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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

Cross posted to http:theboywhodeniedwolf.com

Understanding Ourselves - thanks Wikipedia

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Wikipedia can save the world through helping us understand ourselves better

Some human traits work to block progress in facing problems of Anthropogenic Climate Destabilization

Unique to our species, our human psychology, built from years of survival tests, leaves us with traits unsuited for modern times.  These can explain human inactivity in the face of this impending catastrophe.

Consider a quick sampling of Wikipedia’s social psychology entries :


===  see   http://en.wikipedia.org/wiki/Category:Social_psychology  ===


Denial See: http://en.wikipedia.org/wiki/Denial - postulated by Freud; a condition “in which a person is faced with a fact that is too uncomfortable to accept and rejects it instead, insisting that it is not true despite what may be overwhelming evidence.”

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Bystander Effect.. A common explanation of this phenomenon is that, with others present, observers all assume that someone else is going to intervene and so they each individually refrain from doing so and feel less responsible. This is an example of how diffusion of responsibility leads to social loafing. People may also assume that other bystanders may be more qualified to help, such as being a doctor or police officer, and their intervention would thus be unneeded. People may also fear losing face in front of the other bystanders, being superseded by a superior helper, offering unwanted assistance, or the legal consequences of offering inferior and possibly dangerous assistance. Another explanation is that bystanders monitor the reactions of other people in an emergency situation to see if others think that it is necessary to intervene. Since others are doing exactly the same, everyone concludes from the inaction of others that other people do not think that help is needed.  

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Groupthink is a type of thought exhibited by group members who try to minimize conflict and reach consensus without critically testing, analyzing, and evaluating ideas. During groupthink, members of the group avoid promoting viewpoints outside the comfort zone of consensus thinking. A variety of motives for this may exist such as a desire to avoid being seen as foolish, or a desire to avoid embarrassing or angering other members of the group. Groupthink may cause groups to make hasty, irrational decisions, where individual doubts are set aside, for fear of upsetting the group’s balance. The term is frequently used pejoratively, with hindsight.


The term was coined in 1952 by William H. Whyte in Fortune:  …We are not talking about mere instinctive conformity …what we are talking about is a rationalized conformity — an open, articulate philosophy which holds that group values are not only expedient but right and good as well.

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The bandwagon effect …is the observation that people often do and believe things because many other people do and believe the same things. The effect is often pejoratively called herding instinct, particularly when applied to adolescents. People tend to follow the crowd without examining the merits of a particular thing. The bandwagon effect is the reason for the bandwagon fallacy’s success.

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Diffusion of responsibility is a social phenomenon which tends to occur in groups of people above a certain critical size when responsibility is not explicitly assigned.

Diffusion of responsibility can manifest itself:

  • in a group of peers who, through action or inaction, allow events to occur which they would never allow if alone (action is typically referred to as groupthink; inaction is typically referred to as the bystander effect) or
  • in hierarchical organizations as when, for example, underlings claim that they were following orders and supervisors claim that they were just issuing directives and not doing anything per se.

This mindset can be seen in the phrase “No one raindrop thinks it caused the flood”.

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An argumentum ad populum (Latin: “appeal to the people”), in logic, is a fallacious argument that concludes a proposition to be true because many or all people believe it; it alleges that “If many believe so, it is so.” In ethics this argument is stated, “If many find it acceptable, it is acceptable.

This type of argument is known by several names[1], including appeal to the massesappeal to beliefappeal to the majorityappeal to the people,argument by consensusauthority of the many, and bandwagon fallacy, and in Latin by the names argumentum ad populum (“appeal to the people”),argumentum ad numerum (“appeal to the number”), and consensus gentium (“agreement of the clans”). It is also the basis of a number of social phenomena, including communal reinforcement and the bandwagon effect, the spreading of various religious beliefs, and of the Chinese proverb “three men make a tiger”.

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wisdom of repugnance, or the ‘yuck’ factor  describes the belief that an intuitive (or “deep-seated”) negative response to some thing, idea or practice should be interpreted as evidence for the intrinsically harmful or evil character of that thing. Furthermore, it refers to the notion that wisdom may manifest itself in feelings of disgust towards anything which lacks “goodness” or wisdom, though the feelings or the reasoning of such ‘wisdom’ may not be immediately explicable through reason.

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Somebody Else’s Problem ..is an effect that causes people to ignore matters which are generally important to a group but may not seem specifically important to the individual.

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Optimism bias…  tendency for people to be over-optimistic about the outcome of planned actions…over-estimating the likelihood of positive events and under-estimating the likelihood of negative events.

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The Banality of Evil … describes the thesis that the great evils in history generally, and the Holocaust in particular, were not executed by fanatics or sociopaths but rather by ordinary people who accepted the premises of their state and therefore participated with the view that their actions were normal.

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pluralistic ignorance is a process which involves several members of a group who think that they have different perceptions, beliefs, or attitudes from the rest of the group. While they do not endorse the group norm, the dissenting persons behave like the other group members, because they think that the behaviour of the other group members shows that the opinion of the group is unanimous. In other words, because everyone who disagrees behaves as if he or she agrees, all dissenting members think that the norm is endorsed by every group member but themselves. This in turn reinforces their willingness to conform to the group norm rather than express their disagreement. Because of pluralistic ignorance, people may conform to the perceived consensual opinion of a group, instead of thinking and acting on their own perceptions.

[edit]Consequences of Pluralistic Ignorance

In a series of studies conducted to test the effect of pluralistic ignorance, Prentice and Miller[3] studied the consequences of pluralistic ignorance at Princeton University. They found that, on average, private levels of comfort with drinking practices on campus were much lower than the perceived average. In the case of men, they found a shifting of private attitudes toward this perceived norm, a form of cognitive dissonance. Women, on the other hand, were found to have an increased sense of alienation on the campus but lacked the attitude change detected in men, presumably because norms related to alcohol consumption on campus are much more central for men than for women.

Pluralistic ignorance may partially explain the bystander effect: the observation that people are more likely to intervene in an emergency situation when alone than when other persons are present. If people monitor the reactions of others in such a situation, they may conclude from the inaction of others that other people think that it is not necessary to intervene. Thus no one may take any action, even though some people privately think that they should do something. On the other hand, if one person intervenes, others are more likely to follow and give assistance. For example, in the murder case of Kitty Genovese: About a dozen witnesses failed to help Genovese when she was stabbed to death in 1964. Most of the witnesses only heard the murder (i.e. they were not eye witnesses) and were both unsure of what was happening and unable to monitor the reactions of other people. Nevertheless, pluralistic ignorance may explain their inaction if at the time they were reasoning: “Others must also hear what is happening - if no one else is doing anything about it, then it must not be an emergency.”

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