Experimental Social Sciences: Investigating the
Deep Bases of Economic and Political Decisions
Akademi for Talentfulde Unge
Alexander K. Koch & Michael Bang Petersen
Aarhus, October 2014
A Spotlight on Behavioral & Experimental
Economics: Social Preferences
Akademi for Talentfulde Unge
Alexander K. Koch
Aarhus, October 2014
Game 1
You have been provisionally allocated 100kr
• Decide how to divide these 100kr
between yourself and another
randomly chosen person from this
room
• Use amounts divisible by 10kr.
• Please write down how much you
want to give to the other person
• You keep the rest for yourself
Game 2
• You and another randomly chosen person from this
course have to split 100kr.
• The procedure is as follows:
• Stage 1: you (the sender) propose how
to divide these 100kr between yourself
and the other person
• Stage 2: the other person (the receiver)
can accept or reject
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•
•
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If the receiver rejects: you both get 0kr.
If the receiver accepts: the 100kr. are shared as proposed in stage 1
Which division would you propose as sender (use multiples of 10kr.)?
Suppose now you are the receiver.
What is the lowest offer from the sender that you would accept?
From homo oeconomicus to homo sapiens
Prototypical economist conception of human behavior:
• People maximize their (discounted, expected) utility
• People are governed by self-interest
• People are fully rational, i.e., decisions result from a fully
rational process of finding an optimal choice given the
constraints and all information available
Experimental economics: tests of economic models in the
laboratory/field have shown that some basic postulates in
economic theory should be modified
Behavioral Economics
What is behavioral economics
Behavioral Economics increases the explanatory power
of economics by providing it with more realistic
psychological foundations
• Keep using the same powerful analytical end empirical tools
but modify assumptions from standard economic theory:
• Examples:
• Realistic utility functions: social preferences, reference
dependent preferences
• Unstable preferences: e.g. why do people make forever
resolutions to go on e.g. a diet or stop smoking, only to give
in later
• Biases, mistakes
• Bounded rationality
Social preferences
• Why do we donate
money?
• Why do we care about
what others have?
• Why do we care about
how others see us?
Game 1: Dictator Game
Decide how much of 100kr. to give to a random person
• What would the standard
economic model predict?
• What decisions do you actually
expect?
• What motivated your decision?
Game 1: Dictator Game
• The standard economic model predicts that you keep
all of the 100kr. for yourself
• Experimental results (e.g. Andreoni and Miller 2002):
• 40 percent of senders keep everything for
themselves
• 20 percent give more than 0, but less than 50
percent to the other person
• 40 percent divide the amount of money equally
• Almost nobody gives more than 50 percent
• Behavior is quite sensitive to context
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Anonymity (also vis-a-vis experimenter)
Framing: 'Wall Street Game' vs. 'Community Game'.
Small changes in protocol: choice set included option
to take money, moral wriggle room
Game 2: Ultimatum Game
• Split of 100kr.
• If the receiver rejects sender’s offer, both get 0kr.
• If the receiver accepts: 100kr. shared as proposed
• What would the standard
economic model predict?
• What decisions do you actually
expect?
• What motivated your decision?
Game 2: Ultimatum Game
• The standard economic model predicts that you
propose to keep the 100kr. for yourself and that the
other person accepts
• Numerous experimental studies from different
countries, with different stake sizes and different
experimental procedures, clearly refute the
prediction of the standard model
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•
•
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There are virtually no offers above 0.5
The vast majority of offers in almost any study is in the
interval [0.4; 0.5]
There are almost no offers below 0.2
Low offers are frequently rejected, and the probability of
rejection tends to decrease with the share offered
Public good game (social dilemma)
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You and 3 other people from this class form a group.
Each of you can contribute to a public good
You are each given 200kr.
Your task is to decide how much to keep for yourself
and how much to contribute to the public good
• Your payoff depends on how much you and the
others invest in the public good / keep for
themselves as follows:
Your payoff= 200 - (your contribution to the PG)
+ 0.4 x (sum of contributions of the 4 participants)
Predictions
• The standard economic model predicts that everybody
contributes 0 to the public good
• What would be the socially efficient outcome?
• Compare to the prisoners’ dilemma!
Experimental results
• In the lab, subjects play this game ten times in a row
(with the same group members or with different
group members)
• In the first rounds, some subjects contribute a
positive amount
• The contribution rates are declining
• In the final period, the vast majority of subjects (on
average 73%) play the equilibrium strategy of
complete free riding (contribute nothing)
• So what about our social preferences now?
A variation: PG game with punishment
• Suppose now that after deciding how much to
contribute to the public good and learning how much
each member contributed, group members can
punish each other by assigning “punishment points"
• Punishing other participants reduces their income,
but it also reduces the income of the person who
punishes
• Standard economic theory: no punishment
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•
•
•
•
Let us consider the second stage (punishment stage) first (backward
induction)
Suppose somebody contributed 0 and you contributed 20. Should you
punish him?
No, because you cannot change his contribution anymore! Punishing
him reduces however your own income!
Thus, we should observe no punishment in the last stage
But then, what should people contribute in the first stage?
Experimental results
Fehr and Gaechter (2000)
Experimental results
• People punish free riders:
• The vast majority of punishments are imposed by
cooperators on the free-riders
• Lower contribution levels are associated with higher
received punishments
• Consequence for cooperation:
• Defectors do not gain from free riding because they
are being punished
• A strikingly large fraction of roughly 80 percent
cooperates fully in the game with punishment in the
final period
• So what about the standard theory again? How can
we reconcile these puzzling facts?
