ultimatum game

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Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

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availability heuristic, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, laissez-faire capitalism, loss aversion, market bubble, mental accounting, meta analysis, meta-analysis, Nash equilibrium, new economy, payday loans, Potemkin village, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, ultimatum game, working poor

That makes a case for offering an even split, as a plurality of Cornell students did. The thing is, neither life nor the ultimatum game is necessarily fair. The two participants have different choices and different powers. Unless the responder is so upset that he is willing to cut his own throat, the proposer has power and incentive to shave a little off the even split. Why not offer $4, or $3 . . ., uh, or even $1? You can see where this is going. For any responder, there’s a point where he gets so angry that he vetoes. A greedy-though-prudent proposer would want to approach that point as closely as possible without exceeding it. Where is that point, exactly? That is one question that the ultimatum game asks. It’s easy to recognize echoes of the ultimatum game in your own life. Every day people use pushiness, entitlement, and chutzpah to get their way in the world.

Boul-ware (and the many labor negotiators who attempted to emulate him) was acting like a strategic proposer in the ultimatum game. The more usual back-and-forth kind of bargaining can be thought of as a sequence of ultimatum games. Offers on real estate are structured as ultimatums: This offer must be accepted by 6:00 p.m. Tuesday, or it’s null and void. Unless you accept the latest offer, you run the risk that the other side will walk away. Bargaining is often a polite, socially sanctioned ritual. I lower my offer and you raise yours in stairstep increments. We meet somewhere in the middle. Sometimes fake “ultimatums” are part of that ritual. “That’s my final offer, take it or leave it. I’m leaving . . . I’m actually walking out the door . . .” Each side may know the other isn’t serious. The crux of negotiation is how to deal with tough bargainers making lopsided demands. The ultimatum game presents, in concentrated form, the truly difficult part of negotiation.

There is a “beauty premium” for the congenitally fabulous. For everyone else, there’s a plainness penalty. Sara Solnick thought the ultimatum game might be a way to investigate the effects of physical appearance on prices and salaries. This is normally a complicated matter, because there are many reasons an employer might pay attractive people more. In sales or waiting tables, appearance is part of the total package. An employer can reason that the public likes an attractive face. The ultimatum game eliminates at least some of these factors. “There are no productivity issues, no expectations, and no contact between subjects,” Solnick and collaborator Maurice Schweitzer wrote. If looks matter even in the ultimatum game, they probably matter whenever people set a price or negotiate a salary. In Solnick and Schweitzer’s experiment, seventy student volunteers agreed to be photographed.

 

pages: 236 words: 66,081

Cognitive Surplus: Creativity and Generosity in a Connected Age by Clay Shirky

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Andrew Keen, Brewster Kahle, Burning Man, citizen journalism, corporate social responsibility, Dean Kamen, experimental economics, experimental subject, fundamental attribution error, invention of movable type, invention of the telegraph, Kevin Kelly, means of production, meta analysis, meta-analysis, New Urbanism, Nicholas Carr, social software, Steve Ballmer, The Nature of the Firm, the scientific method, ultimatum game

No group of proposers playing the classic version of the Ultimatum Game ever behaved as selfishly as neoclassical theory predicted, and no group of responders was ever moved to accept a proposed split that deviated too far from some perceived sense of fairness, no matter how sensible such a choice would be in the short term. In the Ultimatum Game, people behave as if their relationship matters, even if they are told it doesn’t, even if they are assured it doesn’t, even if they have only a single interaction with an unknown partner. Critiques of the Ultimatum Game have contended that the game would work if the participants were convinced that their action would have no social consequences outside the game. This criticism misses the fact that if we have a hard time imagining situations in which our dealings will be completely anonymous, it may be because we are deeply social. We are terrible at acting as if we were purely isolated because such isolation is rare and unnatural. (Even economics students, famously among the greediest proposers in the Ultimatum Game, never get anywhere near nine-to-one splits.)

By creating a simple set of rules, experimenters can observe human behavior under relatively controlled conditions. The trick is to create an experiment that will cleanly illuminate the part of human behavior the researcher is interested in. One of the most famous and elegant experimental games in social science is called the Ultimatum Game, first tried in 1982 by Werner Güth, Rolf Schmittberger, and Bernd Schwarze at the University of Cologne, and repeated countless times around the world, because its results were so at odds with the predictions of neoclassical economics. The Ultimatum Game is a two-person interaction. Imagine you and a stranger are the players, and you each have a role: your unknown partner is the proposer, and you are the responder. The game starts when the researcher gives your partner ten dollars, instructing her that she is to decide how she would like to split the money between the two of you.

This result—fairly intuitive, if you imagine yourself on the short end of that particular stick—was a shock to neoclassical theory (what rational actor would give up a free dollar for the sake of mere emotional satisfaction?). As the results of the Ultimatum Game became more widespread, so did the challenges to its conclusions. Versions were run with hundreds of dollars at stake, with ever-tighter controls on the anonymity between the participants so they wouldn’t worry about retribution, with experimental subjects of different ages, different classes, and different cultures. In one version called the Dictator Game, the proposer is able to declare the terms of the split without the recipient’s having any say at all. Even here, the proposed split was more generous than expected. The experiment was performed in countless variations, but the attempt to uncover the secretly rational core of humanity simply failed. No group of proposers playing the classic version of the Ultimatum Game ever behaved as selfishly as neoclassical theory predicted, and no group of responders was ever moved to accept a proposed split that deviated too far from some perceived sense of fairness, no matter how sensible such a choice would be in the short term.

 

pages: 324 words: 93,175

The Upside of Irrationality: The Unexpected Benefits of Defying Logic at Work and at Home by Dan Ariely

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Burning Man, business process, cognitive dissonance, corporate governance, Daniel Kahneman / Amos Tversky, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, George Akerlof, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, loss aversion, Peter Singer: altruism, placebo effect, Richard Thaler, Saturday Night Live, second-price auction, software as a service, The Wealth of Nations by Adam Smith, ultimatum game, Upton Sinclair, young professional

It is another matter altogether to realize that these emotional influences can continue to affect us for a long, long time. The Ultimatum Game To test our emotional-cascade idea, Eduardo and I had to do three key things. First, we had to either irritate people or make them happy. This temporary emotional baggage would set the stage for the second part of our experiment, in which we would get our participants to make a decision while under the influence of that emotion. Then we would wait until their feelings subsided, get them to make some more decisions, and measure whether the earlier emotions had any long-lasting influence on their later choices. We got our participants to make decisions as part of an experimental setup that economists call the ultimatum game. In this game there are two players, the sender and the receiver. In most setups, the two players sit separately, and their identities are hidden from each other.

After all, we’ve all had experiences with unfair offers in the past, and we can imagine that we would feel insulted and say “Forget it, you #$%*&$#!” if someone were to suggest a $19:$1 split. This understanding of how unfair offers make people feel and behave is why most people in the ultimatum game offer splits that are closer to $12:$8 and why those splits are almost always accepted. I should note that there is one interesting exception to this general rule of caring about fairness. Economists and students taking economics classes are trained to expect people to behave rationally and selfishly. So when they play the ultimatum game, economic senders think that the right thing to do is to propose a $19:$1 split, and—since they are trained to think that acting rationally is the right thing to do—the economic recipients accept the offer. But when economists play with noneconomists, they’re deeply disappointed when their uneven offers are rejected.

