Behavioral Economics

Slide 5.1 Instructions for the Proposers: You have been assigned a number. Be sure to keep this number. Write your assigned number on the top right hand corner of your Proposer’s Offer Sheet. This number will be used to make sure that you get your offer sheet back. You have been given 10 units of a reward. It is your job to allocate the reward between yourself and another student, the responder. You are free to offer any amount between 0 and 10 to the responder. You will keep the rest. The amount offered must be in whole numbers. Other Things Matter www.EconEdLink.org

Slide 5.2 Instructions for the Proposers: Record your allocation under the “Proposer’s Offer” column for round 1 on your worksheet. Once you have written down your offer, raise your hand so that your proposal can be handed to a responder. Once all of the responders have recorded their decision, you will get your paper back to see whether your responder accepted or rejected your offer. In the third column of your offer sheet (Total number of Rewards) fill in the total rewards for the proposer and the responder based on the responder’s action. Other Things Matter www.EconEdLink.org

Slide 5.3 Instructions for the Responders: A proposer has been given 10 units of a reward and asked to propose an allocation of that reward between the two of you. Your role is to either accept or reject the offer that you receive from your proposer. You will be offered an amount between 0 and 10. If you accept the proposer’s offer, you and the proposer will get the allocation of the reward proposed. If you reject the offer, both of you will receive no reward. Read the offer on the Proposer’s Offer Sheet you are given and decide whether to accept or reject the offer. Write the decision on the proposer’s offer sheet. On your Responder’s Summary Sheet, record the number of the proposer that made you the offer, the offer that you received from the proposer, and whether you accepted or rejected the offer in round 1. Once you have made your decision, raise your hand so that the Proposer’s Offer Sheet can be collected. Other Things Matter www.EconEdLink.org

For both the proposers and responders: Slide 5.4 For both the proposers and responders: If the responder rejects the proposer’s offer, neither the proposer nor the responder will receive any reward. Other Things Matter www.EconEdLink.org

Slide 5.5 What did we just do? This experiment is called the Ultimatum Game and has been conducted by many researchers and some commonly produced results are: The mean split is 60% of the total reward for the proposer and 40% for the responder. A 50/50 split is the most common offer. About 20% of low offers (any offer below 50%) are rejected. How would an Econ behave as a responder in the ultimatum game versus how a Human behaves in choosing whether to accept or reject an offer? Other Things Matter www.EconEdLink.org

Slide 5.6, Comparing Econs and Humans Lesson Econs Humans 1 Use system 2 for all their decisions. Use system 1 to make many routine decisions.   Carefully weigh costs and benefits to make decisions. Make decisions on past experience or quick judgments. 2 Are not subject to cognitive biases when making decisions. Are subject to cognitive biases when making decisions and so may use anchors and fall into relativity traps. 3 Make decisions by weighing costs and benefits equally. Tend to weigh losses greater than gains. Are not influenced by their current situation when making decisions. Tend to bias to the default or to things they already have. 4 May discount costs and benefits that occur in the future. May have self-control problems and discount the future too much or be subject to present bias, causing inconsistent decisions. 5 Only use costs and benefits to make decisions. May make decisions based on fairness or for other emotional factors such as whether work is meaningful. Other Things Matter www.EconEdLink.org

Slide 5.7, The Results The Meaningful Group The Sysiphus Group Average number of Bionicles built 10.6 7.2 Average earnings $14.40 $11.52 Median wage at which subjects stopped working $1.01 $1.40 Fraction of subjects who continued to work at a wage of <$1.00 65% 20% Kamenica, Emir, Dan Ariely, and Drazen Prelec. "Man's Search for Meaning: The Case of Legos." Journal of Economic Behavior & Organization (2005): n. pag. Web. 05 Dec. 2015 Information of the Sisyphus Group: This condition in the experiment was named after the mythical figure Sisyphus, whom “The gods had condemned…to ceaselessly rolling a rock to the top of a mountain, whence the stone would fall back of its own weight. They had thought with some reason that there is no more dreadful punishment than futile and hopeless labor.” (Albert Camus. "The Myth of Sisyphus." The Myth of Sisyphus. N.p., n.d. Web. 17 Jan. 2016.) Other Things Matter www.EconEdLink.org

Presentation of the information (framing) Slide 5.8 Conclusion People make decisions based on: Incentives Monetary Emotional Recognition Costs versus benefits Self interest Presentation of the information (framing) Other Things Matter www.EconEdLink.org