Summary
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•
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In some cases the standard model works quite well and social
preferences seem not to matter (market experiments, public
good games)
But we have also some examples where the standard model
does not make the right prediction and social preferences
seem to matter (dictator game, ultimatum game, public good
game with punishment)
Is there a simple common principle that can explain the
evidence?
Note: We do not want to have a model that explains one example, but not the others
Social preferences
• Key idea: a player’s utility does not only depend on his own
payoff, but also on the payoff of the other player
• Altruism (Andreoni and Miller 2000):
• A person is altruistic if her utility increases with the well being of other
people
• Can explain behavior of some (but not all) people in the dictator game
• Can't explain behavior in ultimatum game
• Inequity aversion (Fehr and Schmidt 1999, Bolton and Ockenfels 2000):
• A person is altruistic towards other players if their material payoffs are
below an equitable benchmark, but she feels envy when the other
players' material payoffs exceed this level
• For most economic experiments it seems natural to assume that an
equitable allocation is an equal monetary payoff for all players
Summary
• Inequality aversion model can explain:
• Positive and negative actions towards other players
• Behavior in market, dictator, ultimatum, public and public good with
punishment games (and others not mentioned)
• Why fairness plays a smaller role in most markets for goods (no player alone
can enforce equitable outcome) than in labor markets
• Problems:
• Consider again the ultimatum game, but now suppose a
computer randomly chooses for the sender
• Suppose the computer proposes 10kr to you (i.e., the other
player would get 90kr). Would you accept or reject?
• What if a real person proposes 10kr to you?
• Inequity aversion predicts there is no difference between these two
scenarios
• However many people would accept the offer if came from a computer but
not if another person proposed it
• Why? Intentions matter!
Which boss would you prefer to
negotiate with over your salary?
The deep bases of behavior…
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Our preferences are shaped by evolution
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our ancestors were successful at reproducing
suppose that we have inherited our ancestors’ preferences
(genetically, culturally)
then our preferences should direct us towards maximization of
reproductive success
Individual selection theory suggests a world populated by resolutely
selfish “homo economicus”
Group selection theory: groups with internal cooperation will be more
successful than other groups, and that this may cause altruistic
behaviors or individual sacrifices for the common good of the group to
survive and in some circumstances thrive
We have ”biases” shaped by evolution
•
•
Preferences can explain why some behavior is “rational”
But some facets of behavior seem “hard wired” rather than a
rational response
The deep bases of behavior…
•
Our preferences are shaped by evolution
•
•
•
•
•
•
our ancestors were successful at reproducing
suppose that we have inherited our ancestors’ preferences
(genetically, culturally)
then our preferences should direct us towards maximization of
reproductive success
Individual selection theory suggests a world populated by resolutely
selfish “homo economicus”
Group selection theory: groups with internal cooperation will be more
successful than other groups, and that this may cause altruistic
behaviors or individual sacrifices for the common good of the group to
survive and in some circumstances thrive
We have ”biases” shaped by evolution
•
•
Preferences can explain why some behavior is “rational”
But some facets of behavior seem “hard wired” rather than a
rational response
Raise your hand if you heard…
Dada…
Raise your hand if you heard…
Baba…
McGurk effect
• Interaction between hearing and vision in speech
perception
• The visual information we gets from seeing a person
speak changes the way we think we hear the sound
• Vision: very accurate
• Hearing: not so accurate
• Evolution has taught us to discriminate between low
and high quality signals:
• If vision signal present, trust it more than auditory
signal
Are we still influenced by how we solved prehistoric decisions?
• Imagine you are a pre-historic caveman, who has just
killed a big animal
• On the horizon you spot a man who sets off in your
direction
• Should you flee or should you risk
confront him in a physical fight?
• Models of behavior in resource
conflicts suggest that adaptive
strategies depend on asymmetries in
fighting ability
• When own relative fighting ability is high
(and correctly assessed), it is adaptive to
escalate the conflict
• For humans, one key component of
fighting ability is upper-body strength
Do prehistoric traits still (unconsciously)
influence our behavior?
• Are people able to assess physical strength from minimal cues?
• Pre-study: Measure strenght in one sample, show raters
silhouettes
• Result: ratings correlate with actual strength
• Do they bargain differently with stronger opponents?
• War of attrition experiment:
• Part I: Participants had photos taken (all male)
• Part II: Randomly assigned to either control or treatment group
• War of attrition: two players start with 225 ECU, each second
they each lose one ECU until first hits STOP button (or no
money left); the one who waits longer gets a 100 ECU prize
• Each player gets to see silhouette of opponent (treatment
group)
• Everyone plays between 7 and 12 rounds with new opponents
Findings
The more different opponents are in physical strength
the shorter the WoA and the more likely it is that the
stronger one pockets the 100 ECU prize
• Physical strength acts as coordination
device
• Remarkable because strength gives no
advantage per se in the game!
• Suggests that people apply strategies
developed during evolution to modernday problems of similar strategic form
Conclusions
• Humans are deply social
creatures
• We care about others’
wellbeing and others’
intentions
• Our strategies rely on (rational) consideration of our
• social preferences
• how others will respond to our behavior
• Our estimates of how others will respond depend
partially on (hard-wired) strategies shaped by ancient
evolutionary environment