., 187–88 hedonic treadmill and, 175 placing limits on, 186–87 reducing, 185–86 spacing of, 185, 186 contrafreeloading, 60–63 Jensen’s study of, 60–62, 63 standard economic view at odds with, 62–63 Converse, 95 cooking: children’s involvement in, 121 enjoyment factor and, 62n, 105–6 semi-preprepared food and, 85–88 CO2 emissions, 251–52 counting strategies, 282–83 Count of Monte Cristo, The (Dumas), 123 creation, pride of: ideas and, see Not-Invented-Here (NIH) bias self-made goods and, see IKEA effect creativity, bonuses and improvements in, 47–48 Csíkszentmihályi, Mihály, 49 cultures, organizational: acronyms and, 120 Not-Invented-Here bias and, 119–21 customer revenge, 131–51 against airlines, 142–43 apologies and, 149–51, 152 author’s experience with Audi customer service and, 131–36, 137, 147–49, 153–54 distinction between agents and principals and, 144–47 Farmer and Shane’s “Yours Is a Very Bad Hotel” and, 140–41, 146 fictional case study for Harvard Business Review on, 147–49 increase in, 143 Neistat brothers’ video on Apple’s customer service and, 141–42 passage of time and, 151 phone call interruption experiments on, 135–39, 145–46, 150–51 customization, 94–96 of cars, 88, 89, 94 effort expended in, 89, 95–96 overvaluation despite removing possibility of, 96 of shoes, 95, 96 D Dallaire, Roméo, 255 Darfur, 238, 253 Dart Ball game, 23, 34 Darwin, Charles, 157 dating, 191–235 market failures in, 213–15, 216–17, 220–21, 230–32, 233–35 playing hard to get and, 104 standard practice of, 224–25, 227–28 yentas (matchmakers) and, 213 see also assortative mating; online dating; speed dating decision making: author’s medical care and, 284–88 cooling off before, 257, 279 emotions and, 261–77 gender differences and, 274–76 irreversible decisions and, 285, 286 rationalization of choices in, 287 from rational perspective, 5–6 short-term, long-term decisions affected by, 264–65, 270–74, 276–77 stability of strategies for, 261–65; see also self-herding ultimatum game and, 265–70, 275–76 dentistry, adaptation to pain and, 161–62 design, taking people’s physical limitations into account in, 230–32 destroying work in front of workers, 74–76 Dichter, Ernest, 86 disease: adaptation to pain and, 165, 167 preventative health care and, 251, 256 “survivor” rhetoric and, 241–42 Disney, 154 distraction, performance-based incentives and, 30, 36 division of labor, 77–80 IT infrastructure and, 77, 79–80 Marx’s alienation notion and, 79 Smith’s observations on, 77–78 divorce, foreseeing outcome of, 173 Dodson, John, 18–20, 22, 31, 47 do-it-yourself projects, see IKEA effect Donath, Judith, 225 Dostoyevsky, Fyodor, 157 Doubletree Club, Houston, 140–41, 146 dreams, author’s self-image in, 182–83 DreamWorks SKG, 154 driving: momentary anger during, 261 safety precautions and, 6–7 texting during, 6, 7, 8 see also cars drop-in-the-bucket effect, 244–45, 252, 254–55 Dumas, Alexandre, 123 E Eastwick, Paul, 172–73 Edison, Thomas, 117–19, 122 effort: increase in value related to, 89, 90, 95–96, 105–6; see also IKEA effect joy derived from activity and, 71–72 meaningful work conditions and, 72 ownership of ideas and, 114–16 see also labor egg theory, 86–88 Eisner, Michael, 154 electric chair, 119 electricity, alternating current (AC) vs. direct current (DC), 117–19 emotional cascades, 265–78 gender differences and, 274–76 romantic relationships and, 277–78 ultimatum game and, 265–76 emotional priming: empathy for plight of others and, 246–48 ultimatum game and, 268–70 emotions, 43, 237–79 appeals to, willingness to help others and, 240–42, 248–50, 253–54, 256 decision making and, 261–77; see also decision making in past, humans’ poor memory of, 264 transience of, 257, 261, 270 see also empathy; negative feelings, acting on empathy: animals’ suffering and, 249, 252 apathy toward statistical victims and, 238–41, 242, 246, 247–49, 252–53 Baby Jessica saga and, 237–38 calculating vs. emotional priming and, 246–48 clear moral principles and, 255 closeness and, 243, 245, 254 drop-in-the-bucket effect and, 244–45, 252, 254–55 emotional appeals and, 240���42, 248–50, 253–54, 256 global warming and, 251–52 identifiable victim effect and, 239–42, 248, 256 overcoming barriers to, 252–56 rules to guide our behavior and, 254–55 thought experiment of drowning girl and, 242–43, 245 toward one person vs. many in need, 237–56 vividness and, 24, 243n, 244, 245 endowment effect, 285, 286 Enron, 216 evolution, mismatch between speed of technological development and, 8–9 experiments, 10–11, 288–95 business or public policy and, 292–94, 295 of Gideon, 288–89 medical practice and, 289–92 rational economists’ criticisms of, 49–51 see also specific topics Exxon Valdez oil spill, 249 F fairness, sense of: in chimpanzees, 127 decision making and, 266–67; see also ultimatum game gender differences and, 275–76 Fallows, James, 158 Farmer, Tom, 140–41, 146, 148–49 FedEx, 108–9 feedback, about work, 74–76 Feeks, John, 118–19 Fehr, Ernst, 125–26 financial incentives: meaning of labor and, 72–73, 76 see also bonuses financial markets, safety measures for, 7 financial meltdown of 2008, 7, 21, 216 chronology of events in, 129–30 desire for revenge in wake of, 128–31 lack of experimental approach to, 293 outraged public reaction to bailout in, 128–29, 130 Finkel, Eli, 172–73 First Knight, 50 fixation, pride in creation and ownership and, 89, 122 food: animals’ preference for working for, 59–63 semi-preprepared, 85–88 shortages of, identifiable victim effect and, 239–41 see also cooking Food and Drug Administration (FDA), 292 Ford, Henry, 78–79, 94 Forgea (white terrier), 249 Fox, Michael J., 254 “Fox and the Grapes, The” (Aesop), 198–99 Frank, Barney, 41 Frankl, Viktor, 45 free food, animals’ preference for working for food vs., 60–62 Frenk, Hanan, 161–65, 300 Friends, ultimatum game and, 269, 270–71, 272 frog experiment, 157–58 Frost, Jeana, 219–20, 229, 300 Fryer, Bronwyn, 148 furniture, do-it-yourself, 83–84, 96, 105, 106 future, foreseeing adaptation to changes in, 160, 171–74 G gardening: children growing food and, 121 enjoyment factor and, 105–6 gender differences: assortative mating and, 209, 211 decision making and, 274–76 pain threshold and tolerance and, 168–69 Gideon, 288–89 global warming, 158, 251–52 Gneezy, Ayelet, 135, 144–45, 150, 300–301 Gneezy, Uri, 21, 44, 301 Gore, Al, 158, 252 government policies, experimental approach to, 292–94, 295 H happiness: comparisons to other people and, 189 consumer purchases and, 175, 185–88 inaccurate predictions about, 170–71 return to baseline of, 170 transient vs. constant experiences and, 187–88 Harvard Business Review (HBR), 147–49 health care, see medical care hedonic adaptation, 160–84 to annoying experiences, 177–79, 180 author’s personal history and, 181–84, 189 blindness and, 172–74 breaking up experiences and, 177–81 changes in workers’ pay and, 169–70 comparisons to other people and, 189 consumer purchases and, 175, 185–88 extending pleasurable experiences and, 176–78, 179–81, 185, 186 in future, foreseeing of, 160, 171–74 happiness baseline and, 170 life-altering injuries and, 171–72, 174 moving to California and, 176 new houses and, 168–69 pain and, 160–67 romantic breakups and, 172–73 to transient vs. constant experiences, 187–88 using our understanding of, 176–81, 184–90 hedonic disruptions, 177–81 hedonic treadmill, 175 Heingartner, Alexander, 45–46 Henry, O., 98 herding, 262 see also self-herding Herman, Edward, 45–46 Hippocrates, 82 Hogerty, Megan, 81 homeostatic mechanisms, 81 Hong, James, 201, 203 HOT or NOT study, 201–5, 208 gender differences in, 209, 211 Meet Me feature and, 204–5, 208, 209 humor, sense of, 199, 200, 207, 208, 228 Hurricane Katrina, 250, 251 I ideas: attachment to, see Not-Invented-Here (NIH) bias idiosyncratic fit and, 111–12 identifiable victim effect, 239–42, 248, 256 American Cancer Society and, 241–42 identity, connection between work and, 53–55, 79 idiosyncratic fit, ideas and, 111–12 ignoring workers, 74–76 IKEA, 83–84, 106 IKEA effect, 83–106 author’s creations in rehabilitation center and, 100–101 completion of project and, 101–4, 105 do-it-yourself furniture and, 83–84, 96, 106 effort expended and, 89, 90, 95–96, 105–6 four principles in, 104–5 and lack of awareness of overvaluation, 99 Legos experiment and, 96, 97 Local Motors cars and, 88, 89 Not-Invented-Here (NIH) bias and, 109–10, 121 origami experiments and, 91–94, 97, 98–99, 102–4 parents’ overvaluation of their children and, 97–98 practical implications of, 121–22 relaxation notion and, 105–6 removal of individual customization and, 96 semi-preprepared food and, 85–88 shoe design and, 95, 96 immediate gratification, 5 Inconvenient Truth, An, 252 initiation into social groups, 89 injuries: association of pain with getting better after, 166–67 author’s dating prospects and, 191–96, 210–11 author’s decisions about his medical care and, 284–88 author’s personal history related to, 1–4, 13, 107, 160–62, 166–67, 181–84, 189, 191–96, 210–11, 281–88 battlefield vs. civilian, 167 foreseeing future after, 160 life-altering, adaptation to, 160, 171–72, 174 pain thresholds and tolerance related to severity of, 161–65 Institute for Evolutionary Anthropology, Leipzig, Germany, 126–27 insurance products, 233–34 interruptions: in pleasant vs. painful experiences, 177–81 TV commercials and, 181n see also phone call interruption experiments intuitions: bonuses and, 36–37 received medical wisdom and, 289–92 romantic, 172–73 testing of, 10n, 288–95 inverse-U relationship, defined, 19 iPods and iPhones, battery replacement in, 141–42 irrationality: summary of findings on, 288 upside as well as downside of, 11–12, 294 irreversible decisions, 285, 286 IT infrastructure, division and meaning of labor and, 77, 79–80 J Janoff-Bulman, Ronnie, 170 Jensen, Glen, 60–62, 63 Jensen, Keith, 127 Jewish tradition, 254–55 Johns Hopkins Bloomberg School of Public Health, Baltimore, 152 Joyless Economy, The (Scitovsky), 188 justice, see fairness, sense of K Kahneman, Danny, 32n, 175–76 Kamenica, Emir, 66, 301 Katzenberg, Jeffrey, 154 Kemmler, William, 119 kinship, empathy and, 243 Krishnamurti, Tamar, 172–73 Krzyzewski, Mike, 39 L labor: connection between identity and, 53–55, 79 contrafreeloading and, 60–63 economic model of, 55, 62–63, 105 financial incentives and, see bonuses meaning of, see meaning of labor overvaluation resulting from, see IKEA effect on projects without meaning, 56–57, 63–72 Labyrinth game, 23 Lee, Leonard, 132, 134, 197, 201–2, 301–2 Lee, Sandra, 87–88 leeches, medicinal use of, 290–91 Legos experiments: on IKEA effect, 96, 97 on reducing meaningfulness of work, 66–74, 77, 80 letter-pairs experiment, 74–76, 80 life-altering events, hedonic adaptation and, 170 Life as a House, ultimatum game and, 268, 269, 270, 272, 276 light, adaptation to changes in, 159 Local Motors, Inc., 88, 89 Loewenstein, George, 21, 44, 80–81, 172–73, 197, 201–2, 239–41, 246–48, 302 long-term objectives, short-term enjoyments vs., 4–5 loss aversion, 32–33, 285, 286 lottery winners, hedonic adaptation of, 170, 171 “Love the One You’re With,” 197, 211–12 M malaria, 250, 251 Man’s Search for Meaning (Frankl), 45 marketing, adaptation and, 158 market mechanisms, 215–16 dating and, 213–15, 216–17, 220–21, 230–32, 233–35 Marx, Karl, 79 massages, extending pleasure of, 179–80 matchmakers (yentas), 213 Mazar, Nina, 21, 30, 44, 302 McClure, Jessica (Baby Jessica), 237–38 meals, see cooking meaning of labor, 53–82 in acknowledged, ignored, and shredded conditions, 74–76 animals’ preference for working for food and, 59–63 blogging and, 65 division of labor and, 77–80 draining work of meaning and, 55–57, 63–77 financial incentives and, 72–73, 76 joy derived from activity and, 71–72 labor-identity connection and, 53–55, 79 Legos experiment and, 66–74, 76, 80 lessons for workplace on, 80–82 letter-pairs experiment and, 74–76, 80 “meaning” vs.

 

pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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There is clear evidence that people dislike unfair offers and are willing to take a financial hit to punish those who make them. It is less clear that people feel morally obliged to make fair offers. Although it is true that in the Ultimatum Game the most common offer is often 50%, one cannot conclude that Proposers are trying to be fair. Instead, they may be quite rationally worried about being rejected. Given the empirical evidence on respondents’ behavior, the profit-maximizing strategy in the Ultimatum Game is for the Proposer to offer about 40% of the pie. Lower offers start to run the risk of being rejected, so a 50% offer is not far from the rational selfish strategy. Whether the offers made by Proposers are driven by fairness or selfish concerns, the outcomes of the Ultimatum Game appear to be quite robust. Proposers make offers of close to half the pie, and Responders tend to reject offers of less than 20%.

Nevertheless, one question that people have long wondered about is whether the tendency to reject small offers in the Ultimatum Game persists as stakes increase. A natural intuition shared by many is that as the stakes go up, the minimum offer that will be accepted goes down as a fraction of the total pie. That is, if when playing for $10 the average minimally acceptable offer is $2, then when the stakes are raised to $1,000, would people accept less than $200? Investigating this hypothesis has been plagued by two problems: running a high-stakes version of the Ultimatum Game is expensive, and most Proposers make “fair” offers. Experimenters in the United States ran a version of the Ultimatum Game for $100, and the results did not differ much from lower-stakes games. Even more telling is evidence from running the game in poor countries, where the cost of living allows experimenters to raise the stakes even higher.

Of course, I could not say to my critics that by clinging to their beloved theories they were merely paying attention to sunk costs, but I could introduce the one bit of new experimental data we had included in the paper. The data came from a version of the Ultimatum Game. In the usual version of the Ultimatum Game, the experimenter provides the money that the participants divide. Now we had created a version in which the experimenter makes money! We asked students to bring $5 to class for the purpose of an in-class demonstration. (Participation was voluntary.) Then each student filled out a form indicating how he would play a $10 version of the Ultimatum Game, with the money coming from the $5 each player had contributed. Players indicated their contingent decisions both as Proposer and as Responder, were told that they would be randomly assigned to one of those roles, and then were paired with another, anonymous student who had been given the other role.¶ If sunk costs don’t matter, then the outcome of this game should be identical to the one where the experimenter provides the money.

 

pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

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And the interesting thing is that the proposers anticipate this—presumably because they know they would act the same way if they were in the responder’s shoes. As a result, the proposers don’t make many low offers in the first place. The most common offer in the ultimatum game, in fact, is $5. Now, this is a long way from the “rational man” picture of human behavior. The players in the ultimatum game are not choosing what’s materially best for them, and their choices are clearly completely dependent on what the other person does. People play the ultimatum game this way all across the developed world: cross-national studies of players in Japan, Russia, the United States, and France all document the same phenomenon. And increasing the size of the stakes doesn’t seem to matter much either. Obviously, if the proposer were given the chance to divide $1 million, the responder wouldn’t turn down $100,000 just to prove a point.

Presumably if they’d been given the chance to stop their comrades from enjoying those riches—as the players in the ultimatum game were—the capuchins would have gladly taken it. Capuchins and humans alike, then, seem to care whether rewards are, in some sense, “fair.” That may seem like an obvious thing to worry about, but it’s not. If the monkey thought a rock for a cucumber was a reasonable trade and was happy to make it before he saw his comrade get a grape, she should be happy to make the trade afterward, too. After all, her job hasn’t gotten any harder, nor is the cucumber any less tasty. (Or if it is, that’s because she’s obsessed with what her neighbor’s getting.) So her feelings about the deal should stay the same. Similarly, the responders in the ultimatum game are being offered money for what amounts to a few minutes of “work,” which mostly consists of answering “yes” or “no.”

But people are willing to do it in order to make sure that the distribution of resources is fair. Does this mean people think that, in an ideal world, everyone would have the same amount of money? No. It means people think that, in an ideal world, everyone would end up with the amount of money they deserved. In the original version of the ultimatum game, only luck determines who gets to be the proposer and who gets to be the responder. So the split, people feel, should be fairly equal. But people’s behavior in the game changes quite dramatically when the rules are changed. In the most interesting version of the ultimatum game, for instance, instead of assigning the proposer role randomly, the researchers made it seem as if the proposers had earned their positions by doing better on a test. In those experiments, proposers offered significantly less money, yet not a single offer was rejected.

 

pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

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airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Nash: game theory, joint-stock company, Julian Assange, meta analysis, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K

Neuroscience is starting Kerri Smith (2011), “Neuroscience vs Philosophy: Taking Aim at Free Will,” Nature, 477:23–5. Ultimatum game Charles A. Holt (2000), “Y2K Bibliography of Experimental Economics and Social Science: Ultimatum Game Experiments,” University of Virginia. Hessel Oosterbeek, Randolph Sloof, and Gijs van de Kuilen (2004), “Cultural Differences in Ultimatum Game Experiments: Evidence From a Meta-Analysis,” Experimental Economics, 7:171–88. how the game works Werner Güth, Rolf Schmittberger, and Bernd Schwarze (1982), “An Experimental Analysis of Ultimatum Bargaining,” Journal of Economic Behavior & Organization, 3:267–88. turn down offers Hessel Oosterbeek, Randolph Sloof, and Gijs van de Kuilen (2004), “Differences in Ultimatum Game Experiments: Evidence from a Meta-Analysis,” Experimental Economics, 7:171–88. cultural backgrounds Donna L.

If the police and the judges are just as calculating as you and the taxi driver, why should they attempt to resolve the dispute fairly, rather than in favor of the side that gave them the biggest bribe? They might fear they would get caught and punished, but that fear assumes those doing the catching and punishing aren't calculating and will attempt to be fair and honest. (13) Neuroscience is starting to make inroads into that question, too. (14) The Ultimatum game was first developed in 1982, and has been replicated repeatedly by different researchers using different variants in different cultures; there are hundreds of academic papers about the Ultimatum game. Here's how the game works. Two strangers are put in separate rooms and told they will divide a pot of money between them. They can't meet each other, and they can't communicate in any way. Instead, one of the subjects gets to divide the money any way he wants. That division is shown to the second subject, who gets to either accept or reject the division.

This experiment has been conducted with subjects from a wide variety of cultural backgrounds. It has been conducted with large amounts of money, and in places where small amounts of money make a big difference. Results are consistent. (15) The Dictator game is like the Ultimatum game, but with one critical difference: the second player is completely passive. The first player gets to divide the money, and both players receive their share. If the first player wants to keep all of it, he does. The second player has no say in the division or whether or not it is accepted. In the Ultimatum game, the first player had to worry if the second player would penalize him. The Dictator game removes all of that second-guessing. The first player gets a pile of money, and hands the second player some, then keeps the rest. He is in complete control.

