wrote, you use publicly-funded airports to travel to speaking gigs where you (presumably) earn income. What’s the difference?
Altering one’s life to suit an ideology that has only ever been applied inconsistently might be considered madness. Certainly fanaticism. It would be irrational, in other words, to turn down my assistantship as a matter of principle, unless I was just as willing to not use public roads or police or fire departments or hospitals or airports.
I don’t want to live as a hermit, and no individualist society has ever emerged as an alternative. Maybe Friedman fils will change that, but my bet’s against it. Until then, I’ll choose to live as rationally as I can, given the constraints placed in front of me. So I’ll take the money in the ultimatum game.
As a student in an undergraduate experimental economics class last year, our (small) class had to design an experiment. Inspired by your Slate article on the matter, I proposed that we modify a standard game by giving non-monetary payoffs (say, chocolate bars) and destroying any that were left over. That way, cooperative behaviour would truly increase social welfare and not just move money around.
Unfortunately, we couldn’t agree on a universally appreciated non-monetary good (we considered alcohol, but I doubt university regulations would allow that). It wasn’t helped by the fact that other students didn’t understand that destroying money or vouchers didn’t have the same impact on social welfare as destroying real resources would (perhaps I wasn’t good enough at explaining it?) We therefore settled on a boring slightly modified dictator game.
Experimenters must realise that they may not be measuring what the think they are. You cannot assume that all people would be motivated to maximise the amount of money they leave the experiment with. Steve may be motivated to minimise the amount, and some may be motivated to appear a generous person to the experimenter. These studies should be “blind” wherever possible.
I think you can take the money with a clear conscience. The experimenter has put in a proposal for reasearch funds to advance human knowledge. This has been scrutinised by a committee, and the funds authorised. It has been considered that the returns provide value for money. You may disagree that it is value for money, but at least it has been looked at. The money falling out of a guys pocket is different.
However, the total sum of money available is quite small, such that it really makes no difference to people. If you start with $20, anything much less than 50:50 is well under $10, a sum it is very easy to reject. If we started off with $1,000,000, even a 1% split amounts to $10,000 – a sum people may find it harder to turn down. No committee thinks it worth these sums to find out.
Besides, it is rational for the responder to turn down low offers. It makes it much more likely that you will get a high offer. The proposer has a theory of mind, and presumes the responder will act in a similar way to himself. If the proposer would turn down a derisory offer, then he will be forced to make a decent offer. This is the same argument as for revenge – it may be damaging to the individual, but it keeps everyone honest.
Interesting approach, although doubt most “no” responders would be motivated by the same thing you are.
This game is perfectly explainable in standard economic terms if you just imagine that the responder is motivated to maximize his outcome not in this game in isolation, but in this + all similar games he anticipates getting into going forward. If he accepts a $3/$17 split this time, well yes, that’s $3 more than he had before, but what sort of offers will he get in future ‘games’ now that he’s marked himself as a pushover? Projecting an image to others of not being a pushover is wealth-maximizing in this context.
And even if the game is a one-off (like the person knows he will never be in such a ‘game’ for the rest of his life, and he is assured that the testers will never tell anyone how he chose in this game), a “no” answer can still make sense as part of a strategy of trying to train yourself not to be a pushover – of self-discipline, delayed rewards. Which, again, could be the wealth-maximizing solution.
Seems to me it takes a rather small imagination to declare econ debunked based on this game…
I think jambarama hit on the reason most people who turn down small amounts do so. If the reason given in the original post applies to most of the decliners, then we should expect a privately-funded ultimatum game to have significantly different results from a publicly-funded one. Later in the day I’ll check to see if I can find any info on the matter; I’m guessing the game will go similarly regardless of funding.
Thank you thank you. I get tired of all these experiments whose results are actually less clear than claimed, and which are extrapolated wildly — always to prove a political point it seems.
Couple more points. Having actually had a look at the Wikipedia article, it seems that some committee did think it worth exploring high value amounts – not quite $1,000,000. They used $100, but in Indonesia where it represented about 2 months wages. Rejections were reportedly independant of the stakes, indicating that the effect is not only valid for small amounts.
