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Behavioral Economics Ultimatum Game

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The Ultimatum Game is a deceptively simple test of human economic attitude.

It goes like this:   The experimenter tells two subjects that he will give one of them a sum of money that they may split.   One person will decide how much to give to the other.  The other person may accept or reject the offer.   If accepted then both keep whatever money they hold.   However, if the other person deems it unfair then by refusing money prevents both of them from getting any cash.   Session over.   The test is given once only.

In examining the results for the Ultimatum Game it seems that many groups will accept a small percentage.   If the experimenter gave 100 dollars, then $5 might suffice.   This changed with Western subjects, who measured 30-40%… meaning they were willing to cut off all wealth until that fairness level.  Some even insisted on 50%.

Economists used to think that we, as rational actors, would always choose the best deal.   The irrational choice of cutting off all money and ending play - was difficult to understand.   Was it the sense of fairness?   Game theory and behavioral economics are pretty new fields of study.   One can see how it may apply to the economics of global warming.

A related experiment is the dictator game where the players who make the offers get to keep their share no matter what.   Predictably they make less equal offers, keeping more of the cash.   The second mover always accepted unequal money.

So one privileged person, shares a bit with someone less privileged.  The less privilegled fellow see this is fine, until he sees the privileged one cross some sort of line that is going too far…. like Billion dollar fortunes from bailouts that will raise taxes and condemn our future.  And like a carbon fuel industry selling a dangerous product that kills our future.  That crosses the line.  Increased stakes seem to make subjects more pliant toward small rewards

The privileged ones get vast wealth, vast - the recipient has generations of cheap power, cheap electricity, cheap mortgages, rising value of real estate, easy credit, rising stocks.  The wealth runoff to the recipient is a very small fraction of the vast wealth.

It is easy to apply this to modern economics - Think of a great experimenter bestowing vast free wealth to humans in the form of Forests, Ocean harvests, Mining ores, and Oil and coal.  All were thought to be essentially free, bestowed like money in the Ultimatum Game experiment.  The initial recipients redistributing a portion of the wealth to all others: employees, clients, stock holders and consumers.   The ratio of owner wealth to consumer wealth is something other than 0 and certainly not 100% - At some time it might have been 5% and now maybe 30% [Students in economics will write many papers describing the percentage of this wealth.]  Was it 30%?

The implicit rule of this real life Ultimatum Game is an honest description of the terms of the deal, and promise of safety.

The Ultimatum Game starts with the agreement that all the costs will be known.   Free coal is dug and sold cheaply, and we get warm electricity.   But the soot and CO2 poison life itself and our 30% share (or whatever percentage) is gone - reduced to nothing - or vastly lower.

So the Ultimatum Game is that human recipients are beginning to demand a halt to this play - asking for a new agreement.   The carbon fuel companies have reduced the cost of oil, kept coal cheap in effort to move up the percentage of wealth offered to the others.   We tacitly accept, keep driving and heating and continue the game.

Now however we are about to feel the true cost of the carbon economy.   Any further CO2 output moves our species demise closer.   Even a payoff all the way to 100% is not a good deal if no one survives.   Many will ask the game play canceled.

Those who adopt the dictator stance of economic transaction will be rudely shocked to discover that C02 and atmospheric science does not negotiate with economists.

Richard Pauli



More reading in behavioral economics and global warming:

http://en.wikipedia.org/wiki/Ultimatum_game
http://www.economics.rpi.edu/workingpapers/rpi0701.pdf
http://ideas.repec.org/p/rpi/rpiwpe/0701.html
http://noimpactman.typepad.com/blog/2008/07/human-motivatio.html
http://tonysclimateblog.blogspot.com/2008/02/behavioral-economics.html
http://europe.theoildrum.com/tag/behavioral_economics
http://www.tdaxp.com/archive/2006/10/21/quick-dirty-literature-review-for-the-ultimatum-game.html
http://www.fte.org/capitalism/activities/ultimatum/index.html


“The policy recommendations of most economists are based on the rational actor model of human behavior. Behavior is assumed to be self-regarding, preferences are assumed to be stable, and decisions are assumed to be unaffected by social context or frame of reference. The related fields of behavioral economics, game theory, and neuroscience have confirmed that human behavior is other regarding, and that people exhibit systematic patterns of decision-making that are “irrational” according to the standard behavioral model…. the standard economic approach to climate change policy, with its almost exclusive emphasis on rational responses to monetary incentives, is seriously flawed. In fact, monetary incentives may actually be counter-productive. Humans are unique among animal species in their ability to cooperate across cultures, geographical space and generations. Tapping into this uniquely human attribute, and understanding how cooperation is enforced, holds the key to limiting the potentially calamitous effects of global climate change.” http://www.economics.rpi.edu/workingpapers/rpi0701.pdf

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