 

pages: 237 words: 50,758

Obliquity: Why Our Goals Are Best Achieved Indirectly by John Kay

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Andrew Wiles, Asian financial crisis, Berlin Wall, bonus culture, British Empire, business process, Cass Sunstein, computer age, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, discovery of penicillin, diversification, Donald Trump, Fall of the Berlin Wall, financial innovation, Gordon Gekko, greed is good, invention of the telephone, invisible hand, Jane Jacobs, Long Term Capital Management, Louis Pasteur, market fundamentalism, Nash equilibrium, pattern recognition, purchasing power parity, RAND corporation, regulatory arbitrage, shareholder value, Simon Singh, Steve Jobs, The Death and Life of Great American Cities, The Predators' Ball, The Wealth of Nations by Adam Smith, ultimatum game, urban planning, value at risk

They think about their subjects as agents, or players, not people—and there is a big difference. We operate in a world in which we may sometimes be uncertain about our own objectives and will frequently be uncertain about the other player’s objectives. Real ultimatum games only superficially resemble the experimenter’s problem. These real-life problems are neither closed nor simple. Even in an everyday ultimatum problem like negotiating a deal for a new car, we don’t have the complete specification of the options available to us, and to the other player, that the ultimatum game provides. In a loose sense, we negotiate all the time—with our family and friends, our workmates, our employer. So we use oblique methods that depend on our interpretation of the context of the negotiations, and anger and a sense of fairness influence our responses to ultimatum problems.

Today the best computer can play chess about as well as the best human. The best chess computers function by combining the computational capacity of the machine with the professional skills of a team of grand masters. Even a cheap computer program will defeat an average player, but only because it is programmed with the skills of experts. The computer is an efficient decision-making aid, not an efficient decision maker. In the ultimatum game, two people have to agree how to share one dollar; otherwise they receive nothing. There is an argument that you should accept anything you are offered—one cent is better than nothing—and because that is true for the other player also, you should demand ninety-nine cents. But that isn’t what usually happens. In practice, many people reject low offers, even if the consequence is that they get nothing.

Scott Fitzgerald expressed a similar thought: “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function.”5 The oblique decision maker, the fox, is not hung up on consistency and frequently holds contradictory ideas simultaneously. Chapter 20 DODGY DOSSIERS—How Spurious Rationality Is Often Confused with Good Decision Making What do people mean when they say it is irrational for us not to play the ultimatum game according to the game theorist’s predictions, irrational to reject proposals out of anger or to make them from a sense of fairness? They don’t mean that we would be better off if we didn’t have these reactions. The neuroscientist Antonio Damasio made famous the case of a patient who, after brain damage, retained his cognitive abilities but operated at a very low level of emotional response.

 

pages: 898 words: 266,274

The Irrational Bundle by Dan Ariely

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accounting loophole / creative accounting, air freight, Albert Einstein, banking crisis, Bernie Madoff, Black Swan, Broken windows theory, Burning Man, business process, cashless society, Cass Sunstein, clean water, cognitive dissonance, computer vision, corporate governance, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, endowment effect, Exxon Valdez, first-price auction, Frederick Winslow Taylor, fudge factor, George Akerlof, Gordon Gekko, greed is good, happiness index / gross national happiness, Jean Tirole, job satisfaction, knowledge economy, knowledge worker, lake wobegon effect, late fees, loss aversion, Murray Gell-Mann, new economy, Peter Singer: altruism, placebo effect, price anchoring, Richard Feynman, Richard Feynman, Richard Thaler, Saturday Night Live, Schrödinger's Cat, second-price auction, shareholder value, Silicon Valley, Skype, software as a service, Steve Jobs, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, ultimatum game, Upton Sinclair, Walter Mischel, young professional

It is another matter altogether to realize that these emotional influences can continue to affect us for a long, long time. The Ultimatum Game To test our emotional-cascade idea, Eduardo and I had to do three key things. First, we had to either irritate people or make them happy. This temporary emotional baggage would set the stage for the second part of our experiment, in which we would get our participants to make a decision while under the influence of that emotion. Then we would wait until their feelings subsided, get them to make some more decisions, and measure whether the earlier emotions had any long-lasting influence on their later choices. We got our participants to make decisions as part of an experimental setup that economists call the ultimatum game. In this game there are two players, the sender and the receiver. In most setups, the two players sit separately, and their identities are hidden from each other.

After all, we’ve all had experiences with unfair offers in the past, and we can imagine that we would feel insulted and say “Forget it, you #$%*&$#!” if someone were to suggest a $19:$1 split. This understanding of how unfair offers make people feel and behave is why most people in the ultimatum game offer splits that are closer to $12:$8 and why those splits are almost always accepted. I should note that there is one interesting exception to this general rule of caring about fairness. Economists and students taking economics classes are trained to expect people to behave rationally and selfishly. So when they play the ultimatum game, economic senders think that the right thing to do is to propose a $19:$1 split, and—since they are trained to think that acting rationally is the right thing to do—the economic recipients accept the offer. But when economists play with noneconomists, they’re deeply disappointed when their uneven offers are rejected.

., 187–88 hedonic treadmill and, 175 placing limits on, 186–87 reducing, 185–86 spacing of, 185, 186 contrafreeloading, 60–63 Jensen’s study of, 60–62, 63 standard economic view at odds with, 62–63 Converse, 95 cooking: children’s involvement in, 121 enjoyment factor and, 62n, 105–6 semi-preprepared food and, 85–88 CO2 emissions, 251–52 counting strategies, 282–83 Count of Monte Cristo, The (Dumas), 123 creation, pride of: ideas and, see Not-Invented-Here (NIH) bias self-made goods and, see IKEA effect creativity, bonuses and improvements in, 47–48 Csíkszentmihályi, Mihály, 49 cultures, organizational: acronyms and, 120 Not-Invented-Here bias and, 119–21 customer revenge, 131–51 against airlines, 142–43 apologies and, 149–51, 152 author’s experience with Audi customer service and, 131–36, 137, 147–49, 153–54 distinction between agents and principals and, 144–47 Farmer and Shane’s “Yours Is a Very Bad Hotel” and, 140–41, 146 fictional case study for Harvard Business Review on, 147–49 increase in, 143 Neistat brothers’ video on Apple’s customer service and, 141–42 passage of time and, 151 phone call interruption experiments on, 135–39, 145–46, 150–51 customization, 94–96 of cars, 88, 89, 94 effort expended in, 89, 95–96 overvaluation despite removing possibility of, 96 of shoes, 95, 96 D Dallaire, Roméo, 255 Darfur, 238, 253 Dart Ball game, 23, 34 Darwin, Charles, 157 dating, 191–235 market failures in, 213–15, 216–17, 220–21, 230–32, 233–35 playing hard to get and, 104 standard practice of, 224–25, 227–28 yentas (matchmakers) and, 213 see also assortative mating; online dating; speed dating decision making: author’s medical care and, 284–88 cooling off before, 257, 279 emotions and, 261–77 gender differences and, 274–76 irreversible decisions and, 285, 286 rationalization of choices in, 287 from rational perspective, 5–6 short-term, long-term decisions affected by, 264–65, 270–74, 276–77 stability of strategies for, 261–65; see also self-herding ultimatum game and, 265–70, 275–76 dentistry, adaptation to pain and, 161–62 design, taking people’s physical limitations into account in, 230–32 destroying work in front of workers, 74–76 Dichter, Ernest, 86 disease: adaptation to pain and, 165, 167 preventative health care and, 251, 256 “survivor” rhetoric and, 241–42 Disney, 154 distraction, performance-based incentives and, 30, 36 division of labor, 77–80 IT infrastructure and, 77, 79–80 Marx’s alienation notion and, 79 Smith’s observations on, 77–78 divorce, foreseeing outcome of, 173 Dodson, John, 18–20, 22, 31, 47 do-it-yourself projects, see IKEA effect Donath, Judith, 225 Dostoyevsky, Fyodor, 157 Doubletree Club, Houston, 140–41, 146 dreams, author’s self-image in, 182–83 DreamWorks SKG, 154 driving: momentary anger during, 261 safety precautions and, 6–7 texting during, 6, 7, 8 see also cars drop-in-the-bucket effect, 244–45, 252, 254–55 Dumas, Alexandre, 123 E Eastwick, Paul, 172–73 Edison, Thomas, 117–19, 122 effort: increase in value related to, 89, 90, 95–96, 105–6; see also IKEA effect joy derived from activity and, 71–72 meaningful work conditions and, 72 ownership of ideas and, 114–16 see also labor egg theory, 86–88 Eisner, Michael, 154 electric chair, 119 electricity, alternating current (AC) vs. direct current (DC), 117–19 emotional cascades, 265–78 gender differences and, 274–76 romantic relationships and, 277–78 ultimatum game and, 265–76 emotional priming: empathy for plight of others and, 246–48 ultimatum game and, 268–70 emotions, 43, 237–79 appeals to, willingness to help others and, 240–42, 248–50, 253–54, 256 decision making and, 261–77; see also decision making in past, humans’ poor memory of, 264 transience of, 257, 261, 270 see also empathy; negative feelings, acting on empathy: animals’ suffering and, 249, 252 apathy toward statistical victims and, 238–41, 242, 246, 247–49, 252–53 Baby Jessica saga and, 237–38 calculating vs. emotional priming and, 246–48 clear moral principles and, 255 closeness and, 243, 245, 254 drop-in-the-bucket effect and, 244–45, 252, 254–55 emotional appeals and, 240–42, 248–50, 253–54, 256 global warming and, 251–52 identifiable victim effect and, 239–42, 248, 256 overcoming barriers to, 252–56 rules to guide our behavior and, 254–55 thought experiment of drowning girl and, 242–43, 245 toward one person vs. many in need, 237–56 vividness and, 24, 243n, 244, 245 endowment effect, 285, 286 Enron, 216 evolution, mismatch between speed of technological development and, 8–9 experiments, 10–11, 288–95 business or public policy and, 292–94, 295 of Gideon, 288–89 medical practice and, 289–92 rational economists’ criticisms of, 49–51 see also specific topics Exxon Valdez oil spill, 249 F fairness, sense of: in chimpanzees, 127 decision making and, 266–67; see also ultimatum game gender differences and, 275–76 Fallows, James, 158 Farmer, Tom, 140–41, 146, 148–49 FedEx, 108–9 feedback, about work, 74–76 Feeks, John, 118–19 Fehr, Ernst, 125–26 financial incentives: meaning of labor and, 72–73, 76 see also bonuses financial markets, safety measures for, 7 financial meltdown of 2008, 7, 21, 216 chronology of events in, 129–30 desire for revenge in wake of, 128–31 lack of experimental approach to, 293 outraged public reaction to bailout in, 128–29, 130 Finkel, Eli, 172–73 First Knight, 50 fixation, pride in creation and ownership and, 89, 122 food: animals’ preference for working for, 59–63 semi-preprepared, 85–88 shortages of, identifiable victim effect and, 239–41 see also cooking Food and Drug Administration (FDA), 292 Ford, Henry, 78–79, 94 Forgea (white terrier), 249 Fox, Michael J., 254 “Fox and the Grapes, The” (Aesop), 198–99 Frank, Barney, 41 Frankl, Viktor, 45 free food, animals’ preference for working for food vs., 60–62 Frenk, Hanan, 161–65, 300 Friends, ultimatum game and, 269, 270–71, 272 frog experiment, 157–58 Frost, Jeana, 219–20, 229, 300 Fryer, Bronwyn, 148 furniture, do-it-yourself, 83–84, 96, 105, 106 future, foreseeing adaptation to changes in, 160, 171–74 G gardening: children growing food and, 121 enjoyment factor and, 105–6 gender differences: assortative mating and, 209, 211 decision making and, 274–76 pain threshold and tolerance and, 168–69 Gideon, 288–89 global warming, 158, 251–52 Gneezy, Ayelet, 135, 144–45, 150, 300–301 Gneezy, Uri, 21, 44, 301 Gore, Al, 158, 252 government policies, experimental approach to, 292–94, 295 H happiness: comparisons to other people and, 189 consumer purchases and, 175, 185–88 inaccurate predictions about, 170–71 return to baseline of, 170 transient vs. constant experiences and, 187–88 Harvard Business Review (HBR), 147–49 health care, see medical care hedonic adaptation, 160–84 to annoying experiences, 177–79, 180 author’s personal history and, 181–84, 189 blindness and, 172–74 breaking up experiences and, 177–81 changes in workers’ pay and, 169–70 comparisons to other people and, 189 consumer purchases and, 175, 185–88 extending pleasurable experiences and, 176–78, 179–81, 185, 186 in future, foreseeing of, 160, 171–74 happiness baseline and, 170 life-altering injuries and, 171–72, 174 moving to California and, 176 new houses and, 168–69 pain and, 160–67 romantic breakups and, 172–73 to transient vs. constant experiences, 187–88 using our understanding of, 176–81, 184–90 hedonic disruptions, 177–81 hedonic treadmill, 175 Heingartner, Alexander, 45–46 Henry, O., 98 herding, 262 see also self-herding Herman, Edward, 45–46 Hippocrates, 82 Hogerty, Megan, 81 homeostatic mechanisms, 81 Hong, James, 201, 203 HOT or NOT study, 201–5, 208 gender differences in, 209, 211 Meet Me feature and, 204–5, 208, 209 humor, sense of, 199, 200, 207, 208, 228 Hurricane Katrina, 250, 251 I ideas: attachment to, see Not-Invented-Here (NIH) bias idiosyncratic fit and, 111–12 identifiable victim effect, 239–42, 248, 256 American Cancer Society and, 241–42 identity, connection between work and, 53–55, 79 idiosyncratic fit, ideas and, 111–12 ignoring workers, 74–76 IKEA, 83–84, 106 IKEA effect, 83–106 author’s creations in rehabilitation center and, 100–101 completion of project and, 101–4, 105 do-it-yourself furniture and, 83–84, 96, 106 effort expended and, 89, 90, 95–96, 105–6 four principles in, 104–5 and lack of awareness of overvaluation, 99 Legos experiment and, 96, 97 Local Motors cars and, 88, 89 Not-Invented-Here (NIH) bias and, 109–10, 121 origami experiments and, 91–94, 97, 98–99, 102–4 parents’ overvaluation of their children and, 97–98 practical implications of, 121–22 relaxation notion and, 105–6 removal of individual customization and, 96 semi-preprepared food and, 85–88 shoe design and, 95, 96 immediate gratification, 5 Inconvenient Truth, An, 252 initiation into social groups, 89 injuries: association of pain with getting better after, 166–67 author’s dating prospects and, 191–96, 210–11 author’s decisions about his medical care and, 284–88 author’s personal history related to, 1–4, 13, 107, 160–62, 166–67, 181–84, 189, 191–96, 210–11, 281–88 battlefield vs. civilian, 167 foreseeing future after, 160 life-altering, adaptation to, 160, 171–72, 174 pain thresholds and tolerance related to severity of, 161–65 Institute for Evolutionary Anthropology, Leipzig, Germany, 126–27 insurance products, 233–34 interruptions: in pleasant vs. painful experiences, 177–81 TV commercials and, 181n see also phone call interruption experiments intuitions: bonuses and, 36–37 received medical wisdom and, 289–92 romantic, 172–73 testing of, 10n, 288–95 inverse-U relationship, defined, 19 iPods and iPhones, battery replacement in, 141–42 irrationality: summary of findings on, 288 upside as well as downside of, 11–12, 294 irreversible decisions, 285, 286 IT infrastructure, division and meaning of labor and, 77, 79–80 J Janoff-Bulman, Ronnie, 170 Jensen, Glen, 60–62, 63 Jensen, Keith, 127 Jewish tradition, 254–55 Johns Hopkins Bloomberg School of Public Health, Baltimore, 152 Joyless Economy, The (Scitovsky), 188 justice, see fairness, sense of K Kahneman, Danny, 32n, 175–76 Kamenica, Emir, 66, 301 Katzenberg, Jeffrey, 154 Kemmler, William, 119 kinship, empathy and, 243 Krishnamurti, Tamar, 172–73 Krzyzewski, Mike, 39 L labor: connection between identity and, 53–55, 79 contrafreeloading and, 60–63 economic model of, 55, 62–63, 105 financial incentives and, see bonuses meaning of, see meaning of labor overvaluation resulting from, see IKEA effect on projects without meaning, 56–57, 63–72 Labyrinth game, 23 Lee, Leonard, 132, 134, 197, 201–2, 301–2 Lee, Sandra, 87–88 leeches, medicinal use of, 290–91 Legos experiments: on IKEA effect, 96, 97 on reducing meaningfulness of work, 66–74, 77, 80 letter-pairs experiment, 74–76, 80 life-altering events, hedonic adaptation and, 170 Life as a House, ultimatum game and, 268, 269, 270, 272, 276 light, adaptation to changes in, 159 Local Motors, Inc., 88, 89 Loewenstein, George, 21, 44, 80–81, 172–73, 197, 201–2, 239–41, 246–48, 302 long-term objectives, short-term enjoyments vs., 4–5 loss aversion, 32–33, 285, 286 lottery winners, hedonic adaptation of, 170, 171 “Love the One You’re With,” 197, 211–12 M malaria, 250, 251 Man’s Search for Meaning (Frankl), 45 marketing, adaptation and, 158 market mechanisms, 215–16 dating and, 213–15, 216–17, 220–21, 230–32, 233–35 Marx, Karl, 79 massages, extending pleasure of, 179–80 matchmakers (yentas), 213 Mazar, Nina, 21, 30, 44, 302 McClure, Jessica (Baby Jessica), 237–38 meals, see cooking meaning of labor, 53–82 in acknowledged, ignored, and shredded conditions, 74–76 animals’ preference for working for food and, 59–63 blogging and, 65 division of labor and, 77–80 draining work of meaning and, 55–57, 63–77 financial incentives and, 72–73, 76 joy derived from activity and, 71–72 labor-identity connection and, 53–55, 79 Legos experiment and, 66–74, 76, 80 lessons for workplace on, 80–82 letter-pairs experiment and, 74–76, 80 “meaning” vs.