Steve says people are squeamish about taking money from others non-consensually, but in this experiment it is given with full consent, and the giver feels they are getting value for money through the results of the experiments. Taxpayers generally can be assumed to consent, or they would have voted for a different government that did not support research. But I do not think most people feel in the least squeamish about taking money from the Government. The other side of the coin is they try to minimise the amount of tax they pay.
I think one possible explanation for refusing highly unfair divisions is that humans are hardwired to see interactions as ongoing events, and transactions involve not only goods and services, but information. When someone gives a grossly unfair division, we say in effect, “No, and if we ever meet in the future, you had better give me a fairer deal,” no matter how the experiment is designed.
In fact, this is to the good of society as a whole — I can go into a strange grocery store and be fairly confident that the avarice of the owner is checked somewhat by thousands of previous interactions with other shoppers, regardless of whether or not I shop there again. The odd behavior of the ultimatum game may be one way of bypassing the prisoner’s dilemma.
Less noble is the fact humans have a selfish emotion called spite, and there may be good evolutionary reasons for it. A responder who is offered “too small” a share is willing to pay to spite the proposer by turning it down. The utility gain from hurting the stingy proposer is greater than the utility of the small share. Why is this a mystery?
In the spirit of The Selfish Gene –
the responder maximizes utility not for himself only, but for all people sharing his genes (that is, for close relatives, who might play this game in the future).
This leads to a testable hypothesis – people with fewer siblings, tourists, or immigrants should accept lower offers.
Michael and Neil make good points. Our built-in resentment of an unfair division is a pre-commitment strategy which benefits those who adopt it. David Friedman has a great article about “just prices” and evolutionary psychology. I like his observation that, for starters, an unfair price is any price different from the usual price.
http://www.daviddfriedman.com/Academic/econ_and_evol_psych/economics_and_evol_psych.html
About taking the experimenter’s money, Steve’s morality seems a bit foreign to me because it lacks the usual us-versus-them alignments that form so easily for most of us. (Steve, did you have trouble rooting for your side in a football game?)
Here’s an example. One time my wife and I were dining in a restaurant for which we had clipped a coupon that gave us a discount. My wife had an extra coupon that expired that same day, so she gave it to the couple at the next table. They were grateful, but why should she want to transfer money from the restaurant owner to the couple at the next table? We had no reason to prefer either side’s welfare, but I suspect her attitude is the ordinary and common one. I haven’t decided yet whether this sort of thing is irrational or serves some useful purpose, or both.
I think you should always take a government handout. The way government projects are administered, there’s a strong incentive to spend all the money in the budget. They won’t give it back to the taxpayers, not even in the form of reduced future taxes. At least giving it to you has no direct impact on social welfare. If you let them keep it, they might use it to waste real resources.
Vic:
the responder maximizes utility not for himself only, but for all people sharing his genes (that is, for close relatives, who might play this game in the future).
Are you suggesting that the responder doesn’t share genes with taxpayers?
“I’ll turn down whatever I’m offered, whether it’s 50/50 or 20/80 or 80/20. That’s because I don’t feel any better about taking money from the taxpayers who are presumably funding this experiment than I am taking money from the guy in front of me in the checkout line.”
Why do you write such stupid crap?
It is nice to know that you feel better giving money to a total stranger just because it is money from the tax paying public. That must open up a completely new section of economics: People who aren’t influenced by financial incentives.
Now, my question is: how many times during the day do you do the functional equivalent of taking money from the public?
I think a more realistic explanation is that people compare their outcomes with what they think it is fair, and try to punish the other playing when they are offered something less than that.
So if I think I should get at least $3, being offered 1$ offers me so little utility (since I compare it not with 0, but with 3), that I indeed get more utility by punishing the other player with (-7).
This does definitely make more sense than supposing people don’t think $1 is not enough pay to remove money from taxpayers. I doubt that realistically speaking, anyone (but a libertarian economist like yourself) would feel any sort of disutility from removing $1 from 200 million people.
My view has 3 assumptions about human behavior (which all I feel are correct):
a) people compare income not (only) with what they would get instead (usual opportunity cost), but (also) with what they think they deserve;
b) In some situations – in this case when the person believes it was treated unfairly or that the other person is trying to “push him around” – people actually gain utility by punishing others, that is, lessening their utilities;
c) People feel less guilty about causing (relatively) smaller harm to a large number of people than bigger harm to lesser number. So they might find it condemnable to take $10 from someone in a line, but most will think much less so to take $10 from the government (i.e. diluted in 200million people’s taxes).
