Economics vs. Logic -- The "fairness" dilemma

[aehurst]

Quote: It would not be irrational for the person with the $100 to try to keep $99.99 for himself. If the $.01 is rejected, neither party gets anything, so they can obviously do no better. There is no negotiation as the problem is defined. The second person has to accept or deny whatever amount of money the first person offers. It is not rational behavior to turn down free money (we are not led to believe there are any ethical issues involved with the money and its source).

From the original post's link:

Quote: 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.

Monkeys and people are irrational. If the offer is viewed as unfair, it will be turned down. Does this make it irrational to offer player B less than a fair split (Player A's view of what Player B might think is fair)?

I read the original article, perhaps wrongly, to mean A and B have to come to some agreement as to what is fair. Not that it was a one time shot in the dark. That does change things.

[capitalj]

Quote: Originally Posted by J Christopher Yes. That is the point at which player one keeps the most money and player two loses money by not approving the split. That is the rational behavior, with the implied assumption that money is the single metric of preference in the example. Rational does not imply fair.

But in the experiment, if player two refuses the split, player one also gains nothing, so it is more rational on the part of player one to consider fairness as well as monetary gain, not necessarily out of generosity, but to reduce the chances of the offer being rejected by player two.

If you were player one, what would you offer player two?

[cwtnospam]

Quote: Originally Posted by capitalj Is it giving your competitor an advantage if it doesn't put you at a disadvantage?

How could giving your competitor an advantage not put you at a disadvantage? If I give you a 2 second head start in a race, isn't your 2 second advantage my 2 second disadvantage?

From a business perspective, it seems the only rational solution is reject anything below $ .50. I can't imagine a CEO taking $ .49, unless it came with stock options.

[NovaScotian]

Quote: Originally Posted by cwtnospam From a business perspective, it seems the only rational solution is reject anything below $ .50.

Good thing you're not in business for yourself, then.

[capitalj]

Quote: Originally Posted by aehurst From the original post's link: Quote: 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. Monkeys and people are irrational. If the offer is viewed as unfair, it will be turned down. Does this make it irrational to offer player B less than a fair split (Player A's view of what Player B might think is fair)? I read the original article, perhaps wrongly, to mean A and B have to come to some agreement as to what is fair. Not that it was a one time shot in the dark. That does change things.

Also, the experiment is about perceptions of fairness, not economic theory. Similar experiments were carried out with other primates as subjects, usually using fruit as a reward, with similar results.

I thought Michael Schermer was somewhat tendentious in his opinion column. The science does not conclude that humans are irrational about money, but that primates have emotional responses about perceived unfairness. It exists in virtually all primates, so it is not a new development. In that context, the next logical question is "What evolutionary advantage does a sense of fairness give to primates?"

[Craig R. Arko]

Nash equilibrium:

http://www.iscid.org/encyclopedia/Nash_Equilibrium

Outline of applied Game Theory:

http://william-king.www.drexel.edu/t...game/game.html

Applied Game Theorist Steve Brams:

http://politics.as.nyu.edu/object/stevenbrams.html


Just sayin'...

[capitalj]

Quote: Originally Posted by cwtnospam How could giving your competitor an advantage not put you at a disadvantage? If I give you a 2 second head start in a race, isn't your 2 second advantage my 2 second disadvantage? From a business perspective, it seems the only rational solution is reject anything below $ .50.

At first glance, perhaps, but if my goal does not require a first place finish, and I accomplish my goal, I am not disadvantaged.

With regard to finances, I see it the same way. As I said earlier, I used to be a self employed glassblower. I sold my work for significantly less than my competitors, but at enough a profit that my needs were met. My customers were happy, I was happy, I even took some business away from the competition. I didn't want or need to be Dale Chihuly.

My brother, who had thought I was a fool, was pursuing wealth while I was pursuing satisfaction. My basic needs were met, I was mostly content. We don't have a large house or fancy cars, we don't travel for vacations, but that is why we have no debt besides our mortgage and a few dollars in the bank. I was able to close my business when my wife suggested that I stay home with the kids. Meanwhile, my brother and his girlfriend work long hours, struggle with debt, and don't get to take the Harley out very often. He has since expressed envy at my situation.

Sometimes trying to get the most bang for your buck blows up in your face.

Quote: Originally Posted by cwtnospam I can't imagine a CEO taking $ .49, unless it came with stock options.

That seems, too often, to be the case.

[aehurst]

Quote: I thought Michael Schermer was somewhat tendentious in his opinion column.

