Part of a series exploring how economic thought leads to cognition and cognitive behaviour
When academics gather around and heartily chortle at our so-called irrational behaviour its usually best to take a step back. It’s great being able to point out a behaviour but this doesn’t explain why it occurred.
The Ultimatum Game is an example of this.
To play the game we need two players; a Proposer and a Responder.
The Proposer receives an amount of money two divide between himself and the Responder.
The Responder then gets to either accept his offer or she can choose to reject it, in which case neither receives anything.
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In a utopian world of love and harmony our Proposer would split an amount – say $10 – down the middle and he and the Responder would walk off into the sunset.
Unfortunately for this vision, as individuals we seek to maximise the benefit available to us in our environment.
This causes us a problem. We’d like to keep $10 for our self. If we did that the Responder would be likely to reject our offer and we’d get nothing. We need to find the split where we can get the most reward without her rejecting it.
We could probably get away with $6:$4 in our favour. $9:$1 and $8:$2 are probably out of the question – she’d likely reject those. What about $7:$3? It’s unlikely, but it might be worth a try.
What would you accept if the tables were turned and you were playing as the Responder?
To our academics our Responder is being irrational. She is passing up an absolute increase in wealth. The game costs her nothing to play so why doesn’t she just take the money and run?
The problem with uncovering a behavioural bias is that you don’t uncover the reason for it.
Instead of scoffing at our Responder for passing up free money we should be admiring the intelligence she is showing that has been hardwired into us by evolution.
To be clear accepting an absolute increase in wealth of $1 or $2 while allowing someone else that shares your environment to walk off with $8 or $9 is an incredibly stupid thing to do.
It is not the absolute difference we respond to but the relative difference. Allowing a peer to repeatedly obtain a relative advantage over you with lead to a situation where he dominates you in your environment.
If a Responder repeatedly rejects unfair offers there is no relative difference between them. They both have nothing and so can compete over resources in the environment on equal terms.
If she repeatedly accepts unfair offers then she will find herself at a huge disadvantage. Say that she found herself with having $9 and a Proposer had $81. He knows that in any auction process she can’t bid more than $9 and once she has spent this amount she can’t bid on other resources in the environment. The Proposer can then acquire these without competition and use his assets to out produce her.
Our Responder will ultimately find herself in a position where she can compete and is effectively dominated.
From our cosy first world position, when we look at conflicts between herdsmen in undeveloped countries or marginalised communities where refusing to fight is seen as worse than fighting and being beaten badly, it is us that is being naïve, not them.
They are being pragmatic in trying to prevent themselves from being dominated.
A position of dominance is the natural conclusion from seeking maximal benefits from the environment. We’d all like to have billions of dollars or not have to follow the rules. The flip side of the advantage we gain is that others would be at a disadvantage to us.
By preventing others from gaining a relative advantage over us today, we are ensuring we aren’t dominated tomorrow.
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