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Old 01-17-2008, 01:23 PM   #1
NovaScotian
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Economics vs. Logic -- The "fairness" dilemma

This article from the LA Times points out an interesting dilemma shared by many. In part, the article says:

Quote:
Consider one more experimental example to prove the point: the ultimatum game. You are given $100 to split between yourself and your game partner. Whatever division of the money you propose, if your partner accepts it, you each get to keep your share. If, however, your partner rejects it, neither of you gets any money.

How much should you offer? Why not suggest a $90-$10 split? If your game partner is a rational, self-interested money-maximizer -- the very embodiment of Homo economicus -- he isn't going to turn down a free 10 bucks, is he? He is. Research shows that proposals that offer much less than a $70-$30 split are usually rejected.

I'd have taken the tenner and resented the offer; but I'd have taken it nonetheless; but then my wife claims I have two left brains.
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Old 01-17-2008, 01:44 PM   #2
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Personally I think the exercise is out of context, and thus pointless (as most hypothetical situations are.) But, if I was given the 100 dollars and told to split it, I would give him 50. If I was offered ten dollars, I would take it, I figure he must need the 90. If he doesn't, he's going to have to deal with the lack of trust I'll have for him for the duration of our relationship.
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Old 01-17-2008, 02:03 PM   #3
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Quote:
Originally Posted by Zalister
Personally I think the exercise is out of context...

I think it's a context seen every day in business. A large corporation has hundreds of millions of dollars it can spend on salaries. It offers about $40K/year to the average employee, maybe $150K to high value employees, and then the CEO and board of directors split a hundred million or so between themselves. They do that, layoff people at will, and then wonder why there's no loyalty on the part of employees.
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Old 01-17-2008, 04:12 PM   #4
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It's a negotiation. The person who needs the money most will get the least. We can only hope the winner put the money into the stock market last week.
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Old 01-17-2008, 04:14 PM   #5
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Originally Posted by aehurst
We can only hope the winner put the money into the stock market last week.

So they can use it to ship more US jobs overseas?
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Old 01-17-2008, 04:30 PM   #6
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So they can use it to ship more US jobs overseas?

Ha! No, the winner took advantage his of position in the negotiation and buying into an about to dive market would be a tiny bit of perverse justice.... sorta his/her reward for greed.
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Old 01-17-2008, 08:17 PM   #7
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see, in any real world context the partner could just say "no, you give me $90, or I'll see to it that neither of us gets anything".

that's the silliness with these kinds of exercises - you can construct them to prove just about anything you want. in fact, most people are not particularly economically-minded: they are more concerned about how they appear to others than about the profit they are making, and so they'll usually go for the 50/50 split. (incidentally, this is why corporations keep their executives hidden deep inside bureaucracies - the less personal contact the people in power have with workers or outsiders, they less they'll be worried about their reputations and the more ruthless they'll be where it concerns the welfare of others. there's nothing sicker than bureaucratic capitalism...)
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Old 01-17-2008, 09:08 PM   #8
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Originally Posted by tw
Philosophy is a battle against the bewitchment of our intelligence by means of language. -LW-

Is language bewitching our intelligence or being used in the battle against the bewitchment?
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Old 01-17-2008, 09:45 PM   #9
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Originally Posted by fazstp
Is language bewitching our intelligence or being used in the battle against the bewitchment?

egggggzactly
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Old 01-17-2008, 10:01 PM   #10
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Quote:
Originally Posted by aehurst
It's a negotiation. The person who needs the money most will get the least. . .

<Sidebar>Said tongue-in-cheek, I'm sure, but that's not how it works. Generally, salaries are paid according to what the market can bear. If you can get someone to do a job for $10 an hour but can't get anyone to do it for $9, then you pay $10. If you want to pay $11, that's nice of you, but sooner or later you'll have times when expenses mount or income shrinks and you'll need to cut back in places, so you look for that $10 an hour employee again, or even someone overseas. "Personal need" has nothing to do with it.

This even applies for CEOs. If you can get a good one to work for a large company for $250,000, that's great, but it's not usually the market price for a great executive. Same goes for pro athletes, movie stars, and a lot of other situations. It might not seem fair that a movie star makes $2,000,000 for a part in a film while Joe Geek makes only $35,000 slaving to keep a school system's network up and going, but that's the way it goes. No one will pay $10.00 to see Joe Geek in a movie; they'll fork it out for Tom Hanks, however.</Sidebar>

-----

Re. the exercise, I'd probably accept the $10 as well, the alternative for me being nothing. Then I'd hope I'd get to be the one doing the offering next time around.
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Old 01-17-2008, 10:30 PM   #11
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Quote:
Originally Posted by Phil St. Romain
Quote:
Originally Posted by aehurst
It's a negotiation. The person who needs the money most will get the least. . .

<Sidebar>Said tongue-in-cheek, I'm sure, but that's not how it works. Generally, salaries are paid according to what the market can bear... </Sidebar>

but isn't that exactly the same thing? 'what the market will bear' implicitly refers to supply and demand, and those who need the most have a much greater demand for a salary than those who need the least. therefore, those who need the most will get much lower salaries from 'salary suppliers'.

besides, you're overlooking class distinctions. the small number of top-level management positions available in the world carry high salaries because the pool of potential demanders is artificially restricted to a small, small subset of the population belonging to certain social networks. I could run a largish corporation as well as most CEOs (given that I'm bright, very determined, and both responsible and competent), and I'd work for a quarter of the salary that most CEOs get, but the free market doesn't really extend to giving me a shot at the job.
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Old 01-17-2008, 10:38 PM   #12
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tw, you're using "supply and demand" in reference to personal needs, and that's not what the terms refer to in the marketplace.

