1. ECON 100 Lecture 7
Wednesday, October 8

2. Announcements
Course webpage
Class participation records are posted. - Announcements section
Answers to Problem set #2 are posted. - Assignments section
Exercise Set #2 is bigger and more difficult than #1. This has been intentional!
No new Problem Set this week.
Problem sets (study questions) are an important resource for exam preparation.
Problem sets are not graded.

3. Problem Session / KOLT tutors
PSs start this week! (Friday, October 10)
I will you the day-time-room info for the PSs.
No attendance will be taken at the PSs.
Econ 100 KOLT tutors: Sonkurt, Jülide, and Ilgaz

4. Class participation
You must attend the section where you are registered. Your in-class exercise is your participation record. I collect them at the end of the lecture.

5. Lecture plan
Award ceremony!

6. Lecture plan Award ceremony! A few words on the “ultimatum game”
The results of our in-class experiment
Comments, perhaps a short discussion
and then something completely new:
Demand, Supply, and the Market Equilibrium

7. 8:30 section The winners are…
AWARD CEREMONY

8. Winners – 8 30 class Proposer-Responder pair #13062013 Sezen Yılmaz Mustafa Düremez

9. Winners – 10 00 class Proposer-Responder pair #2255 Elif Koçak Barış Şenkal

10. Back to the lecture…

11. Remember the Wednesday Oct 1 lecture

12. Splitting 50 TL with “ultimatum bargaining”
The proposer proposes how much of 50 TL to keep for himself/herself and give the remaining to the responder.
The responder either accepts or rejects the proposal.
If the responder accepts, the proposal is enacted. If the responder rejects, both get 0.

13. What were the proposals? How many were rejected?
What is your guess?

14. In the 8 30 section, there were 31 proposer-responder pairs.
Try to guess:
How many of these offers were rejected?
What is the most common offer?

15. What were the proposals? How many were rejected?
Here are the results …

16. Amount offered to the responder
8:30 section (31 pairs)
Amount offered to the responder
# of offers
# of rejections 48 1 27 2 25 24 3 23 22 21 20 8 19 18 15 7

17. 8:30 section 21 20 % 15 % 50 Mean offer Mode offer Median offer
Rejection rate
Rejection rate* 21 20
% 15
% 50
* When 10 TL or less is offered to the responder

18. Amount offered to the responder
10:00 section (40 pairs)
Amount offered to the responder
# of offers
# of rejections 26 3 25 7 24 23 2 22 1 21 20 10 19 17 15 11 4 5

19. 10:00 section 19,5 20 % 20 % 67 Mean offer Mode offer Median offer
Rejection rate
19,5 20
% 20
% 67
* When 10 TL or less is offered to the responder

20. If you search for “ultimatum bargaining” on scholar. google
If you search for “ultimatum bargaining” on scholar.google.com… you will find more than 24,000 results.

21. Search for Acemoglu on scholar. google
Search for Acemoglu on scholar.google.com, You find about 40,000 results!

22. This will be funny only if you have done Problem Set #2!

23. Werner Güth, Rolf Schmittberger, and Bernd Schwarze
“An experimental analysis of ultimatum bargaining,”
“Journal of Economic Behavior & Organization Volume 3, Issue 4, December 1982, Pages 367–388.
The first sentence:
“There are many experimental studies of bargaining behavior, but surprisingly enough nearly no attempt has been made to investigate the so-called ultimatum bargaining behavior experimentally.”

24. Keep 25 – 30TL
Keep 35 – 40TL
Keep 30 – 35TL
Keep 40 – 45TL
Keep 45 – 50TL

25. Since then thousands of ultimatum game experiments and extensions have been published.

26. So much so that in 2003, Colin Camerer proposed a “ban on ultimatum experiments.”
Colin Camerer received his PhD in when he was 22.

27. Steffen Andersen, Seda Ertaç, Uri Gneezy, Moshe Hoffman, and John List
Steffen Andersen, Seda Ertaç, Uri Gneezy, Moshe Hoffman, and John List "Stakes Matter in Ultimatum Games." American Economic Review, 101(7):
HWK! Due in class on Monday October 13 Use JSTOR or google it. Find the PDF file. Download the article!
Read it and write a few sentences (in Turkish) about it so that I can tell about it to my students at Koç Uni Summer School for High School Students (July 2015). I have not read Seda Ertaç’s article; so please help me.

28. Initially, researchers used the ultimatum game to study bargaining and to document limits of the assumptions of rationality and material selfishness or opportunism.

29. 2012 Nobel prize in Economics
“Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study” 1991 Authors: Alvin Roth*, Vesna Prasnikar, Masahiro Okuno-Fujiwara, and Shmuel Zamir College students are asked to play the “Ultimatum bargaining game”.
*Al Roth
2012 Nobel prize in Economics

30. Results
The modal offer in all 4 countries were in the range of % The modal offer in Yugoslavia and the U.S. was 50%, The modal offer in Japan and Israel was closer to 40%. Rejection rates were not higher in Japan and Israel. The authors thought that the differences are due to cultural norms about what constitutes a reasonable demand!