 

pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, invisible hand, Isaac Newton, iterative process, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, moral hazard, mortgage debt, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning

Schelling, Thomas Schoemaker, Paul Schwartz, Anna Science (journal) Securities Security interdependent international national Sen, Amartya Sen, Sankar Sensitivity September 11th, 2001 government aid following impact of risk assessments following Shleifer, Andrei Shu Zukang Sichuan province, earthquake in Sierra Club Silent Spring (Carson) Simon, Herbert Skillful weighing Slovic, Paul Small Business Administration (SBA) Smart Choices (Keeney and Hammond) Smith, Adam Smith, Vernon Social sciences Social Security Social welfare Socrates Spetzler, Carl Stage 1 risks Stage 2 risks Stern, Nicholas Stern Review Stock markets Storms Strategic Decisions Group Strömberg, David Stroop tasks Subprime mortgage crisis “Subway” uncertainty Sunstein, Cass Superfund Superstition Supplemental Security Income Supply-shock story “Sure Thing Principle” (Savage) Sustainability Terrorism governmental response to mega- preventing Terrorism Risk Insurance Act (TRIA) Thaler, Richard Theory of Games. See also Game Theory; Ultimatum Game Thompson, Michael Thucydides Timing Toll collectors, algorithm for assigning Tradeoffs certainty and value Trope, Yaacov Tropical Storm Agnes Tsunamis Tunguska, asteroid explosion at Tversky, Amos Ultimatum Game (UG) (fig.). See also Game Theory; Theory of Games Uncertainty(fig.) assessing behavior and coconut general equilibrium under growth of handling insurance and market subway types of Underinsurance Unfair offers(fig.) Union Carbide plant United Nations World Economic and Social Survey 2008 Universal Declaration of Human Rights U.S.

Measuring what subjects are looking at on the computer screen is potentially a way for economists to distinguish between these two different interpretations. In fact, on about 10 percent of the trials, players did not even open up the third box to see how much was available. In a boundedly rational way, their lazy pattern of looking made some sense because only 8 percent of the games went into the third stage. We concluded that while fairness preferences might be part of the story (as the simpler ultimatum game strongly suggested), limited look-ahead was too. Such a clear conclusion could not be reached so quickly without knowing what subjects were looking at. Another thing researchers can do with attentional data is try to predict from what people look at what they are likely to do. We did this in the 2002 paper, which summarizes the results in a series of “icon graphs” and associated histograms showing the frequency of various offer amounts.

WHAT CAN WE LEARN FROM THE MARRIAGE OF ECONOMICS AND NEUROSCIENCE? Today, this multidisciplinary field—which brings together economics, neuroscience, psychology, philosophy, sociology, and physics—is offering new empirical and theoretical insights on how emotions and rationality interdependently sha(r)p(en) our decisions. Among the most striking examples are a couple of neuroscientific studies of a familiar experimental economic setting, the Ultimatum Game (UG). The first of these was conducted by scientists at Princeton University in 2003.8 Alan Sanfey, Jonathan Cohen, and colleagues used functional magnetic resonance imaging (fMRI)9 in order to estimate the brain activity that occurs when people decide to accept (or not) an unfair share of money in the UG.10 From a purely rational view, whether a proposition is unfair or not should not make any difference to their decision—they would get more money by accepting than by rejecting it.

 

pages: 310 words: 82,592

Never Split the Difference: Negotiating as if Your Life Depended on It by Chris Voss, Tahl Raz

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banking crisis, Black Swan, clean water, cognitive bias, Daniel Kahneman / Amos Tversky, Donald Trump, framing effect, friendly fire, iterative process, loss aversion, market fundamentalism, price anchoring, telemarketer, ultimatum game, uranium enrichment

What’s more important is engaging in the process and having a feel for how long that will take. You may see that you have more to accomplish than time will actually allow before the clock runs out. NO SUCH THING AS FAIR In the third week of my negotiations class, we play my favorite type of game, that is, the kind that shows my students how much they don’t understand themselves (I know—I’m cruel). It’s called the Ultimatum Game, and it goes like this: After the students split into pairs of a “proposer” and an “accepter,” I give each proposer $10. The proposer then has to offer the accepter a round number of dollars. If the accepter agrees he or she receives what’s been offered and the proposer gets the rest. If the accepter refuses the offer, though, they both get nothing and the $10 goes back to me. Whether they “win” and keep the money or “lose” and have to give it back is irrelevant (except to my wallet).

A decade of brain-imaging studies has shown that human neural activity, particularly in the emotion-regulating insular cortex, reflects the degree of unfairness in social interactions. Even nonhuman primates are hardwired to reject unfairness. In one famous study, two capuchin monkeys were set to perform the same task, but one was rewarded with sweet grapes while the other received cucumbers. In response to such blatant unfairness, the cucumber-fed monkey literally went bananas. In the Ultimatum Game, years of experience has shown me that most accepters will invariably reject any offer that is less than half of the proposer’s money. Once you get to a quarter of the proposer’s money you can forget it and the accepters are insulted. Most people make an irrational choice to let the dollar slip through their fingers rather than to accept a derisory offer, because the negative emotional value of unfairness outweighs the positive rational value of the money.

This irrational reaction to unfairness extends all the way to serious economic deals. Remember Robin Williams’s great work as the voice of the genie in Disney’s Aladdin? Because he wanted to leave something wonderful behind for his kids, he said, he did the voice for a cut-rate fee of $75,000, far below his usual $8 million payday. But then something happened: the movie became a huge hit, raking in $504 million. And Williams went ballistic. Now look at this with the Ultimatum Game in mind. Williams wasn’t angry because of the money; it was the perceived unfairness that pissed him off. He didn’t complain about his contract until Aladdin became a blockbuster, and then he and his agent went loud and long about how they got ripped off. Lucky for Williams, Disney wanted to keep its star happy. After initially pointing out the obvious—that he’d happily signed the deal—Disney made the dramatic gesture of sending the star a Picasso painting worth a reported $1 million.

 

pages: 327 words: 103,336

Everything Is Obvious: *Once You Know the Answer by Duncan J. Watts

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affirmative action, Albert Einstein, Amazon Mechanical Turk, Black Swan, butterfly effect, Carmen Reinhart, Cass Sunstein, clockwork universe, cognitive dissonance, collapse of Lehman Brothers, complexity theory, correlation does not imply causation, crowdsourcing, death of newspapers, discovery of DNA, East Village, easy for humans, difficult for computers, edge city, en.wikipedia.org, Erik Brynjolfsson, framing effect, Geoffrey West, Santa Fe Institute, happiness index / gross national happiness, high batting average, hindsight bias, illegal immigration, interest rate swap, invention of the printing press, invention of the telescope, invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, lake wobegon effect, Long Term Capital Management, loss aversion, medical malpractice, meta analysis, meta-analysis, Milgram experiment, natural language processing, Netflix Prize, Network effects, oil shock, packet switching, pattern recognition, performance metric, phenotype, planetary scale, prediction markets, pre–internet, RAND corporation, random walk, RFID, school choice, Silicon Valley, statistical model, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, The Death and Life of Great American Cities, the scientific method, The Wisdom of Crowds, too big to fail, Toyota Production System, ultimatum game, urban planning, Vincenzo Peruggia: Mona Lisa, Watson beat the top human players on Jeopardy!, X Prize

As it turns out, the Au and Gnau tribes had long-established customs of gift exchange, according to which receiving a gift obligates the receiver to reciprocate at some point in the future. Because there was no equivalent of the ultimatum game in the Au or Gnau societies, they simply “mapped” the unfamiliar interaction onto the most similar social exchange they could think of—which happened to be gift exchange—and responded accordingly. Thus what might have seemed like free money to a Western participant looked to an Au or Gnau participant very much like an unwanted obligation. The Machiguenga, by contrast, live in a society in which the only relationship bonds that carry any expectation of loyalty are with immediate family members. When playing the ultimatum game with a stranger, therefore, Machiguenga participants—again mapping the unfamiliar onto the familiar—saw little obligation to make fair offers, and experienced very little of the resentment that would well up in a Western player upon being presented with a split that was patently unequal.

It should also be noted, however, that attempts to formalize this backup system, most notably in artificial intelligence research, have so far been unsuccessful (Dennett 1984); thus, however it works, it does not resemble the logical structure of science and mathematics. 8. See Minsky (2006) for a discussion of common sense and artificial intelligence. 9. For a description of the cross-cultural Ultimatum game study, see Henrich et al. (2001). For a review of Ultimatum game results in industrial countries, see Camerer, Loewenstein, and Rabin (2003). 10. See Collins (2007). Another consequence of the culturally embedded nature of commonsense knowledge is that what it treats as “facts”—self-evident, unadorned descriptions of an objective reality—often turn out to be value judgments that depend on other seemingly unrelated features of the socio-cultural landscape.

Bewildered and overwhelmed, most of them eventually left. NOT COMMON AT ALL As remarkable as it is, common sense exhibits some mysterious quirks, one of the most striking of which is how much it varies over time, and across cultures. Several years ago, for example, an enterprising group of economists and anthropologists set out to test how different cultures play a particular kind of game, called an ultimatum game. The game goes something like this: First, pick two people and give one of them $100. That person then has to propose a split of the money between himself and the other player, ranging from offering them the whole amount to nothing at all. The other player then gets to accept the deal or reject it. If the second player accepts the deal, they get what they were offered and both players go on their merry way.