The experiment was clouded by making the choices far short of life changing. If I were offered the $1, I would reject it because it is not fair AND because the $1 is insignificant. If on the other hand there was $100 million on the table and the only offer to me was for $1 million.... then it's the heck with that fairness thing, I'm taking the cash! I may be irrational, but I am not stupid.

[cwtnospam]

Quote: Originally Posted by aehurst The experiment was clouded by making the choices far short of life changing.

True, and just as important is your relative positions. Let's make it $2 million after tax dollars, and it's your landlord for your business that makes the offer. Whatever he offers you, if you accept, he's going to know that you can afford* to pay more rent! What do you do then?


*I've seen more than a few restaurants close because they were successful. The landlord jacked the rent up, assuming they'd have to pay. My wife's favorite Tex Mex restaurant was one.

[capitalj]

Quote: Originally Posted by aehurst The experiment was clouded by making the choices far short of life changing. If I were offered the $1, I would reject it because it is not fair AND because the $1 is insignificant. If on the other hand there was $100 million on the table and the only offer to me was for $1 million.... then it's the heck with that fairness thing, I'm taking the cash! I may be irrational, but I am not stupid.

The fact that the experiment was within the realm of common experience made it valid. Using unrealistic numbers would be bad science resulting in skewed data.

What I asked was (under the terms of the experiment - knowing that rejection of the offer means you gain nothing) what would you offer? I would offer close to a fifty fifty split - how close might depend on my mood that day - because that would virtually guarantee that my offer would be accepted and I would not walk away nothing.

That being said, I too would reject $1 but keep $1 million. That's a different ball game! (in today's dollars, anyway )

[aehurst]

Quote: What I asked was (under the terms of the experiment - knowing that rejection of the offer means you gain nothing) what would you offer? I would offer close to a fifty fifty split - how close might depend on my mood that day - because that would virtually guarantee that my offer would be accepted and I would not walk away nothing.

In the real world outside the carefully defined experiment, then I think the 50-50 split makes a lot of sense. It is fair. It is what I would hope the other partner would do if it were his choice. It minimizes the possibility of rejection. It leaves the door open for future dealings with an anticipation of fair treatment. It is win-win on many levels.

I guess what this all means is we primates put a price on fairness, but a pretty small one. I've found myself in this position many times and, to the extent possible, I walk away if I believe I am being treated unfairly... even if it costs me money to do so. I'm pretty much a curmudgeon on such things.

[Phil St. Romain]

Quote: Originally Posted by J Christopher Your comment described the effects of supply side dynamics in the same paragraph as it denied the effects of changing needs on supply side and its equally important influence on market prices.

Whatever you say, doc. As I suggested, check the contexts of the posts. It's OK with me if you think I don't know how supply and demand influences costs and jobs, however.

capitalj: sure, there are dysfunctional businesses and business dynamics, even when choosing CEOs. Sometimes they even come up with a good CEO. Jobs second tenure at Apple is a good example of an unusual rise to the top. He was de facto CEO before accepting the official title from the Board, and it's worked out nicely. My main points about CEOs is that, in the end, they and the companies they run aren't immune from market dynamics. If they and the company don't perform well, they pay a price, and it does seem that companies that take care to recruit good leaders do better. Generalizations, of course.

[fazstp]

Quote: Originally Posted by aehurst In the real world outside the carefully defined experiment, then I think the 50-50 split makes a lot of sense. It is fair. It is what I would hope the other partner would do if it were his choice. It minimizes the possibility of rejection. It leaves the door open for future dealings with an anticipation of fair treatment. It is win-win on many levels. I guess what this all means is we primates put a price on fairness, but a pretty small one. I've found myself in this position many times and, to the extent possible, I walk away if I believe I am being treated unfairly... even if it costs me money to do so. I'm pretty much a curmudgeon on such things.

In the real world one monkey owns the banana tree and gets to keep all the bananas if his offer of one is rejected.

[J Christopher]

Quote: Originally Posted by capitalj But in the experiment, if player two refuses the split, player one also gains nothing, so it is more rational on the part of player one to consider fairness as well as monetary gain, not necessarily out of generosity, but to reduce the chances of the offer being rejected by player two. If you were player one, what would you offer player two?

For player two to turn down any amount of free money is not rational, given that the experiment's only metric of success being how much money each player receives.

It all comes down to opportunity costs. If player two receives an offer, the cost of refusing that offer is the amount of the offer. The cost of accepting the offer is zero, since there can be no other offers.