31. Summary of known facts
On average, proposers offer 40% of the total amount to the responder. Offers are rejected about 15-20% of the time. Lower offers are more likely to be rejected. Ultimatum games played with larger amounts of money to be divided show that the size of the money does not significantly affect behavior.

32. Why so many additional studies are needed?

33. We still cannot predict individual behavior in the ultimatum game based on observables! Age (Example: older people offer a larger amount?) Gender (Example: females offer a larger amount?) Education Culture / religion Income Amount to be split (large or small)

34. Let’s try to find well formulated (precise, to the point, not vague) responses to the following three questions:
What would be the most likely outcome in ultimatum bargaining if both the proposer and the responder are motivated purely by monetary considerations? Modal offer? Rejection rates?
Why do responders reject offers?
Is it possible that the proposers are behaving “rationally” given responder behavior?

35. If both participants care only about their monetary payoffs, the proposer should get almost the entire amount of money.
The responder should accept any positive offer.
The proposer should anticipate this and only offer a very small amount of money.

36. Why are “good” offers rejected
Why are “good” offers rejected? Perhaps the responders want to punish greed. Perhaps they have a concern for fair outcomes.

37. Does it seem that proposers are behaving “rationally” given responder behavior?

38. A critical question:
Are proposers trying to be fair or are they reacting strategically? e.g., “trying to make the smallest acceptable offer”

39. The dictator game!

40. The dictator game
Robert Forsythe, Joel L. Horowitz, N. E. Savin, and Martin Sefton, 1994, “Fairness in Simple Bargaining Experiments” Player 1 proposes to split a fixed sum of money with player 2. Player 2 cannot reject the proposal. The proposal is enacted.

41. What is your guess?
How much money (say out of 50 TL) will the dictator give to the responder?

42. Results
In the case of the $10 game, 80% left a positive amount of money. 20% left half. ($5) The modal offer was $3.

43. Consider the “market game” (Prasnikar and Roth 1992)
There are 9 buyers and 1 seller.
The buyers try to purchase an item worth 1000 tokens to them.
Each buyer simultaneously makes an offer to the seller (in 5 token units).
The seller can either accept or reject the highest offer. If he accepts it, the item is sold at the proposed price and all of the other buyers get zero. If the seller rejects the high offer, everybody get 0.
If participants are selfish, the high offer should either be 995 or and the offer should always be accepted.
In experiments, the behavior rapidly converges to this outcome.

44. What would you do?
In-class activity

45. PART I
Imagine a world in which it is a known fact that everybody tries to maximize their own material gains in interactions with others.
In the “splitting 50 TL game” what is the smallest amount of money the responder will accept?
How much money will the proposer offer to the responder?

46. PART II
Forget that selfish world, you are now back to the real (your) world.
In the “splitting 50 TL game” what would be the smallest amount of money YOU would accept if you were the responder? Why will YOU not accept a smaller amount?
In the “splitting 50 TL game” how much money would YOU offer to the responder if YOU were the proposer? Why not offer a larger amount? Why not offer a smaller amount?

47. Let me finish the lecture with a…

48. A very interesting study

50. Ultimatum game results of an experimental study 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 In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies, The American Economic Review, 91:2, (May, 2001), pp Joseph Henrich, Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, Herbert Gintis, and Richard McElreath

52. Lamelara whale-hunters (Indonesia)

54. Barr, Ghana

55. Machiguenga, Peru

56. Samburu (Kenya)

57. Pasadena (USA)

58. Findings
Higher variation in behavior is observed across cultures.

60. Findings But pure material self-interest is never observed.
In none of the small societies was people’s behavior in the ultimatum game consistent with the selfishness axiom.
Age, gender, socio-economic status, risk-aversion, size of the stake etc. did not affect behavior.

61. So, what matters?
Market integration and the importance of cooperation in economic activities!
Splits are more equal in cultures where people must work cooperatively rather than alone/independently.
Splits are more equal in cultures where people are more exposed to market transactions.

62. Machiguenga, Peru

63. Machiguenga, Peru
Mean offer = 26%, mode = 15% Socially disconnected, live apart, economic isolation

64. Lamelara whale-hunters (Indonesia)

65. Lamelara whale-hunters (Indonesia)
Mean offer = 58%, mode = 50%

66. Lamelara whale-hunters (Indonesia)

67. Repmember the homework
Steffen Andersen, Seda Ertaç, Uri Gneezy, Moshe Hoffman, and John List "Stakes Matter in Ultimatum Games." American Economic Review, 101(7):
HWK! Due in class on Monday October 13 Use JSTOR or google it. Find the PDF file. Download the article!
Read it and write a few sentences (in Turkish) about it so that I can tell about it to my students at Koç Uni Summer School for High School Students (July 2015). I have not read Seda Ertaç’s article; so please help me.

68. End of the lecture