 

pages: 270 words: 79,180

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

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Affordable Care Act / Obamacare, Airbnb, Al Roth, Black Swan, buy low sell high, Credit Default Swap, cross-subsidies, crowdsourcing, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, Jean Tirole, Lean Startup, Lyft, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, ride hailing / ride sharing, Sand Hill Road, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, The Market for Lemons, too big to fail, trade route, transaction costs, two-sided market, Uber for X, ultimatum game, Y Combinator

In fact, developing a reputation as a badass middleman can pay off, as suggested by an interesting series of experiments by the economists Chaim Fershtman and Uri Gneezy.14 The economists had participants play the Ultimatum Game, a game similar to the Dictator Game, except instead of one player simply giving a share to another, the first player makes an offer that the second player can reject. If that player rejects the offer, neither player gets anything. In the middleman version of the game, Fershtman and Gneezy introduced a third player whose role was to make an offer on the first player’s behalf. Just as in the Dictator Games with middlemen, using a third party to make offers reduced the rate at which people reject tough offers. For example, in the standard, two-player Ultimatum Game, offers of a 20 percent share or a 30 percent share tend to get rejected; these offers just don’t seem as fair as offers of 40 or 50 percent, so recipients would rather get nothing themselves than let the proposer get the lion’s share.

For example, in the standard, two-player Ultimatum Game, offers of a 20 percent share or a 30 percent share tend to get rejected; these offers just don’t seem as fair as offers of 40 or 50 percent, so recipients would rather get nothing themselves than let the proposer get the lion’s share. In a one-shot game this response is irrational—like cutting your nose to spite your face—because there’s no chance for the responder to reap any material rewards from teaching the proposer a lesson. Yet, that’s how most respondents in dozens of Ultimatum Game experiments behave. When you bring in a middleman, however, the results change dramatically, Fershtman and Gneezy found. In one experiment, they set up the game such that the middleman got a reward for a proposal that got accepted and no reward for a rejected proposal. When respondents knew that this was the deal, Proposers made tougher offers (through the middleman), and Respondents were more willing to accept these tough offers.

., 175–6 Crabtree, Michael, 179–80 Craigslist, 30–5, 37, 44–6, 65, 89, 171 decision simplicity, 169 Dell, Michael, 195–7 Dictator Game, 181–2 Direct from Dell (Dell), 195 Disney, 140 Dropbox, 18–20 Eachnet, 85 eBay Certifiers and, 58–62, 134, 164 Concierges and, 169 Eachnet and, 85, 102 Enforcers and, 84–5, 91 feedback and, 84–5, 89, 134 middlemen and, 3–4, 7 reputation and, 62, 67, 91 Eberlijn, Nina, 148–51 Edmunds.com, 165 Einstein, Albert, 127 Elberse, Anita, 135 Enforcers clients and, 107–9 explained, 7 knowing the workers, 75–7 need for, 73–5 playing watchdog, 77–8 punishment and, 92–7 reputation and, 85–6 restaurant business and, 78–84 role, 73 setting shared standards, 101–7 threat of consequences and, 86–8 trading in private information, 97–100 weak vs. strong, 88–92 Enron, 41 Expedia, 145 experiments Dictator Game, 181–2 Investment Game, 86–8, 92–4, 101–5 “Letter E” experiment, 131 networking and, 21 reputation and, 62 Ultimatum Game, 183–4 watchdogs and, 77–8 external risk, 111, 120, 123, 125–8, 142 see also risk Facebook, 4, 20, 22–3, 36, 80, 128–9, 137, 175 farmers’ markets, 66 Feller, William, 142 Fernandez-Mateo, Isabel, 98–100 Fershtman, Chaim, 183–4 Finlay, William, 175–6 Fischbacher, Urs, 181 Flash Boys (Lewis), 112 Floodgate, 5, 124–5, 127, 132 Free (Anderson), 39 Friendster, 36 Galinsky, Adam, 131 gallerists see art gallerists Gambetta, Diego, 74 Game-Changer (McAdams), 90 Garden, Sara, 193–4 Gates, Bill, 3 General Electric, 8 Give and Take (Grant), 41 Gneezy, Uri, 183–4 Goldberg, Bryan, 179 Goldman, Eric, 91 Goldman Sachs, 10 Google, 21, 128, 156, 175 Gottlieb, Robert, 69–70 Graham, Paul, 125 Granovetter, Mark, 24, 27, 42 Grant, Adam, 41 Green, Michael, 177 Greylock, 125 Grosvenor, Deborah, 68–70 Groupon, 44 GrubHub, 38, 40 Hall, Sarah, 146 Harley-Davidson, 137 Hawkison, Paul, 53–4, 71 headhunters, 2, 7, 61, 66, 175–6, 180 see also Insulators Hewlett-Packard, 196 hidden action, 74, 104 hidden information, 66, 73–4 Hoffman, Reid, 27 HomeAway, 90–1 Horejs, Jason, 113–17, 135, 198 Houston, Drew, 18 Hunt for Red October, The (Clancy), 68 Insulators agents and, 178–80 black markets and, 174–5 duty and, 190–3 example, 173–4 explained, 7 need for, 193–4 niceness and, 185–90 recruiting and, 175–8, 180–2 role, 173 toughness and, 182–5 insurance Bridges and, 30–1 Concierges and, 172 Insulators and, 188 “Market for Lemons” and, 65 middlemen and, 2 Risk Bearers and, 111–14, 121–2, 138–9 internal risk, 123, 126 see also risk Investment Game, 86–8, 92, 94, 101–3, 105 iSoldIt, 3, 59 J.

 

pages: 387 words: 110,820

Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell

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barriers to entry, Berlin Wall, big-box store, cognitive dissonance, computer age, Daniel Kahneman / Amos Tversky, delayed gratification, deskilling, Donald Trump, Edward Glaeser, fear of failure, Ford paid five dollars a day, Frederick Winslow Taylor, George Akerlof, global supply chain, global village, greed is good, Howard Zinn, income inequality, interchangeable parts, inventory management, invisible hand, James Watt: steam engine, Joseph Schumpeter, Just-in-time delivery, knowledge economy, loss aversion, market design, means of production, mental accounting, Ponzi scheme, price anchoring, price discrimination, race to the bottom, Richard Thaler, Ronald Reagan, side project, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, traveling salesman, ultimatum game, Victor Gruen, washing machines reduced drudgery, working poor, yield management

A cucumber may not be as good as a grape, but it is edible, so tossing out chunks of the stuff appears self defeating and irrational. This behavior is consistent with the way monkeys and humans deal with what we perceive to be unfairness. At least some monkeys prefer nothing to less than the next monkey. The Ultimatum Game suggests that the same is often true for humans. Mathematician and evolutionary biologist Martin Nowak, now director of the Program for Evolutionary Dynamics at Harvard University, has studied the evolutionary underpinnings of fairness. Nowak designed a virtual version of the Ultimatum Game in which players who collected the most money were also the fastest to reproduce. (One of the central tenets of evolutionary theory is that the fitter one is, the more likely one is to pass on one’s genes to the next generation.) Under this scenario, players who accepted any fraction of the total offered by the first player—even if it were far less than half—ultimately won more money, had more offspring, and were thereby “fitter” by natural selection standards.

Thaler proposed an alternative descriptive theory built on Kahneman and Tversky’s work, making the case that price was not merely a number but a relationship between buyer and seller in which context is extremely important. In a series of influential papers he described a variety of apparently irrational behaviors that humans engage in when making financial transactions. A common theme in what Thaler called these “anomalies” was the resistance to deal rationally with ambiguity. Humans simply cannot cope with too many unknowns. Consider the Ultimatum Game, first described by three German economists in 1982. The game is between two players who interact only once, so reciprocation—or “payback”—is not at stake. The first player is given a sum of money—for simplicity let’s call it $10—and asked to divide it between himself and the other player. He can divvy it up any way he chooses, but if the second player rejects the division, neither player gets anything.

Marketing Letters 16, nos. 3/4 (2005): 347-60. 63 the distance estimated by the students: Plenary lecture at the annual meeting of the American Association for the Advancement of Science, February 15, 2008, in Boston. 64 “for a new field of research”: As announced in the press release from the Royal Swedish Academy of Science, October 9, 2002, available at http://nobelprize. org/nobel__prizes/economics/laureates/2002/press.html. 65 when making financial transactions: Thaler compressed and compiled many of these cases into a book. See Richard Thaler, The Winner’s Cure: Paradoxes and Anomalies of Economic Life (New York: The Free Press, 1992). My description of the Ultimatum Game was informed by Thaler’s chapter on the subject (pp. 21-36) and also by conversations with Dr. Patrick Kaufman, chairman of marketing at Boston University School of Management. 66 Emotion, Reason, and the Human Brain: Antonio R. Damasio, Descartes’ Error: Emotion, Reason, and the Human Brain (New York: Harper Perennial, 1995). 66 true not only for humans: There is a rich scientific literature giving evidence that humans are biologically programmed or “hardwired” to be fair and to demand fairness in others.

 

pages: 339 words: 105,938

The Skeptical Economist: Revealing the Ethics Inside Economics by Jonathan Aldred

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airport security, Berlin Wall, carbon footprint, citizen journalism, clean water, cognitive dissonance, congestion charging, correlation does not imply causation, Diane Coyle, experimental subject, Fall of the Berlin Wall, first-past-the-post, framing effect, greed is good, happiness index / gross national happiness, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, labour market flexibility, laissez-faire capitalism, libertarian paternalism, new economy, pension reform, positional goods, Ralph Waldo Emerson, RAND corporation, risk tolerance, school choice, spectrum auction, trade liberalization, ultimatum game

A more promising recent attempt to resolve the problem has focused on observing behaviour in controlled laboratory conditions rather than the messy real world. If there is one piece of evidence which has begun to persuade economists that we sometimes act truly unselfishly, at immediate cost to ourselves even when there are no hidden or future benefits, it is a laboratory experiment, the ultimatum game. The Ultimatum Game There are two players, a proposer and a responder who have to agree on how to share a fixed sum of money. The proposer makes a proposal to the responder on how the money should be split between them. The responder is only allowed to accept or refuse the proposal; he cannot make a counter-offer: If the responder accepts, the money is split as proposed, but if the responder refuses, then both players receive nothing.

Most players refer to fairness in explaining their actions. These results are indisputable: they have been observed over hundreds of trials in various cultures, with large and small stakes of money, where the researcher cannot observe the players’ choices, and most importantly, where the players are strangers who play the game just once and never meet.42 The existence of unselfish acts in laboratory experiments such as the Ultimatum Game has led many more economists to accept the possibility of unselfish behaviour in the outside world too. But it remains just a possibility, because they struggle to see how people’s motives can be determined outside the laboratory. So the conventional wisdom remains the first strategy mentioned above, where every apparently unselfish act is argued to involve the pursuit of hidden or future benefits.

In sum, expecting selfishness in others, I become more selfish. More obviously, the Homo economicus doctrine actively recommends selfishness. As we have seen, pursuing self-interest is always seen as rational. Acting otherwise is not. But does anyone really believe this? Well, economics students seem to — studying economics makes you more selfish. Survey evidence on charitable giving, and laboratory studies of behaviour in games such as the Ultimatum Game, both show economics students becoming more selfish over the duration of their courses.56 If this kind of intensive exposure to the Homo economicus doctrine increases selfishness, there may well be a similar, albeit milder, effect on people with more limited exposure to the doctrine. Does reading The Economist or Freakonomics make you more selfish? Although exposure to the doctrine from just watching television news is much more limited, the effect may be exaggerated because by that stage the doctrine is caricatured, becoming simply ‘Greed is Good’.57 Unfortunately, in the absence of research studying the impact of the doctrine as presented in the mainstream media, these questions cannot be answered directly.

 

pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

Adult proposers rarely give less than 30 percent to the responder and many responders reject offers of less than 30 percent. Even in the dictator game, where the responders have to take what they get, dictators routinely give a significant amount, though less than in the ultimatum game (Bolton and Ockenfels 2000). On the other hand, a simple auction game shows that competition can indeed induce behavior conforming to the homo economicus assumption. In such an experiment one player gets the right to auction off money, say $10, provided by the experimenter. Several other participants, perhaps ten, compete with their offers for the money. The same people who reject an offer of $1 in the ultimatum game and so take nothing 166 ECONOMISTS AND THE POWERFUL voluntarily offer more than $9 for a ten dollar bill, netting less than $1 for themselves and leaving more than $9 to the lucky auctioneer (Bolton and Ockenfels 2000).

They are thus not suited to analyze modern capitalist societies. —Samuel Bowles and Herbert Gintis, 2006 An almost uncountable number of field studies and laboratory experiments that have tested the notion of homo economicus have unfailingly found it wanting. Strong feelings of solidarity, fairness, cooperation and revenge seem to be hardwired into human nature. Behavioral economists have used a laboratory experiment called the ultimatum game to show these feelings. The experimenters pair participants and designate one in each pair as the proposer. They give each pair a sum of money, say US$10, and the proposer can suggest how this money shall be divided between the two. The responder can either accept or reject the proposal. If the responder rejects the proposal, both get nothing. Homo economicus would offer $0.01 to the responder and the responder, if also a homo economicus, would accept, as $0.01 is better than nothing.

