1. How the Emotions Enforce the Cooperative Behavior in Social Dilemma Games Speaker ：林 家 仰

2. Before start The main contents in this speech are discussing Prof. Ernesto Reuben’s paper and using the materials in his courses http://ereuben.googlepages.com/home

3. Outline What’s experimental economics? A very brief history Neuroeconomics Public goods Punishment Emotions

4. What’s experimental economics? A discipline in which data are collected in a controlled environment.

5. A Brief History Market experiments Decentralized markets  Chamberlin (1948) induced demand and cost structure Double auction  Vernon Smith (1962, 1964) Game experiments Prisoners‘dilemma 1950’s  Originally by psychologists and sociologists Oligopoly games  Reinhard Selten(1959) Individual choice experiments Choice under uncertainty  Savage (1954) Allais paradox (1953)

6. Why experimental method Advantages of the experiments  Control Institutions (e.g. voting rules, communication, etc.)  Not always complete control (e.g. social norms) Incentives (payoffs)  Not always complete control (e.g. altruism) Measure confounding variables (e.g. beliefs) Randomization (avoids some self-selection problems)  Replication Check for robustness, experimenter effects, etc. Gives an incentive to do it right Make available: data, instructions, program, and procedures

7. Importance Economics is becoming an experimental science like physics and biology. Like theory, running experiments is an established method to explain and/or describe economic activity.

8. Neuroeconomics See lecture 1 on Prof. Ernesto Reuben’s web site http://ereuben.googlepages.com/expteach

9. Public Goods Real-world problems of cooperation Cooperative hunting and warfare Teamwork in firms Charities and gift-giving Environmental protection Economic public goods  Paying taxes  Fishing  Security Political collective action  Voting  Lobbying  Revolutions

10. The voluntary contributions mechanism (VCM) The profit of each subject endowment: e i Contribute to public account: c i Contributions to the public good benefit each member by: α i (marginal per capita return, MPCR) Group of n members

11. Reasons for cooperation By mistake!  Do not understand that c i = 0 is dominant  Do understand dominance but make systematic errors Social preferences  Altruism, warm glow, efficiency-seeking motives  Conditional cooperation, reciprocity Strategic cooperation  Strategies such as Tit-for-Tat can support cooperation among selfish players mostly infinitely repeated games but see also Kreps et al. (1982)

12. By mistake Cooperating by Mistake Brandts et al. 2004 Design  VCM: n= 4, e= 9, repeated for 10 periods  72 subjects, within subjects  On every period the MPCR is randomly drawn from 10 values MPCR ≤0.1875: efficient ci= 0, dominant strategy ci= 0 0.3125 ≤MPCR ≤0.9375: efficient ci= 9, dominant strategy ci= 0 MPCR ≥1.0625:efficient ci= 9, dominant strategy ci= 9

13. By mistake Result

14. Conditional Cooperation Conditional or unconditional cooperation? Fischbacher & Gächeter 2006 Design  140 subjects, within subjects  VCM: n= 4, e= 20, MPCR = 0.4  2 stages: strategy method and normal  Decisions 1: unconditional contribution decision  Decision 2: use strategy method to elicit contribution schedule with respect to average contribution of decision 1  Pick randomly three decision 1’s and one decision 2 Predictions  Altruism or ‘warm glow’: contribution is positive but independent of others contribution  Reciprocity: contribution increases with the average contribution of others  Selfish: always contribute zero

15. Conditional Cooperation Results Little unconditional cooperation Heterogeneity in types :  55% conditional cooperators  23% selfish  12% ‘hump- shape’contributors  10% other

16. Strategic cooperation Is there strategic cooperation? Keser& van Winden2000 Compare partners vs. strangers  If partners cooperate more → supports strategic cooperation? Design VCM:  n= 4, e= 10, 25 periods, MPCR = 0.5  160 subjects between subjects Results Strong effect of the partner’s treatment

17. Explaining the decline in cooperation Croson 1996 Why does cooperation decline with time  Strategic cooperation  Learning to play the dominant strategy Design: surprise restart  VCM:  n= 4, e= 25, MPCR = 0.5  Repeated 10 + 10 periods  24 subjects Results  Clear evidence of restart specially for partners

18. Punishment The effectiveness of punishment Nikiforakis and Normann 2006 Results  Punishment sustains cooperation with a damage/cost ratio greater than 2/1  Punishment increases welfare with a damage/cost ratio greater than 3/1

19. To punish or not to punish Sanfreyet al. 2003 Results  Higher activation in anterior insulafor unfair human offers  Activation is higher with degree of unfairness

20. Results Higher activation in anterior insulafor unfair human offers  Activation is higher with degree of unfairness  Activation is highest with rejection Higher activation in right dorsolateral prefrontal cortex  Not sensitive to rejection

21. Emotions Prosocial emotions Hopfensitz and Reuben 2006 For punishment to be effective:  Punished subjects should switch to cooperation  Punished subjects should not punish back Design  Trust game with ‘infinite’ rounds of punishment (costs 1 to reduce 4)  2 periods, perfect strangers  emotions are measured before making decisions

22. Measurement of Emotions Is self reports a good idea ? experimental economists  self reports is sometimes regarded with suspicion (Smith and Walker, 1993)  self reports will often overstate the true amount that individuals are will-ing to pay (Murphy et al., 2005)

23. Measurement of Emotions Social psychology  emotions are internal, difficult to observe states, self reports of emotions are an often used technique (Robinson and Clore, 2002)  self reports of anger have been related to skin  conductance levels for emotional reactions in the power to take game (Ben-Shakhar et al., 2007  self reported are indeed reliable can be deduced from a recent neuroimaging study (Takahashi et al., 2004)

24. Measurement of Emotions measured emotions included: anger, gratitude, guilt, happiness, irritation, shame, and surprise.

25. Results  first movers cooperate more often and second movers return more in the presence of punishment

27. Results  2 nd movers cooperate after being punished only if they feel guilt

28. Results  2 nd movers cooperate after being punished only if they feel guilt

29. Results Considerable retaliation after receiving punishment  40% of second movers punish back if punished 2 nd movers retaliate because:  They are angry and feel no guilt