Download Lecture 4 held on July 5, 2007

University of Auckland
Winter Week Lectures
Fourth Lecture
5 July 2007
Associate Professor
Ananish Chaudhuri
Department of Economics
University of Auckland
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Recommendations for
further reading
• Thomas Schelling
• Micromotives and Macrobehavior
• The Strategy of Conflict
• Michael Chwe
• Rational Ritual: Culture, Coordination
and Common Knowledge by
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Recommendations for
further reading
• Joseph Henrich et al. (Editors)
• Foundations of Human Sociality
• Matt Ridley
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The Red Queen
The Origins of Virtue
Nature versus Nurture
Genome
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Recommendations for
further reading
• Robert Putnam
• Bowling Alone: The Collapse and Revival
of American Community
• Francis Fukuyama
• Trust – The Social Virtues and the
Creation of Prosperity
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Recommendations for
further reading
• Robert Frank
• Passions within Reason: The
Strategic Role of Emotions
• Choosing the Right Pond: Human
Behavior and the Quest for Status
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Recommendations for
further reading
• Brian Skyrms
• The Evolution of the Social
Contract
• Tim Harford
• The Undercover Economist
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Other-regarding
preferences
• The null hypothesis of game theory is the
homo economicus assumption of selfinterest
• But it turns out that in a large majority of
cases people exhibit much more nuanced
behaviour
• Other-regarding preferences
• Conditional Cooperation
• Fairness
• Emotions play a role in economic decisions
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Player 1
Player 2
Ultimatum Game
Has $10.00
Offer $X, 0 < X < 10?
Keep $(10 – X)?
Accept?
Gets $(10 – X)
Gets $X
Reject?
Gets $0.00
Gets $0.00
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Prediction based on selfinterest
• Player 1 should offer only a small
amount to player 2 and player 2
should accept since anything is
better than nothing.
• Suppose Player 1 is constrained to
make offers in whole dollars - then
he should offer $1.00 to Player 2 and
keep $9.00
• Player 2 should accept this offer
since getting $1.00 is better than
getting nothing
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Dictator Game
• Like the ultimatum game but player
2 has no choice so that the proposed
allocation is always implemented.
• Self-interest prediction: Player 1
should offer only a very small
amount to player 2 and player 2 has
no choice in this case.
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The ultimatum game
(Güth, Schmittberger and Schwarze)
• Inexperienced subjects
• Split DM 4 or DM 10
(multiples of DM 1)
• All offers above DM 1
• Modal x = 50 percent (7 of 21 cases)
• Mean x = 37 percent
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The ultimatum game
(Güth, Schmittberger and Schwarze)
• A week later (experienced subjects)
• All except one offer above DM 1
• 2/21 offer an equal split
• Mean offer 32 percent of pie
• 5/21 of the offers are rejected
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Do higher stakes change
the results?
• Hoffman, McCabe, Smith (1999):
Ultimatum Game with 10$ and 100$
• Offers are not dependent on the size of
the cake.
• Rejections up to 30$!
• Cameron (1995): Ultimatum Game in
Indonesia $2.5, $20, $100
(GDP/Person = $670)
• The higher the stakes the more offers
approach 50/50.
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Does altruism explain the
high first mover offers?
• Forsythe, Horowitz, Savin and Sefton
compare offers in the ultimatum
game with those in the dictator
games.
• If player 1 is motivated by altruism
alone then offers in the two games
should not be different.
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Does altruism explain the
high first mover offers
• Not entirely
• But the higher concentration of
offers around the equal division in
the ultimatum game suggests that
behavior cannot be fully attributed to
altruism.
• Players do take into account the
possibility of rejection of unfair
offers.
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Does bargaining behaviour
vary across cultures?
• Alvin Roth and colleagues look
at behaviour of university
students in the ultimatum game
played in
•
•
•
•
Jerusalem (Israel)
Ljubljana (Slovenia)
Pittsburgh (U.S.A.)
Tokyo (Japan)
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Does bargaining behaviour
vary across cultures?
• Looking at modal offers, i.e.
offers made by the largest
number of participants, they
find that
• in Pittsburgh and Ljubljana the
modal offer is 50%
• while in Jerusalem and Tokyo the
modal offer is 40%
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USA
50%
40%
50%
40%
45%
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Does bargaining behaviour
vary across cultures?
• Moreover while offers are in general
lower in Tokyo and Jerusalem,
rejection rates are lower in these
two countries as well
• Thus it seems that the difference is
not so much that participants in
Tokyo or Jerusalem are “tougher”
bargainers but rather perceptions of
what constitutes a “fair” offer differ
across cultures
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Are university students in
these four countries all that
different culturally?
• McArthur Foundation Norms and
Preferences Network led by Ernst
Fehr, Colin Camerer, Herbert Gintis,
Robert Boyd, Samuel Bowles, Joseph
Henrich
• Look at ultimatum game behaviour in
a number of primitive small-scale
societies
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McArthur Foundation Norms
and Preferences Network
• 12 experienced field researchers
working in 12 countries over 5
continents gathered data for 15
small-scale societies exhibiting a
wide variety of economic and
cultural conditions
• Three foraging societies, six that
practice slash-and-burn horticulture,
four nomadic herding groups and
three sedentary, small-scale
agricultural societies
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McArthur Foundation Norms
and Preferences Network
• Mean offers in industrialized
societies are typically close to 44%,
mean offers in this cross-cultural
study range from 26% (Machiguenga)
to 58% (Lamalera)
• While modal offers in industrialized
nations are around 50%, modes in
this study vary from 15% to 50%
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McArthur Foundation Norms
and Preferences Network
• In industrial nations offers
below 20% are rejected in about
5 out of 10 cases, but rejections
in these small-scale societies
are extremely rare among some
groups
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McArthur Foundation Norms
and Preferences Network
• The large variations across the
different cultural groups
suggest that preferences or
expectations are affected by
group-specific conditions, such
as social institutions or cultural
fairness norms
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Two important factors that
affect offers and rejections
• Payoff to cooperation
• How important and how large is a group’s payoff
from cooperation in economic production
• Machiguenga, who are entirely economically
independent and rarely engage in productive
activities that involve others besides family
members, make very low offers
• Lamalera whale hunters, who go to sea in large
canoes manned by a dozen or more individuals
requiring close cooperation between them, make
more generous offers
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Two important factors that
affect offers and rejections
• Market Integration
• How much do people rely on
market interaction in their daily
lives
• Those who engage in greater
interaction make more generous
offers in the ultimatum game
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McArthur Foundation Norms
and Preferences Network
• Plausible explanation of this
behaviour
• when faced with a novel situation
(the experiment), the participants
looked for analogues in their daily
experience asking “What familiar
situation is this game like?”
• then acted in a manner
appropriate for that situation
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Questions?
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