If you can run a company as well as a CEO of a large business, then that's great! But what you'll have to do to be given the opportunity is to be the CEO of a small company, prove yourself, get noticed, etc. The free market doesn't owe you a "shot at the job." You have to sell your abilities and someone has to be willing to pay for them. Lots of other "bright, very determined, responsible, competent" people are willing to be the CEO of a large company. Why would they hire you? (Hint: your "social network" has little relevance.)
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Old 01-17-2008, 11:02 PM   #13
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Quote:
Originally Posted by Phil St. Romain
tw, you're using "supply and demand" in reference to need, and that's not what the terms refer to in the marketplace.

that's fascinating... what exactly do you think demand for something entails? you can use whatever euphemism you like, and you can cast this on any of a number of different levels, but it seems to me that any market transaction is an exchange between someone who has an excess of some commodity and someone who has a need for that commodity. why would I get a new pair of shoes unless I had a physical (or emotional, or socially imposed) need for shoes? why would I get a job unless I had a physical (or emotional, or socially imposed) need for a job? now you can argue that the worker/employer relationship is a market transaction, or you can argue that it isn't, but you can't have it both ways.

Quote:
Originally Posted by Phil St. Romain
If you can run a company as well as a CEO of a large business, then that's great! But what you'll have to do to be given the opportunity is to be the CEO of a small company, prove yourself, get noticed, etc. The free market doesn't owe you a "shot at the job." You have to sell your abilities and someone has to be willing to pay for them. Lots of other "bright, very determined, responsible, competent" people are willing to be the CEO of a large company. Why would they hire you?

you're making my point for me. if in fact there were lots of competent people vying for CEO positions, there would be no reason for corporations to pay CEOs such large salaries. I don't care how good a CEO you are, there's someone out there younger and brighter and willing to work for less - market forces would keep the salaries down. but that doesn't happen, does it?
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Old 01-18-2008, 12:24 AM   #14
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Quote:
Originally Posted by tw
I don't care how good a CEO you are, there's someone out there younger and brighter and willing to work for less - market forces would keep the salaries down. but that doesn't happen, does it?

If the world is about to blow up, you don't quibble about the price when buying a rocket-ship - indeed you likely would be more than willing to pay ten or a hundred times the price for a rocket that had 99% reliability instead of one that had merely 90%. Large corporations generally consider it foolish to take a risk when having the right CEO can mean the difference between being immensely profitable and going broke.
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Old 01-18-2008, 12:53 AM   #15
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Originally Posted by hayne
If the world is about to blow up, you don't quibble about the price when buying a rocket-ship - indeed you likely would be more than willing to pay ten or a hundred times the price for a rocket that had 99% reliability instead of one that had merely 90%. Large corporations generally consider it foolish to take a risk when having the right CEO can mean the difference between being immensely profitable and going broke.

so you're implying that the corporate world is always about to blow up? picking a world-shattering example and suggesting that it's the norm is a rhetorical device that doesn't really stand up to careful thought. I mean, consider: even if I grant your premise that corporations are always choosing top management as though the corporation is facing imminent extinction, that would still mean that corporations are not responding to market forces the way Phil has been suggesting. instead, they would be doing what desperate people have always done - giving away everything they have to whatever charlatan promises them a few days more of life. Adam Smith would shudder...
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Old 01-18-2008, 12:54 AM   #16
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Originally Posted by cwtnospam
I think it's a context seen every day in business.

I agree, but I'm feeling cheeky-- "Everday Business" is a context for the situation. But remember this same situation can be put into many contexts. You could put this situation in the context of marriage or family, perhaps church, or charity, or politics. There are thousands of contexts for this situation.

But I like the context you came up with, I would have been far more apt to write a long winded reply to that one than to the original question posted (no offense intended NovaScotian.)
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Old 01-18-2008, 07:53 AM   #17
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I'm wondering how those who believe that market forces have anything to do with CEO pay can explain golden parachutes. If market forces had any effect, no company would sign any deal that allowed a CEO to be bought out if he didn't perform well. Market forces dictate that if you fail to perform, you're fired! Not only that, but any CEO that asked for such a deal would be considered a failure from the start, since they'd be asking to eliminate the effect of market forces on their position.
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Old 01-18-2008, 08:23 AM   #18
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Quote:
Originally Posted by cwtnospam
I'm wondering how those who believe that market forces have anything to do with CEO pay can explain golden parachutes. If market forces had any effect, no company would sign any deal that allowed a CEO to be bought out if he didn't perform well. Market forces dictate that if you fail to perform, you're fired! Not only that, but any CEO that asked for such a deal would be considered a failure from the start, since they'd be asking to eliminate the effect of market forces on their position.

If it's not market forces, then how do you explain the phenomenon?

"Golden parachutes" can be understood as part of the "package." If you don't offer them, you don't get certain people. And those who fail and "parachute" are often "finished."
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Old 01-18-2008, 08:27 AM   #19
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Collusion. It's a classic good ole boy network.

And if you want to golden parachute me, I'd be happy to be 'finished.'
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Old 01-18-2008, 08:29 AM   #20
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tw, you keep mixing apples and oranges in your examples. Your need for shoes has no bearing on the price paid for the shoes nor the price paid the shoemaker. If a lot of people need shoes and there aren't many shoemakers, the price is higher than if there are. The personal needs of the shoemaker might influence the price he charges, but if the consumer can buy a cheaper pair that's just as good down the road, that's what they do.

you're making my point for me. if in fact there were lots of competent people vying for CEO positions, there would be no reason for corporations to pay CEOs such large salaries. . .

You're joking, aren't you? You think there's a scarcity of people who want to be CEOs? What line of work are you in, anyway? You sound like someone who has only a theoretical understanding of how this all works.
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