Bargaining and Psychology Lecture One: The Structure & Evolution of Preferences Keith Chen, Nov 3 rd 2004

Plan of Action Overall: Broadly: Whirlwind tour of Biology, Psychology and Experimental Economics. Provide a toolbox of insights from these disciplines: –a conceptual framework through which to understand the interpersonal / cultural aspects of negotiations.

Plan of Action Today: Basic departure from the self-interested model: Fairness, Altruism & Spite. How do we begin to conceptualize and measure notions of Fairness / Blame / Blameworthiness? Economic Experiments. Framing, Cultural & SES Effects Stability and Strategies: my work on the evolution of Altruism and Fairness Preferences.

Economic Experiments Rules of the Road for all Economics Experiments: –NO DECEPTION (on my part)! –Real stakes!! Ask that you play within the rules: –Do your best and think hard about the game.

Ultimatum Game:  The rules of the game: 1.You will be randomly paired with someone else in the class; this pairing will remain completely anonymous. 2.One of you will be chosen (by coin flip) to be either the Proposer or the Responder in this experiment, and one pair will be randomly chosen to play for $ The Proposer gets to make an offer to split $100 in some proportion with the Responder. So the proposer can offer $x to the responder, proposing to keep $100-x for themselves. 4.The Responder must decide what is the lowest amount offered by the proposer that he / she will accept; i.e. “I will accept any offer which is greater than or equal to $y.” 5.If the responder accepts the offer made by the proposer, they split the sum according to the proposal. If the responder rejects, both parties lose their shares.

Ultimatum Game:  Cross-Cultural Variation that tracks social structure: Henrich et al.  Variation in predictions for first and second answer:  Different levels of rationality  The beauty-contest game.  When self-interest becomes less stable (weaker consequences,) fairness has more room to emerge?

Fairness in the Market Constraints are based more on notion of what is normal rather than “objective” justice; KaKnTh Reference Transactions –History of previous transactions (Q2) –Market (nominal) Prices (Q4) –Posted (list, nominal) Prices (Q5) Occasions for Pricing Decisions / Reference Profits –Protecting Profits (Q9) –Profit Increases (Q11) –Increases in Market Power Punishment

Economic Fairness: Surveys & Framing Effects Reference Points, Regret & Framing.

Effect of Knowing Alternate Outcomes Larrick & Bowles: References Affect Bargaining People are risk-averse when they won’t know the outcome of an alternate gamble People are more risk-neutral when they will be told the alternate gamble outcome Coin flip +$0/+$200 vs. $90 guaranteed People are willing to pay a “regret premium” to avoid discovering the outcome Negotiators who won’t get feedback on a foregone alternative are more likely to reach agreement

Surveys Say: There is a temporal pattern to regret (Bowles) –In the short term, people regret actions taken more than inaction –In the long term, people regret inaction more than action Train-Track surveys, Glaeser-Sacerdote work on sentencing (VHS +56% women, -53% black) Takeaway: reference points strongly effects their perceptions of Fairness.

Culture, Blame & Attribution South vs. North East vs. West (collectivist vs. individualist) Rich vs. Poor (the illusion of control.) Economic Position and in/out-group –Jews, Chinese & Copts Ultimatum Games in Other Cultures.

The Theory of Reciprocal Altruism / Cooperation Why study reciprocal play in animals? 1.Examining Animals gives us: Perspective on cross-cultural validity of game-theory. Way of thinking about how fairness is either cultural or biological, socially constructed or evolutionary.

Cotton-top Tamarins: a cooperative breeder Subjects:

New World monkeys Old World monkeys Apes

barrier actor receiver tray tool food Experimental Setup:

Training & Solo Conditions w. barrier Condition 1 Condition 2 Condition 3 & 4 Condition 5 no barrier

Intentionality?

First Game A Simple Reciprocation Game Experiment 1 tests for: (i) Contingent cooperation (ii) Recognition of reputation Setup: trained vs untrained actors S1S2 S1S2

SH: 100% AltruistJG: 100% Defector

Untrained Actors Reciprocation Game 2a: Experiment 2a tests for: Reciprocal strategies between untrained actors S1S2 S1S2

One fixed session 1 final session Reciprocation Game 2b: 3 sessions of: 1 session:

Selfish Altruism Reciprocation Game 3: Experiment 3 tests for: Recognition of byproduct altruism, or “selfish” altruism S1S2 S1S2

New Experiment: 3 Year Old Kids

Cotton-top Tamarins: a cooperative breeder Subjects:

New World monkeys Old World monkeys Apes

barrier actor receiver tray tool food Experimental Setup:

Training & Solo Conditions w. barrier Condition 1 Condition 2 Condition 3 & 4 Condition 5 no barrier

Intentionality?

First Game A Simple Reciprocation Game Experiment 1 tests for: (i) Contingent cooperation (ii) Recognition of reputation Setup: trained vs untrained actors S1S2 S1S2

SH: 100% AltruistJG: 100% Defector

Untrained Actors Reciprocation Game 2: Experiment 2 tests for: Reciprocal strategies between untrained actors S1S2 S1S2

Selfish Altruism Reciprocation Game 3: Experiment 3 tests for: Recognition of byproduct altruism, or “selfish” altruism S1S2 S1S2

Play with Humans Reciprocation Game 4: Experiment 4 tests for: Recognition of unintentional altruism, when a human pulls. S1S2 S1S2 human

Tamarin Conclusions: Biology: 1.Strong evidence of Reciprocal Altruism. 2.Evidence Tamarins are quite sophisticated about reciprocal play. Economics: 1.Sophisticated play not confined to humans. 2.Informs parsimony, suggests wide scope for theory. 3.Preferences such as Altruism seem universal and shaped by evolved cognitive structures.

Capuchin Experiments: More complex division tasks: Ultimatum, dictator and public goods games The use of fiat money: –Recognition of Common Value –Basic tests of Rational Preferences Risk preferences (and biases)

Capuchin Money and Trading Trained Capuchin monkeys to know that “tokens” can be traded for different foods, at different prices with different RAs. New: The Payoffs can be risky.

Capuchin Money and Trading Three Conditions: –Searched for foods for which each actor consumed a relatively interior bundle. –A compensated halving of one good’s price –A money-illusion condition

Capuchin Money and Trading

Broader Tasks: Now have subjects trained on a five-arm mechanism, allows two subjects to play either an ultimatum or dictator setup.

Conclusions: Biology: 1.Strong evidence of Reciprocal Altruism. 2.Evidence Tamarins are quite sophisticated about reciprocal play. Economics: 1.Sophisticated and interactive behavior not confined to humans. 2.Informs parsimony, suggests wide scope for theory of fairness.