The same people who reject an offer of $1 in the ultimatum game and so take nothing 166 ECONOMISTS AND THE POWERFUL voluntarily offer more than $9 for a ten dollar bill, netting less than $1 for themselves and leaving more than $9 to the lucky auctioneer (Bolton and Ockenfels 2000). Bolton and Ockenfels (2000) have developed a theory called ERC, which can consistently explain these seemingly contradictory results. ERC stands for equity, reciprocity and competition. It assumes that people have two main motivations. They want to make more money so they will be able to consume more and they want to get their fair share. The two motivations are in conflict in the ultimatum game. As the share offered to the responder gets smaller, the distribution becomes very uneven. In this case, many responders prefer an equal distribution of zero and zero rather than getting a little more money in a very unfair distribution. The theory can also explain the modesty of bidders in the auction game. The bidders would like to get a higher share. However, if they bid low and others bid high, they will get a very low percentage (0 percent) and a zero absolute amount.

 

pages: 309 words: 86,909

The Spirit Level: Why Greater Equality Makes Societies Stronger by Richard Wilkinson; Kate Pickett

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Berlin Wall, clean water, Diane Coyle, epigenetics, experimental economics, experimental subject, Fall of the Berlin Wall, full employment, germ theory of disease, Gini coefficient, impulse control, income inequality, knowledge economy, labor-force participation, land reform, Louis Pasteur, meta analysis, meta-analysis, Milgram experiment, offshore financial centre, phenotype, Plutocrats, plutocrats, profit maximization, profit motive, Ralph Waldo Emerson, statistical model, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, upwardly mobile, World Values Survey

The human desire to punish even at some personal cost has been called ‘altruistic punishment’, and it plays an important role in reinforcing co-operative behaviour and preventing people freeloading. Although the studies of how people played the ultimatum game were not concerned with the levels of inequality in each society, they are, nevertheless, about how equally or unequally people choose to divide money between themselves and someone else. They are concerned with what people feel is a proper way to treat others (even when there is no direct contact between them and they bear the cost of any generosity). The egalitarian preferences people reveal in the ultimatum game seem to fly in the face of the actual inequalities in our societies. CHIMPS AND BONOBOS Some non-human primates are much more hierarchical than others. Looking at their different social systems, it often seems as if the amount of conflict, the quality of social relations and the relationship between the sexes are functions of how hierarchical they are.

These patterns demonstrate the fundamental truth: systems of material or economic relations are systems of social relations. ECONOMIC EXPERIMENTS Economic theory has traditionally worked on the assumption that human behaviour could be explained largely in terms of an inherent tendency to maximize material self-interest. But a series of experiments using economic games have now shown how far from the truth this is. In the ‘ultimatum game’, volunteers are randomly paired but remain anonymous to each other and do not meet. A known sum of money is given to the ‘proposer’ who then divides it as he or she pleases with the ‘responder’. All the responders do is merely accept or reject the offer. If rejected, neither partner gets anything, but if it is accepted, they each keep the shares of money offered. They play this game only once, so there is no point in rejecting a small offer to try to force the proposer to be more generous next time – they know there isn’t going to be a next time.

When we talk about ‘hurt feelings’ or a ‘broken heart’ we recognize the connection between physical pain and the social pain caused by the breaking of close social bonds, by exclusion and ostracism. Evolutionary psychologists have shown that the tendency to ostracize people who do not co-operate, and to exclude them from the shared proceeds of co-operation, is a powerful way of maintaining high standards of co-operation.343 And, just as the ultimatum game showed that people were willing to punish a mean allocator by rejecting – at some cost to themselves – allocations that seemed unfair, so we appear to have a desire to exclude people who do not co-operate. Social pain is of course central to rejection and is the opposite of the pleasures – discussed earlier – of being valued or of the sense of self-realization which can come from others’ appreciation of what we have done for them.

 

pages: 209 words: 13,138

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading by Joel Hasbrouck

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barriers to entry, conceptual framework, correlation coefficient, discrete time, disintermediation, distributed generation, experimental economics, financial intermediation, index arbitrage, interest rate swap, inventory management, market clearing, market design, market friction, market microstructure, martingale, price discovery process, price discrimination, quantitative trading / quantitative finance, random walk, Richard Thaler, second-price auction, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, two-sided market, ultimatum game

Faced with unfavorable terms an institutional trader might search the prices of other dealers with whom they have relationships, but individuals rarely have accounts with more than one broker. Recent work on the U.S. municipal securities markets highlights the role of bargaining power in a dealer market (Green, Hollifield, and Schuerhoff (2005)). In economic terms, this is an ultimatum game. In the standard fullinformation ultimatum game, one agent (the allocator) proposes a division of the total payoff, and the other agent (the recipient) either accepts or rejects the proposal. If the recipient accepts, both players receive the proposed payoff; if the recipient rejects, both players receive zero. The main feature of this literature is the divergence between the predicted rational outcomes and those that arise in experiments (and in most individuals’ experiences).

Ingersoll, Jonathan E. Jr., 1987, Theory of Financial Decision Making (Rowman and Littlefield, Lanham, MD). Irvine, Paul J., Marc L. Lipson and Andy Puckett, 2006, Tipping. Review of Financial Studies forthcoming. Jones, Charles M., Gautam Kaul, and Marc L. Lipson, 1994, Transactions, volume, and volatility, Review of Financial Studies 7, 631–51. Kagel, John H., Chung Kim, and Donald Moser, 1996, Fairness in ultimatum games with asymmetric information and asymmetric payoffs, Games and Economic Behavior 13, 100–110. Karlin, Samuel, and Howard M. Taylor, 1975, A First Course in Stochastic Processes (Academic Press, New York). Keim, Donald B., and Ananth Madhavan, 1995, Anatomy of the trading process: Empirical evidence on the behavior of institutional traders, Journal of Financial Economics 37(3), 371–98. Keim, Donald B., and Ananth Madhavan, 1996, The upstairs market for block trades: Analysis and measurement of price effects, Review of Financial Studies 9, 1–36.

., and Christoph Schenzler, 2002, Measuring market quality: the relation between quoted and effective spreads (Owen School of Management, Vanderbilt University). Subrahmanyam, Avanidhar, 1991, Risk aversion, market liquidity, and price efficiency, Review of Financial Studies 4, 416–41. Subrahmanyam, Avanidhar, 1991, A theory of trading in stock index futures, Review of Financial Studies 4, 17–51. Teweles, Richard J., and Bradley, Edward S., 1998, The Stock Market, 7th ed. (John Wiley, New York). Thaler, Richard H., 1988, Anomalies: The ultimatum game, Journal of Economic Perspectives 2, 195–206. Tsay, Ruey S., 2002, Analysis of Financial Time Series (John Wiley, New York). U.S. Securities and Exchange Commission, 1963, Special Study of the Securities Markets, U.S. Government Printing Office, via the Securities and Exchange Commission Historical Society, available online at http://www.sechistorical.org/collection/papers/1960/1963_SS_Sec_ Markets/.

 

pages: 295 words: 66,824

A Mathematician Plays the Stock Market by John Allen Paulos

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Benoit Mandelbrot, Black-Scholes formula, Brownian motion, business climate, butterfly effect, capital asset pricing model, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, diversified portfolio, Donald Trump, double entry bookkeeping, Elliott wave, endowment effect, Erdős number, Eugene Fama: efficient market hypothesis, four colour theorem, George Gilder, global village, greed is good, index fund, invisible hand, Isaac Newton, John Nash: game theory, Long Term Capital Management, loss aversion, Louis Bachelier, mandelbrot fractal, margin call, mental accounting, Nash equilibrium, Network effects, passive investing, Paul Erdős, Ponzi scheme, price anchoring, Ralph Nelson Elliott, random walk, Richard Thaler, Robert Shiller, Robert Shiller, short selling, six sigma, Stephen Hawking, transaction costs, ultimatum game, Vanguard fund, Yogi Berra

Although my father was a salesman, he always seemed less intent on making a sale than on schmoozing with his customers, telling jokes, writing poetry (not all of it doggerel), and taking innumerable coffee breaks. Everyone can tell such stories, and you would be hard-pressed to find a novel, even one with a business setting, where the characters are all actively pursuing their economic self-interest. Less anecdotal evidence of the explanatory limits of the homo economicus ideal is provided by so-called “ultimatum games.” These generally involve two players, one of whom is given a certain amount of money, say $100, by an experimenter, and the other of whom is given a kind of veto. The first player may offer any non-zero fraction of the $100 to the second player, who can either accept or reject it. If he accepts it, he is given whatever amount the first player has offered, and the first player keeps the balance.

One would also suspect that the first player, knowing this, would make only tiny offers to the second player. Both suppositions are false. The offers range up to 50 percent of the money involved, and, if deemed too small and therefore humiliating, they are sometimes rejected. Notions of fairness and equality, as well as anger and revenge, seem to play a role. Behavioral Finance People’s reactions to ultimatum games may be counterproductive, but they are at least clear-eyed. A number of psychologists in recent years have pointed out the countless ways in which we’re all subject to other sorts of counterproductive behavior that spring from cognitive blind spots that are analogues, perhaps, of optical illusions. These psychological illusions and foibles often make us act irrationally in a variety of disparate endeavors, not the least of which is investing.

European stock market euros benefits of standardizing European currencies euro-pound/pound-euro exchange rate expected excess return expected value. see also mean value covariance and formula for obtaining graphing against risk (Markowitz optimal portfolios) insurance company example “maximization of expected value,” mu (m) probability theory and exploitable opportunities, tendency to disappear Fama, Eugene Fibonacci numbers Elliott wave theory and golden ratio and fibre-optic cable fifty-two-week highs “flocking effect,” Internet Fooled by Randomness (Taleb) formulas Black-Scholes options compound interest expected value fractals Frank, Robert fraud. see also accounting scandals applying Benford’s Law to corporate fraud applying Benford’s law to income tax fraud Bernie Ebbers Salomon Smith Barney benefitting illegally from IPOs WCOM fraud wrongdoing of brokers at Merrill Lynch free market economy French, Ken Full House: The Spread of Excellence from Plato to Darwin (Gould) fund managers. see also stock brokers/analysts fundamental analysis determining fundamental value by discounting process evidence supporting present value and sequence complexity and trading rules and as sober investment strategy stock valuation with unexciting nature of future value P/E ratio as measure of future earnings expectations present value and gambler’s fallacy games gambling and probability game theory guessing games Monopoly Parrondo’s paradox St. Petersburg paradox ultimatum games WorldCom board game Gans, Herbert Gates, Bill geometric mean illustrated by IPO purchases/sales rate of return “ghosts,” investors Gilder, George Gilovich, Thomas Godel, Kurt Goethe golden ratio Goodman, Nelson gossip Gould, Steven Jay Graham, Benjamin Greek mathematics Greenspan, Alan impact on stock and bond markets on irrational exuberance of investors growth investing vs. value investing growth stocks Grubman, Jack guessing games guilt and despair over market losses Hart, Sergiu “head and shoulders” pattern hedge funds herd-like nature, of stock market Hill, Ted How Nature Works (Bak) How We Know What Isn’t So (Gilovich) “The Imp in the Bottle” (Stevenson) In Search of Excellence (Peters) incompleteness theorem of mathematical logic index funds Efficient market theorists investing in as safe investment inflationary universe hypothesis Innumeracy (Paulos) insider trading attraction of stock manipulation by unexplained price movements and Institutional Investor insurance company example, expected value insurance put options interest rates, market predictability and internal rate of return Internet diameter (or interconnectedness) of “flocking effect,” as network of associations investment clubs investment strategies. see also predictability, of stock market based on Parrondo’s paradox contrarian investing dogs of the Dow fundamental analysis. see fundamental analysis momentum investing secrecy and value investing. see value investing investments. see also margin investments confirmation bias and considering utility of dollars invested vs. dollars themselves counter-intuitive emotions dictating guilt and despair over losses ignoring uniformity of positive ratings protective measures randomness vs. predictability and rumors and safe windfall money and investors. see also traders behavior as nonlinear systems beliefs of impact Efficient Market Hypothesis “blow up” and becoming “ghosts,” buying/selling puts on S&P common knowledge and gauging investors as important as gauging investments irrational exuberance/irrational despair online trading and price oscillation created by investor reactions to each other self description in bear and bull markets short-term IPOs alternative rates of return from as a pyramid scheme Salomon Smith Barney benefitting illegally from stock market in 1990s and strategy for buying and selling Jegadeesh, Narsimhan Jeong, Hawoong Judgment Under Uncertainty (Tversky, Kahneman, and Slovic) Kahneman, Daniel Keynes, John Maynard Kolmogorov, A.

 

pages: 479 words: 144,453

Homo Deus: A Brief History of Tomorrow by Yuval Noah Harari

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23andMe, agricultural Revolution, algorithmic trading, Anne Wojcicki, anti-communist, Anton Chekhov, autonomous vehicles, Berlin Wall, call centre, Chris Urmson, cognitive dissonance, Columbian Exchange, computer age, Deng Xiaoping, don't be evil, European colonialism, experimental subject, falling living standards, Flash crash, Frank Levy and Richard Murnane: The New Division of Labor, glass ceiling, global village, invention of writing, invisible hand, Isaac Newton, job automation, Kevin Kelly, means of production, Mikhail Gorbachev, Minecraft, Moneyball by Michael Lewis explains big data, mutually assured destruction, new economy, pattern recognition, Peter Thiel, placebo effect, Ray Kurzweil, self-driving car, Silicon Valley, Silicon Valley ideology, stem cell, Steven Pinker, telemarketer, too big to fail, trade route, Turing machine, Turing test, ultimatum game, Watson beat the top human players on Jeopardy!

A rational person offered a dollar will always say yes. What does he care if the other player gets $99? Classical economists have probably never left their laboratories and lecture halls to venture into the real world. Most people playing the Ultimatum Game reject very low offers because they are ‘unfair’. They prefer losing a dollar to looking like suckers. Since this is how the real world functions, few people make very low offers in the first place. Most people divide the money equally, or give themselves only a moderate advantage, offering $30 or $40 to the other player. The Ultimatum Game made a significant contribution to undermining classical economic theories and to establishing the most important economic discovery of the last few decades: Sapiens don’t behave according to a cold mathematical logic, but rather according to a warm social logic.