From an economics perspective, it is always irrational to turn down free money, no matter what the amount.

In this sterile experiment, I would offer $.01 to player two if I were player one. In the real world, opportunity costs are virtually never zero, so other factors always have to be taken into consideration.

Here is a different example:

Five bank robbers, Adam, Bob, Charlie, Dan and Eddie, have a bag of 100 gold coins. The robbers recognize one another's experience, and acknowledge seniority. Adam has been at it the longest, followed by Bob, Charlie, Dan and Eddie, in that order.

The robbers have agreed that the highest seniority robber should propose the split, and the group will vote for it. The high seniority robber's vote counts as 1.5 votes, while the remaining robbers each have a single vote, eliminating the possibility of tied votes. If the group votes to accept the split, the split is made as proposed. If the group votes to reject the split, the split is rejected, the high seniority robber is killed, and the next highest seniority robber proposes a new split, with the same rules.

Assumptions:

1. Each robber wants the maximum amount of gold coins he can possibly get.
2. Each robber is rational, and recognizes that some gold is better than no gold.
3. The gold coins are the only consideration when each robber makes a decision.
4. The individual coins cannot be split.

How does Adam propose to split the gold so that he gets the maximum possible number of coins while still ensuring that his proposal is accepted by the group?

There is only one correct answer.

[tw]

Quote: Originally Posted by iampete Write letters to the editor and congress. Start a blog. Establish groups with like-minded individuals to leverage your voice. Picket to raise visibility. Organize boycotts of businesses whose behavior offends you. Pay for ads which promote your opinions in various publications. With a little thought I'm sure you can think of others. Complaining in fora such as this does nothing to raise awareness among those who need to be convinced.

I'll complain wherever and whenever I feel like it. if you don't like it, too bad.

Quote: Originally Posted by iampete For what it's worth, I expect that your incivility towards those who point out flaws in your statements tends to diminish the seriousness with which others view your posts.

hmmm... I reserve the right to be uncivil to people who think I'm part of the 'great unwashed' and suggest that I should just shut up and go away. as to people who point out flaws in my statements... that hasn't happened yet in this discussion.

now, if you don't care to consider my arguments because you don't think I'm a nice person, that's entirely your business. I don't take that as a criticism, however. that just makes me think you're blinded by your own prejudices. I'm not trying to be nice, nor am I trying to be mean; I'm just trying to speak my mind as clearly as I can. if you don't like it - again - too bad.

[tw]

Quote: Originally Posted by hayne well if there's such a large number of people wanting to be movie stars, why are movie star salaries so high?

exactly. even economist will tell you that there is a certain range of human behavior where the conventional assumptions of economic theory fall apart. when it comes right down to it, people are economically rational only when there are no other considerations (ego, status, laziness, comfort, etc.) that come into play. which is almost never...

[tw]

Quote: Originally Posted by aehurst What is unfair is: 1. They figured out how to do it, and I didn't. 2. They were born rich (well, some of them anyway), and I wasn't. Not hard to get the job as CEO and a huge salary when you own the company or the majority of shares. 3. They were lucky or in the right place at the right time, and I wasn't. 4. They were born with the CEO gene, and I got stuck with that darn common man gene. 5. They got a little help from their wealthy friends, and I didn't.

I'm sorry, this made me laugh - I got thinking about George Bush Junior (who was made an officer of several companies, each of which he ran into the ground, and so became president and ran the country into the ground), then I got thinking about the Admiral's first song from HMS Pinafore... life, I tellya.

[tw]

Quote: Originally Posted by Phil St. Romain tw is trying to fashion some rhetorical (not real-world) example to refute the principle of supply/demand in reference to CEOs, so let's take, here, the example of football coaches (as someone did earlier), who are really CEOs of sorts. He's saying that if there are few openings for CEOs and lots of people who want to do it, the salary ought to be lower. Recently, Univ. of Michigan head football coach Lloyd Carr retired, so the Univ. began to search for replacements. Here's the breakdown: A. Number of people who believe they could do the job: countless numbers, including football fans, TV analysts, ex-players, college assistant coaches, high school coaches, etc. B. Number of people with college football coaching experience (including assistant coaches): a much smaller pool. C. Number of college coaches of of Div. 1 schools with proven track records: a much, much smaller number. D. Number of Div. 1 coaches with proven track records who are available to be hired: ZERO. College football is big business and Michigan wants to succeed. Which pool of possible "employees" do you think they'll focus on? "Rhetoritician" tw assumes that A and B are just as viable as C and D, and that in choosing from A or B, the univ. could save lots of money by offering a lower salary. But the Univ. knows they need someone from pool C to enhance their likelihood of winning (which makes more money than losing) as D is all dried up. So they look around and see who they might get. Les Miles from my alma Mater at LSU seemed a lock, only LSU sweetened the pot for Miles to make sure he stayed in Baton Rouge to keep producing championship teams (like this year's ). Finally, they wooed Rodriguez away from W. Va.,, where he had developed a very successful program. There's a price to pay for coaches in pool C, and it's not cheap. So it is with good CEOs who have proven track records. If this doesn't make sense, I give up. Of course, my participation in the discussion was to eventually bring up LSU's national championship in football this year, so now I'll phase out.