Behavioral economists have an irritating tendency to interpret evidence of certain preferences — such as altruism, anticipatory utility, and memory utility — as evidence of irrationality.
What if the ultimatum game is played this way:
1. Proposer does some useful work for which he is given some compensation
2. Proposer has to divide the amount between himself and responder.
3. If responder agrees to the division the compensation is divided accordingly otherwise both get zero.
In such a game what ratios of the division would be acceptable and which ones unacceptable?
Fake Name: This is a great idea. Someone should run this experiment.
neil: “It is nice to know that you feel better giving money to a total stranger just because it is money from the tax paying public.”
Huh? Could you please fill in the missing steps from Steve’s post to your characterization of it?
Fake Name:
We could run your experiment with the variable: does responder know that the sum is compensation?
Steve: “This is a great idea. Someone should run this experiment.”
I’m right on it. As soon as I get government funding. :-)
I assume the University of Rochester is a tax-exempt educational institution, receiving all kinds of public subsidies in the form of government services, students with guaranteed student loans, etc. As a research institution, I expect it receives scads of government grants. I’d guess that particiating in a $10 Ultimatum Game would represent a trivial burden upon taxpayers relative to Landsburg’s professional activities.
How widespread is Landsburg’s aversion to benefiting from taxpayer-financed largesse? Everything I’ve ever heard would suggest that this feeling is not widely held. Indeed, all of political science would seem to be premised on the opposite conclusion. I’d be curious to know how many of Landsburg’s students and fellow faculty members share the view that it’s wrongful to seek or accept government scholarships or grants. I hope Landsburg can expand on this idea.
nobody.really: Without getting into specifics, I think it is a perfectly reasonable moral code to say that you’re willing to be paid for doing useful work, but not to take other people’s money by force in exchange for nothing at all.
If I ever became a mass murderer, I would make people play the ultimatum game for their lives. The proposer divides 100 tokens between him/herself and the responder. If the responder accepts, for each player a random number generator (I personally like the idea of a “Wheel of Fortune” for its tension) produces a number between 1 and 100. If this number is greater than the number of tokens that player has, the player is shot in the head. If the responder rejects the offer, both players are shot in the head.
My hypothesis is that few players would reject say, a 10% chance of living to kill someone who offered them an uneven share. On the other hand, I think proposers may be so scared of getting rejected that they might give relatively uneven offers. Finally, players may question my credibility to not kill them all anyway and defiantly play differently than if they were trustworthy.
Unfortunately it is unlikely that my proposal would pass an ethics committee. I do hope that if mass murder is inevitable, at least one perpetrator will take up the opportunity to perform valuable research.
fixed my post
To get into one specific, Landsburg thinks it is a perfectly reasonable moral code to have people BE FORCED to pay him to do useful work – that is, where most of the people doing the paying are not also the people evaluating whether Landsburg’s work is useful, or whether it’s worth what he’s paid.
That seems like a reasonable point of distinction to the Ultimatum Game. I still question whether the outcomes of the Ultimatum Game can be explained in terms of people’s aversion to accepting tax dollars without doing useful work.
Henry (and Harold):
When you raise the stakes in the ultimatum game (say to tokens that can save your life), there are two effects on the proposer’s incentives: First, the responder is a lot less likely to veto a bad offer, so you can afford to be less generous. But second, a veto is now a lot more devastating, so you might want to be *more* generous just to be safe. Vernon Smith once gave me an argument for why you’d expect these two effects to be of roughly the same size, so that the offered splits (as a percentage of the total pie) don’t change. But I’m not able to recall what his argument was.
Steve ” First, the responder is a lot less likely to veto a bad offer, so you can afford to be less generous”. You might think this would be the case, but not according to wikipedia. It says
“Rejections are reportedly independent of the stakes at this level, with 30 USD offers being turned down in Indonesia”. Thus it is not that the offered splits are the same because of 2 competeing effects, but the level of rejections are the same.
FakeName–I think this experiment is close to what you have in mind:
http://www.econ.cudenver.edu/beckman/Tiffany/cherry%20-hardnose-aer.pdf