During the following years, despite all the hardships of war, these 60,000 armed men never revolted against him – indeed, many of them served him with exceptional courage, risking and even sacrificing their very lives. Why did the Egyptian peasants and Prussian soldiers act so differently than we would have expected on the basis of the Ultimatum Game and the capuchin monkeys experiment? Because large numbers of people behave in a fundamentally different way than do small numbers. What would scientists see if they conducted the Ultimatum Game experiment on two groups of 1 million people each, who had to share $100 billion? They would probably have witnessed strange and fascinating dynamics. For example, since 1 million people cannot make decisions collectively, each group might sprout a small ruling elite. What if one elite offers the other $10 billion, keeping $90 billion?

This is bad news for psychologists, sociologists, economists and others who try to decipher human society through laboratory experiments. For both organisational and financial reasons, the vast majority of experiments are conducted either on individuals or on small groups of participants. Yet it is risky to extrapolate from small-group behaviour to the dynamics of mass societies. A nation of 100 million people functions in a fundamentally different way to a band of a hundred individuals. Take, for example, the Ultimatum Game – one of the most famous experiments in behavioural economics. This experiment is usually conducted on two people. One of them gets $100, which he must divide between himself and the other participant in any way he wants. He may keep everything, split the money in half or give most of it away. The other player can do one of two things: accept the suggested division, or reject it outright. If he rejects the division, nobody gets anything.

 

pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Edward Glaeser, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Washington Consensus, white flight

A little bit of induction may have helped Nalebuff and his colleague recognize at the outset that real-world people do not act like the rational automatons that populate theorists’ models! Today, it is unlikely they would have made the same miscalculation. Experimental work has become much more common, and game theorists have a greater appreciation of where their standard predictions go wrong. Consider the “ultimatum game,” in which the calculations are reminiscent of the taxicab experience. Two players have to agree on how to share $100. One side makes a take-it-or-leave-it offer, which the other side either accepts or rejects. If the responder accepts, then each side receives what they agreed on. If he rejects, they both get nothing. If both players are “rational,” the first player will keep almost the entire $100 for himself, offering the other player a tiny share (perhaps just $1).

Most offers are in the range of $30–$50, and anything less is typically rejected by the responding player. Standard game theory has little predictive power for this game. That’s one reason why economists have moved to different types of models. Recent work in behavioral economics incorporates considerations of fairness and therefore is more applicable to real-life settings that resemble the ultimatum game. Lab experiments use human subjects, typically undergraduates, and have long been common in psychology. Thanks to these investigations, economists are learning more about what drives human behavior besides material self-interest, such as altruism, reciprocity, and trust. Models of competition and markets are being discarded or refined if their results are routinely violated in these experiments.

., 113–45 specific events explained by, 138–44 universal validity of, 114 time-inconsistent preferences, 62–63 “Time to Build and Aggregate Fluctuation” (Kydland and Prescott), 101n tipping points, 42 Tirole, Jean, 208–9 trade, 11, 87, 91, 136, 141, 182–83, 194 in business cycles, 127 comparative advantage in, 52–55, 58n, 59, 139, 170 computational models in tracking of, 41 current account deficits and, 153 general-equilibrium effects and, 41, 56–58, 69n, 91, 120 income inequality in, 139–40 liberalization of, 160, 162–63, 165, 169 outsourcing and, 149 public sector size and, 109–10 second-best theory applied in, 58–61, 163–64, 166 2x2 model of, 52–53 trade creation effect, 59 trade diversion effect, 59 trade unions, 124, 143 Transatlantic Trade and Investment Partnership (TTIP), 41 Transforming Traditional Agriculture (Schultz), 75n transportation, congestion pricing and, 2–3 Truman, Harry S., 151 tulip bubble, 154 Turkey, 166 Ulam, Stanislaw, 51 ultimatum game, 104 unemployment, 102 in business cycles, 125–37 classical view of, 126 in Great Recession, 153 wages and, 118, 150 see also employment Unger, Roberto Mangabeira, xi United States: comparative advantage principle and, 59–60, 139 deficit in, 149 educational vouchers in, 24 federal system in, 187 garment industry in, 57–58 Gold Standard in, 127 Great Depression in, 128 Great Recession in, 115, 134–35, 152–59 housing bubble in, 153–54, 156 immigration issue in, 56–57 income inequality in, 117, 124–25, 138–44 labor productivity and wages in, 123–24, 141 national debt in, 153 outsourcing in, 149 trade agreements of, 41 universal validity, 66–67 Uruguay, 86 validity, external vs. internal types of, 23–24 value, theories of, 117–21 Varian, Hal, 20 verbal models, 34 Vickrey, William, 2–3 Vietnam, 57–58 Vietnam War, 108 “Views among Economists: Professional Consensus or Point-Counterpoint?”

 

pages: 190 words: 61,970

Life You Can Save: Acting Now to End World Poverty by Peter Singer

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accounting loophole / creative accounting, Branko Milanovic, Cass Sunstein, clean water, experimental economics, illegal immigration, Martin Wolf, microcredit, Peter Singer: altruism, pre–internet, purchasing power parity, randomized controlled trial, Richard Thaler, Silicon Valley, Thomas Malthus, ultimatum game, union organizing

Bib Latane and John Darley, The Unresponsive Bystander (New York: Appleton-Century-Crofts, 1970), p. 58.1 am grateful to Judith Lichtenberg, “Famine, Affluence and Psychology,” in Jeffrey Schaller, ed., Peter Singer Under Fire (Chicago: Open Court, forthcoming 2009) both for suggesting the relevance of this research and for this and other references. 20. Bib Latane and John Darley, The Unresponsive Bystander, chapters 6 and 7. 21. There is a substantial literature on the ultimatum game. For a useful discussion, see Martin Nowak, Karen Page, and Karl Sigmund, “Fairness Versus Reason in the Ultimatum Game,” Science 2W (2000), pp. 1773-75. 22. S. F. Brosnan and F.B.M. de Waal, “Monkeys Reject Unequal Pay,” Nature 425 (September 18, 2003), pp. 297-99. 23. Kathleen Vohs, Nicole Mead, and Miranda Goode, “The Psychological Consequences of Money,” Science 314 (2006), pp. 1154-56. 24. Richard Titmuss, The Gifi Relationship: From Human Blood to Social Policy (London: Allen & Unwin, 1970). 25.

Imagine writing that first big check for UNICEF or Oxfam, and then running into your neighbors coming back from a winter vacation in the Caribbean, looking relaxed and tanned, and telling you about their great adventures sailing and scuba diving. How would you feel? So strong is our sense of fairness that, to prevent others getting more than their fair share, we are often willing to take less for ourselves. In the “ultimatum game,” two players are told that one of them, the proposer, will be given a sum of money, say $10, and must divide it with the second player, the responder, but how the money is divided is up to the proposer, who can offer as much or as little as she wishes. If the responder rejects the offer, neither will get anything. The game is played only once, and the players’ identities are not revealed, so their decisions will not be influenced by any thoughts of payback if they should meet again.

 

pages: 353 words: 98,267

The Price of Everything: And the Hidden Logic of Value by Eduardo Porter

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Asian financial crisis, Ayatollah Khomeini, banking crisis, barriers to entry, Berlin Wall, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, clean water, Credit Default Swap, Deng Xiaoping, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, Ford paid five dollars a day, full employment, George Akerlof, Gordon Gekko, guest worker program, happiness index / gross national happiness, housing crisis, illegal immigration, immigration reform, income inequality, income per capita, informal economy, invisible hand, Jean Tirole, John Maynard Keynes: technological unemployment, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, loss aversion, low skilled workers, Martin Wolf, means of production, Menlo Park, Mexican peso crisis / tequila crisis, new economy, New Urbanism, pension reform, Peter Singer: altruism, pets.com, placebo effect, price discrimination, price stability, rent-seeking, Richard Thaler, rising living standards, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, stem cell, Steve Jobs, Stewart Brand, superstar cities, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, transatlantic slave trade, transatlantic slave trade, ultimatum game, unpaid internship, urban planning, women in the workforce, World Values Survey, Yom Kippur War, young professional

They can be measured using an experiment called the Ultimatum Game. In this game, player A is given money and instructed to share it however she wants with player B. If B refuses, they both walk away empty-handed. If A behaved according to the dicta of economics, she would offer as little as possible and B would accept, on the grounds that it’s better than nothing. Both would end up better off. But people rarely exhibit this kind of behavior. In a series of experiments performed around the world, a group of social scientists encountered a wide array of strategies, reflecting different cultural attributes that seemed shaped to mesh with their specific societies. In the tropical forests of southern Perú, Machiguenga villagers playing the Ultimatum Game offered only 26 percent of their money, on average.

The statistic about Japan’s high prices comes from Robert Lipsey and Birgitta Swedenborg, “Explaining Product Price Differences Across Countries,” NBER Working Paper, July 2007. 165-168 Where Culture Comes From: Discussion of the economic implications of trust draws from Jeff Butler, Paola Giuliano, and Luigi Guiso, “The Right Amount of Trust,” CEPR Discussion Paper, September 2009; and the World Values Survey, 2005-2008 wave (www.wvsevsdb.com/wvs/WVSAnalizeSample.jsp, accessed 07/18/2010). Different views on the deformed lips of Mursi girls are from Mursi Online, Oxford University Department of International Development (www.mursi.org/); and Luigi Guiso, Paola Sapienza, and Luigi Zingales, “Does Culture Affect Economic Outcomes?,” Journal of Economic Perspectives, Vol. 20, Spring 2006, pp. 23-48. The results of experiments using the Ultimatum Game around the world are described in Joseph Heinrich et al., “ ‘Economic Man’ in Cross-Cultural Perspective: Behavioral Experiments in 15 Small-Scale Societies,” Behavioral and Brain Sciences, Vol. 28, 2005, pp. 795-855. The use of myth to manage caribou populations among the Chisasibi is described in Fikret Berkes, Sacred Ecology, 2nd edition (New York: Routledge, 2008), pp. 128-129. Data about cultural proximity between societies that share similar environments is found in Mathias Thoenig, Nicolas Maystre, Jacques Olivier, and Thierry Verdier, “Product-Based Cultural Change: Is the Village Global?

surplus survival Sweden, Swedes culture in The Pirate Bay and Swift, Jonathan Taiwan Tanzania, Tanzanians taxes energy faith and income taxicab drivers, tipping of Tea Party tea prices technology Digital Rights Management (DRM) information innovation and stocks ultrasound see also computers telenovelas telephone calls Televisa television advertising on television sets Templeton, Brad Tenenbaum, Joel Tennessee terrorism Texas, happiness in textile mills Tha Carter III (album) Thailand Thatcher, Margaret Theory of Economic Growth, The (Lewis) Theory of the Leisure Class (Veblen) The Pirate Bay tickets: airline for events time faith and free Times of India Time Warner tipping Titanic, lifeboats on TiVo tobacco see also smoking Togo trade barriers to traffic accidents Transportation Department, U.S. Trobriand Islands Truman, Harry trust faith and Turkey Turkmenistan twins, happiness of Ultimatum Game ultrasound technology unemployment United Airlines United Auto Workers United Kingdom United Nations United States carbon emissions of copyright in culture in divorce in drug abuse in free lunch in gas prices in happiness in health care in housing in illegal immigration to immigrant behavior in income and wages in life expectancy in music in 9/11 compensation in out-of-wedlock births in pharmaceutical industry in politics in polygamy in religion in safety issues in sex in sex ratios in slavery in speed limits in women’s work in work hours in vaccines value of women’s work Varian, Hal Veblen, Thorstein Veja Venables-Vernon, George, the second Baron Vernon vending machines versioning video recorders, digital Vietnam Vogue VoIP technology voting, voters wages executive faith and in Indonesia in London minimum of sports and pop stars time and of women see also income waiters, waitresses Waldfogel, Joel Wall Street Walmart Warner Bros.

 

pages: 462 words: 150,129

The Rational Optimist: How Prosperity Evolves by Matt Ridley

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23andMe, agricultural Revolution, air freight, back-to-the-land, banking crisis, barriers to entry, Bernie Madoff, British Empire, call centre, carbon footprint, charter city, clean water, cloud computing, cognitive dissonance, collateralized debt obligation, colonial exploitation, colonial rule, Corn Laws, credit crunch, David Ricardo: comparative advantage, decarbonisation, dematerialisation, demographic dividend, demographic transition, double entry bookkeeping, Edward Glaeser, en.wikipedia.org, everywhere but in the productivity statistics, falling living standards, feminist movement, financial innovation, Flynn Effect, food miles, Gordon Gekko, greed is good, Hans Rosling, happiness index / gross national happiness, haute cuisine, Hernando de Soto, income inequality, income per capita, Indoor air pollution, informal economy, invention of agriculture, invisible hand, James Hargreaves, James Watt: steam engine, Jane Jacobs, John Nash: game theory, joint-stock limited liability company, Joseph Schumpeter, Kevin Kelly, knowledge worker, Kula ring, Mark Zuckerberg, meta analysis, meta-analysis, mutually assured destruction, Naomi Klein, Northern Rock, nuclear winter, oil shale / tar sands, out of africa, packet switching, patent troll, Pax Mongolica, Peter Thiel, phenotype, Plutocrats, plutocrats, Ponzi scheme, Productivity paradox, profit motive, purchasing power parity, race to the bottom, Ray Kurzweil, rent-seeking, rising living standards, Silicon Valley, spice trade, spinning jenny, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, supervolcano, technological singularity, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, ultimatum game, upwardly mobile, urban sprawl, Vernor Vinge, wage slave, working poor, working-age population, Y2K, Yogi Berra

Generosity seems to come naturally, or rather, ungenerous behaviour is irrationally foolish, because the second player will – and does – consider a derisory offer worth rejecting, if only to punish the selfishness of the first player. The lesson of the ultimatum game and hundreds like it is that again and again people emerge from such experiments as nicer than you think. But the even more surprising lesson is that the more people are immersed in the collective brain of the modern commercial world, the more generous they are. As the economist Herb Gintis puts it, ‘societies that use markets extensively develop a culture of co-operation, fairness and respect for the individual’. His evidence comes from a fascinating study in which people in fifteen mostly small-scale tribal societies were enticed to play the Ultimatum Game. Those societies with the least experience of dealing with outsiders were the most hard-hearted, ungenerous and narrowly ‘rational’.

