Behavioral Economics: Social Preferences

This week’s topic deals with interesting findings in behavior dealing with trust, fairness, and reciprocity. I’ll be discussing three different economic experiments (all run independently from one another with different participants). In each of these experiments, two people are brought into a lab, and one is designated as the proposer and the other as the responder. The proposer starts with a certain amount of money, say $10.

Trust Game
In the trust game, the proposer offers a certain amount of the $10 to share with the other player. The amount they choose is then tripled and given to the responder. The responder can then decide how much of the money they were given to return to the first player. If the proposer was to offer all the money, and then the responder was to return half of it, both players would walk out with $15. However, most proposers do not offer much of the money, and are paid back even less. The more the proposer gives, the more the responder is likely to return to them, thus this game is all about reciprocity and trust.

Ultimatum Game
In the ultimatum game, the proposer offers a way to split the money between the two participants. The responder can then either accept the deal and both players walk away with their portion of the money, or refuse the deal and neither player will get any money. Rationally, the responder should accept the deal, even if it is one penny, because it is a gain. However, in actuality, if the responder views the deal from the proposer as not being “fair” enough (about 35% and under), they will punish them by refusing the deal. In the end, both players are hurt.

Dictator Game
In the dictator game, the proposer has complete control. They decide how much of the $10 they want to share with the other player, if any at all, and that is the end of the game. The responder has absolutely no control in this situation. Even in this game, proposers still give about 20-25% of the money, when the rational thing to do would be to keep all the money.

Why is this? The dictator game was originally created to try and prove that the only reason people gave money in the first two games was to be strategic. Looking at the dictator game, we can see that there is no strategy to this, only the proposer trying to create some sort of fairness out of the situation.

These three games have been tweaked in many different ways to see how they hold up in different contexts. They have been tested around the world using different age groups, amounts of money and experimental situations, and while the percentages that participants give and responders accept will shift between groups, the overall findings continue to hold up. How irrational!