1 University of Auckland Winter Week Lectures Fourth Lecture 5 July 2007 Associate Professor Ananish Chaudhuri Department of Economics University of Auckland

2 Recommendations for further reading Thomas Schelling Micromotives and Macrobehavior The Strategy of Conflict Michael Chwe Rational Ritual: Culture, Coordination and Common Knowledge by

3 Recommendations for further reading Joseph Henrich et al. (Editors) Foundations of Human Sociality Matt Ridley The Red Queen The Origins of Virtue Nature versus Nurture Genome

4 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

5 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

6 Recommendations for further reading Brian Skyrms The Evolution of the Social Contract Tim Harford The Undercover Economist

7 Other-regarding preferences The null hypothesis of game theory is the homo economicus assumption of self- interest 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

8 Has $10.00 Offer $X, 0 < X < 10? Keep $(10 – X)? Ultimatum Game Accept? Gets $X Gets $(10 – X) Reject? Gets $0.00 Player 1Player 2

9 Prediction based on self- interest 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

10 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.

11 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

12 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

13 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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16 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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18 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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21 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)

22 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%

23 USA 50% 40% 50% 40% 45%

24 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

25 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

26 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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29 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%

30 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

31 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

32 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

33 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

34 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

35 Questions?