you seem to think that I'm suggesting that football coaches (and CEOs) should get the same salaries as unskilled labor. I don't object to skilled professionals earn their due, and I think that if the Market applied to top-level positions they'd still end up making a bundle. less of a bundle, maybe, but more than enough. the problem in your argument is that you're mixing in emotional factors that have nothing to do with a coach's performance. the only reason UMich wants to hire from group C is that they are stuck on a status issue. there are certainly any number of people in group B who would be qualified and capable of creating a winning season, who have 'proven' records at their level of coaching, and who would jump at the chance at a much lower cost. this whole thing about a 'proven' record becomes a code for excluding anyone who's not already in the 'in' group, and that's what artificially inflates salaries.

if the only thing UMich was worried about was winning, they would have had a much broader pool to draw from.

[tw]

Quote: Originally Posted by J Christopher For player two to turn down any amount of free money is not rational, given that the experiment's only metric of success being how much money each player receives. It all comes down to opportunity costs. If player two receives an offer, the cost of refusing that offer is the amount of the offer. The cost of accepting the offer is zero, since there can be no other offers. From an economics perspective, it is always irrational to turn down free money, no matter what the amount. In this sterile experiment, I would offer $.01 to player two if I were player one. In the real world, opportunity costs are virtually never zero, so other factors always have to be taken into consideration. Here is a different example: Five bank robbers, Adam, Bob, Charlie, Dan and Eddie, have a bag of 100 gold coins. The robbers recognize one another's experience, and acknowledge seniority. Adam has been at it the longest, followed by Bob, Charlie, Dan and Eddie, in that order. The robbers have agreed that the highest seniority robber should propose the split, and the group will vote for it. The high seniority robber's vote counts as 1.5 votes, while the remaining robbers each have a single vote, eliminating the possibility of tied votes. If the group votes to accept the split, the split is made as proposed. If the group votes to reject the split, the split is rejected, the high seniority robber is killed, and the next highest seniority robber proposes a new split, with the same rules. Assumptions: Each robber wants the maximum amount of gold coins he can possibly get. Each robber is rational, and recognizes that some gold is better than no gold. The gold coins are the only consideration when each robber makes a decision. The individual coins cannot be split. How does Adam propose to split the gold so that he gets the maximum possible number of coins while still ensuring that his proposal is accepted by the group? There is only one correct answer.

does that one correct answer involve a gunfight?

look, the problem with the original experiment is that it equates perfect rationality with perfect amorality. well, amorality is a bad word, but it's the best I can come up with - what I mean is that it assumes there are no social or ethical or human relationships existing between the two participants. short of sociopaths, that's almost never the case - we are all deeply conditioned (if not genetically impelled) to create relationships of a minimal sort even with perfect strangers. really, the whole experiment makes the assumption that people act like calculators, and then looks surprise when it finds out that - hey! - people actually act like people.

weird...

there's a whole 'nother line of discussion on the sociopathic nature of the modern corporation, if you want...

[J Christopher]

Quote: Originally Posted by tw does that one correct answer involve a gunfight?

How do you think they acquired the gold coins?

Quote: look, the problem with the original experiment is that it equates perfect rationality with perfect amorality. well, amorality is a bad word, but it's the best I can come up with - what I mean is that it assumes there are no social or ethical or human relationships existing between the two participants. short of sociopaths, that's almost never the case - we are all deeply conditioned (if not genetically impelled) to create relationships of a minimal sort even with perfect strangers. really, the whole experiment makes the assumption that people act like calculators, and then looks surprise when it finds out that - hey! - people actually act like people. weird... there's a whole 'nother line of discussion on the sociopathic nature of the modern corporation, if you want...

That's pretty much what I meant when I said that in the real world, opportunity costs are virtually never zero.