ECON 100 Lecture 7 Monday, February 25

Announcement Answers to the first problem set are posted. (the ASSIGNMENTS section) Problems sessions (optional you can go to any of the three) office hours, KOLT tutors info sent to you (check email) also posted. (the ANNOUNCEMENTS section) Many interesting readings on some of the issues that we discussed in class: meaning of rationality, incentives, markets and morality etc., (the HANDOUTS section) Econ100 website: http://ais.ku.edu.tr/course/20066/Default.html

Lecture plan Splitting 50 TL award ceremony Discussion Presenting the results (maybe) More discussion and Something completely new: Demand, Supply, and the Market Equilibrium

AWARD CEREMONY Winner 9:30 section is #2758

AWARD CEREMONY Winner 11:00 section is #429

The standard assumption in economics is… The “selfishness axiom” : “People try to maximize their own material gains in interactions and expect others to do the same.”

Some warm up questions What does it mean to be self-interested? How can we distinguish between behavior that is self-interested and behavior that is not? What are some of the examples of behavior in markets that is self-interested and behavior in markets that is not self- interested?

Last week Wednesday We used the “splitting 50 TL” example to get started thinking about these and some related questions.

Rules for splitting 50 TL

Also known as the ultimatum game There is 50 TL to split between a proposer and a responder. The proposer must propose how much of 50 TL to keep for himself/herself and give the remaining to the responder. The responder, after receiving the proposal, must either accept or reject it. If the responder accepts, then the proposal is enacted. If the responder rejects, then both the proposer and the responder will get 0.

Report sheet Proposer Number: _____ (Write this number on a piece of paper) I propose to keep ______ TL for myself and give ______ TL to the responder. Responder Number: _____ (Same as Proposer number) _______ I accept, and earnings will be determined by the proposal. _______ I reject, and both of us will earn nothing.

The Ultimatum Game is a simple 2-person experimental interaction The Ultimatum Game is a simple 2-person experimental interaction. It used widely by researchers investigating the nature of self-interest.

Simple questions, the rationality model What does the “standard” model predict about the behavior of proposers? If both the proposer and the responder are selfish (material benefit maximizers), what offers will proposers make and why? What does the economic model predict about the actions of responders in the experiment? Why?

Now… forget about the rational person model/framework. Think about what a real normal person will do. Predict the outcome of the ultimatum game: What do you think is the most common proposal? What types of proposals are most commonly accepted? What types of proposals are most commonly rejected? Give reasons for your predictions.

More specifically… Proposers: How do you think people decide how much to offer to the responder and how much to keep for themselves? Not you, but people in their proposer role in general. Responders: How do you think people decide whether to accept or reject a proposal? Not you, but people in their responder role in general.

Here are the results

Low offer Rejection rate Results, 9 30 section Offer # of offers (total: 33) # rejections 50 1 25 7 26 4 27 30 33 2 35 6 40 3 Mean offer Mode offer Rejection rate Low offer Rejection rate 21 23 % 10 % 66

Low offer Rejection rate Results, 11 00 section Offer # of offers (total: 33) # of rejections 40 1 26 2 25 6 24 5 23 21 20 8 18 15 13 12 10 3 Mean offer Mode offer Rejection rate Low offer Rejection rate 19 20 % 30 % 80

After the results Do you find the results of ultimatum game experiments surprising? Why or why not? Do the results of ultimatum games go against the assumption that people act in their self-interest? How can we defend the view that proposers who offer 25/25 and 45/5 splits are both acting in their self-interest? How is it possible to argue that a responder who rejects a split (and therefore ends up with nothing) is acting in her self-interest?

After the results How are sellers and buyers in markets analogous to proposers and responders in the experiment?

What does the research say? Now What does the research say?

Researchers are fascinated with the ultimatum game! This is because participants do not act as the economic model of self-interest predicts. Proposers generally offer more than the minimum, and even more surprisingly, responders frequently reject low offers, choosing to receive nothing. Hundreds of ultimatum games conducted by scores of researchers have produced the following results:

Results of Large Numbers of Ultimatum Game Experiments The more common split is 50% - 50% The average split is about 60% - 40% About 20% of low offers are rejected Ultimatum games played with larger amounts of money to be divided (up to a quarter of participants’ annual income) show that the size of the money does not significantly affect proposers’ or responders’ behavior.

A very interesting study

Ultimatum game results of an experimental study in 15 small, indigenous societies around the world Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies Joseph Henrich, Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, and Herbert Gintis, Oxford University Press 2004

Lamelara whale-hunters (Indonesia)

Barr, Ghana

Machiguenga (Peru)

Researchers themselves

Samburu (Kenya)

Findings In none of the 15 less-developed societies was people’s behavior in the ultimatum game consistent with the selfishness axiom. Individual differences are not important in explaining ultimatum game behavior. Age, gender, socio-economic status, risk-aversion, size of the stake etc. did not affect ultimatum game behavior. Market integration and the importance of cooperation in economic activities explain a great deal of the ultimatum game behavior. Splits are more equal (the initial offer was higher) in cultures where people must work cooperatively rather than autonomously to earn a living. Splits were also more equal in cultures where people commonly exchange products and labor in markets.

So, what matters? Market integration and the importance of cooperation in economic activities explain a great deal of the ultimatum game behavior. Splits are more equal (the initial offer was higher) in cultures where people must work cooperatively rather than autonomously to earn a living. Splits were also more equal in cultures where people commonly exchange products and labor in markets.

Findings Machiguenga: Mean offer = 26%, mode = 15% (Socially disconnected, live apart, economic isolation) What matters: Amount of cooperative activity or economies of scale in production (e.g. collective hunting for big animals) Market integration (e.g. national language, cash wages, farming for cash)

“. . . [T]he general finding from the overall cross-cultural project…shows fairness increasing with market integration. Something appears to trigger fair-mindedness in association with exposure to market institutions. I [theorize]. . . that among those selling either their labor or their goods, there may be a higher premium placed on reputation, and that one way of signaling a good reputation is to behave fair-mindedly. Eventually, this norm appears to be internalized, as is evident from its emergence in the anonymous, one-shot, economic experiments” (Ensminger 33, emphasis added).