NIALL FERGUSON The Ascent of Money There is a scene in the film The Maltese Falcon in which Humphrey Bogart is about to be given $1,000 by Sydney Greenstreet and will have to share some of it with Mary Astor. Greenstreet whispers to Bogart that he’d like to give him a word of advice: that he assumes that Bogart is going to give her some of the money, but that if he does not give her as much as she thinks she ought to have, he should be careful. The scene prefigures a game, invented by Werner Guth in the late 1970s and much loved by economists, called the Ultimatum Game, which opens a little window into the human spirit. The first player is given some money and told to divide it with the second player. The second player is told he can accept or refuse the offer, but not change it. If he accepts, he receives the money; if he refuses, neither he nor the first player gets a penny. The question is, how much money should the first player offer the second player?

The Long-term Dynamics of European Homicide Rates in Theoretical Perspective The British Journal of Criminology 41:618-638. p. 85 ‘Greenstreet whispers to Bogart’. Siegfried, T. 2006. A Beautiful Math: John Nash, Game Theory and the Modern Quest for a Code of Nature. Joseph Henry Press. p. 86 ‘As the economist Herb Gintis puts it’. http://www.reason.com/news/show/34772.html. p. 86 ‘people in fifteen mostly small-scale tribal societies were enticed to play the Ultimatum Game’. Henrich, J. et al. 2005. ‘Economic man’ in crosscultural perspective: Behavioral experiments in 15 small-scale societies. Behavioral and Brain Sciences 28:795–815. p. 87 ‘costly punishment of selfishness may be necessary’. Fehr, E. and Gachter, S. 2000. Cooperation and punishment in public goods experiments. American Economic Review, Journal of the American Economic Association 90: 980–94; Henrich, J. et al. 2006.

 

pages: 518 words: 147,036

The Fissured Workplace by David Weil

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accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, business process, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, corporate governance, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, ultimatum game, union organizing, women in the workforce, Y2K, yield management

In contrast to assumptions of traditional economics that individuals maximize gains solely for themselves, a large empirical literature from psychology, decision science, and more recently behavioral economics reveals that people care not only about their own gains but also about those of others. In fact, people frequently gauge the magnitude of their own benefits relative to those of others. And they are often willing to sacrifice some of their own gains because of equally important beliefs about fairness. The “ultimatum game” is one of the best demonstrations of the importance of fairness in human interactions and has been extensively tested experimentally and in the field. The game is simple: two people are told there is a pot of money (say $10) to be split between them. One player gets the right to decide how to split it. The second player can accept or reject the first player’s decision. If the second player rejects it, no one receives anything.

Equally important, first players seem to understand this in advance, because they typically offer the second player between 40% and 50% of the pot.11 The results, which have been replicated many times in many different forms, attest to the importance of fairness, because they are based on one-round (nonrepeat) games where the incentives are high for the proposer to take as much as possible and for the responder to accept any offer. When ultimatum games are played in multiple-round scenarios, the incentives to share that pot only become higher. Fairness perceptions affect all kinds of real-world interactions and relationships. Relationships are an intrinsic part of the workplace, and fairness perceptions are therefore basic to how decisions are made within it. The factors driving wage setting arise not just from an employer’s consideration of the additional output a worker might provide if given a higher wage, but on the worker’s perceptions of the fairness of that wage.

For example, Daniel Kahneman, one of the pioneers of behavioral economics, showed that people’s perception of the fairness of a wage cut depends on why they feel it was done: cuts driven by increases in unemployment (and therefore more people looking for work) are viewed as unfair; a company that cuts wages because it is on the brink of bankruptcy is judged more favorably. Like the proposer in the ultimatum game, managers seem to understand this and seldom cut nominal wages in practice.12 Similarly, fairness considerations about compensation depend not only on how much I think I deserve to be paid on an absolute basis (given my experience, education, skills), but also on what I am paid relative to others. Who are relevant comparison groups? It depends on where I am when making the appraisal. If I am looking for a job, my assessment is based on what I see in the labor market—as predicted by traditional economic theory.

 

pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop, illegal immigration, income inequality, income per capita, invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey

The trend toward greater inequality is, if not yet unsustainable, well on its way to being so. THE FAIRNESS INSTINCT The evidence for the existence of a fairness instinct in humans comes from psychological experiments, evolutionary psychology, and primatology. Some of the experimental results have become well known, thanks to the fashion for behavioral economics. One example is the “ultimatum game.” One of two players is given some cash to divide between the two of them. The second player can take or leave the offer, but if he rejects it, neither of them gets any money. Typically, offers that are too low are rejected, with the threshold being about a quarter or a third, even though the second player punishes themselves as well as the insufficiently generous first player. Much has been made of the fact that this contradicts the assumption in economics of rational self-interest—taken to its logical conclusion, this would suggest the second player should accept even a cent as better than nothing.

See nature European Union, 42, 59, 62, 162–63, 177, 219 Evolution of Cooperation, The (Axelrod), 118–19 “Evolution of Reciprocal Altruism, The” (Trivers), 118 externalities, 15, 70, 80, 211, 228–29, 249, 254 Facebook, 289 face-to-face contact, 7, 147, 165–68 fairness: altruism and, 118–22; antiglobalization and, 115; bankers and, 115, 133, 139, 143–44; behavioral econoics and, 116–17, 121; bonuses and, 87–88, 115, 139, 143–44, 193, 221, 223, 277–78, 295; capitalism and, 134, 137, 149; consequences for growth, 135–36; criticism of poor and, 142; democracy and, 141; emotion and, 118–19, 137; game theory and, 116–18, 121–22; government and, 121, 123, 131, 136; gratitude and, 118; growth and, 114–16, 121, 125, 127, 133–37; happiness and, 53; health issues and, 137–43; high salaries and, 130, 143–44, 193, 223, 277–78, 286, 296; inequality and, 115–16, 122–43; innate sense of, 114–19; innovation and, 121, 134; morals and, 116–20, 127, 131, 142, 144, 221; philosophy and, 114–15, 123; politics and, 114–16, 125–31, 135–36, 140–44; productivity and, 131, 135; Putnam on, 140–41; self-interest and, 114–22; social corrosiveness of, 139–44; social justice and, 31, 43, 53, 65, 123, 164, 224, 237, 286; statistics and, 115, 138; superstar effect and, 134; sustainability and, 115; technology and, 116, 131–34, 137; tit-for-tat response and, 118–19; trilemma of, 13–14, 230–36, 275; trust and, 139–44, 150, 157, 162, 172, 175–76; ultimatum game and, 116–17; unequal countries and, 124–30; wage penalties and, 133; well-being and, 137–43; World Values Survey and, 139 Fama, Eugene, 221–22 faxes, 252 Federal Reserve, 145 Ferguson, Niall, 100–101 financial crises: actions by governments and, 104–12; bubbles and, 3 (see also bubbles); capitalism and, 6–9 (see also capitalism); contracts and, 149–50; crashes and, 3, 28, 161, 244, 283; current, 54, 85, 90–91, 145; debt legacy of, 90–92; demographic implosion and, 95–100; goodwill and, 150; government debt and, 100–104; Great Depression and, 3, 28, 35, 61, 82, 150, 208, 281; growth debt and, 85–86; historical perspective on, 3–4; institutional blindness to, 87–88; intangible assets and, 149–50; intrusive regulatory practices and, 244; pension burden of, 92–95; as political crisis, 8–9; statistics of, 145; stimulus packages and, 91, 100–103, 111; structural change and, 25; total cost of current, 90–91; trust and, 88–89 (see also trust); weightless activities and, 150; welfare burden of, 92–95 Financial Times, 257 Fitzgerald, F.

See also gross domestic product (GDP); measurement Stein, Herbert, 104 Stern, Nicholas, 29, 60–61, 68, 72–74, 82 Stevenson, Betsey, 41 stewardship, 78, 80, 275 Stiglitz, Joseph, 37, 82, 202, 274 stimulus packages, 91, 100–103, 111 Strumpf, Koleman, 197 suicide, 44, 51, 279 superstar effect, 134 sustainability: Brundtlandt Report and, 77; cradle-to-grave social systems and, 104; defining, 24, 77–78, 80; economic, 8, 85–86, 89–90, 98, 100, 102, 104–5, 108, 111, 113, 136, 177, 183–85, 203, 233–34, 240, 244, 248, 261, 293; environmental, 38, 56, 59, 62, 65, 69, 71, 76, 112–13, 233; fairness and, 115; government debt and, 102, 104–12; growth and, 53, 57, 80–86, 89–90, 98, 100; Index of Sustainable Economic Welfare (ISEW) and, 36; kinds of, 25; social, 54, 71, 79, 114–16, 143, 151, 233, 237 Sweden, 141, 143, 172, 251 Switzerland, 125 Tabellini, Guido, 136 tacit knowledge, 166 taxes, 3, 12, 15; business investment and, 295; fairness and, 123, 127–28, 131, 135–36, 144; Golden Rule for, 93; increased future, 286–87; happiness and, 22–25, 40, 43; inequality and, 115–16, 123, 127–28, 131, 135–36; infrastructure spending and, 93; luxury goods and, 23; Medicare and, 93–94; nature and, 62, 71; pension burden and, 92–95; policy recommendations for, 279, 282–86, 289–90, 293–97; posterity and, 85–91, 94, 99, 103–5, 111–13; Social Security and, 93–94; thrift education and, 294–95; trust and, 171–76, 182, 191, 203; values and, 229, 235, 245, 248, 258; wasteful spending and, 23; welfare burden and, 92–95 technology: access to, 36; Boskin Commission and, 37; call centers and, 131, 133, 161; cities and, 165–70; computers and, 156; consumer electronics and, 36–37; cultural suspicion of growth and, 26–29; data explosion and, 205, 291; decreased cost of, 254; electrification and, 155–56; electronic monitoring, 252–53; e-mail, 252; Enlightenment and, 7; fairness and, 116, 131–34, 137; faxes, 252; fractal character of, 134; general purpose, 157; globalization and, 7, 160–65; governance and, 173–77; growth and, 268, 270–77, 287–93, 297; Gutenberg press, 7; happiness and, 24–25, 35–37, 44, 53–54; impact of, 7–8, 24–25, 35, 37, 252–54; Industrial Revolution and, 27, 149, 290, 297; innovation and, 6–8 (see also innovation); institutions and, 244–46, 251–54, 257–63; Internet, 155, 195, 245, 260, 273, 287–89, 291, 296; labor and, 132; measurement and, 181–85, 188–91, 194–201, 204–6; Moore’s Law and, 156; music industry and, 194–98; nature and, 69–72, 76–77, 80, 84; new energy, 6; online empowerment and, 287–88, 296; policy recommendations for, 268, 270, 273–77, 287–93, 297; politics and, 7–8, 16–17, 288–89; posterity and, 107; productivity and, 107–8, 157–59, 268; public domain and, 196; reinvention and, 14; Renaissance and, 7; smart cards, 252–53; software, 253; steam power, 155–57; structural change and, 268; superstar effect and, 134; telephony, 252; trust and, 7–8, 151, 155–61, 165, 170, 173–77; values and, 212–13, 216, 218, 233–34, 237–38; voters and, 288–89 Thatcher, Margaret, 93, 121, 211, 240, 245, 247–48 Theory of Justice (Rawls), 31 Theory of Moral Sentiments, A (Smith), 120 Theory of the Leisure Class, The (Veblen), 22–23 Thomson, William (Lord Kelvin), 187 time: shortage of, 204–7; Slow Movement and, 27–28, 205 tragedy of the commons, 80 transparency, 83, 164, 288, 296 Treatise on Human Nature (Hume), 120 trilemmas, 13–14, 230–36, 275 Trivers, Robert, 118 Trollope, Anthony, 33 trust: bankers and, 88–89, 145–50, 158, 161–64, 174, 176, 257; causality and, 154; challenge of building, 170–73; cities and, 165–70; civic cooperation and, 154; decline in, 5, 139–44; democracy and, 175; diversity and, 170–73; doctors and, 247; economic importance of, 152–57; efficiency and, 158–59; face-to-face contact and, 7, 147, 165–68; fraud and, 146–47, 150, 248; General Social Survey and, 140; globalization and, 149–51, 157, 160–70; goodwill and, 150; governance and, 151, 162–65, 173–77, 255–58; government and, 150, 157, 162, 172, 175–76, 247; gross domestic product (GDP) and, 157, 160; growth and, 152–56, 160, 174; health issues and, 172; innovation and, 157; intangible assets and, 149–52, 157, 161; measurement of, 152–57; morals and, 149, 174; paradox of prosperity and, 174; Pew surveys and, 140; politics and, 154, 162–64, 173–77, 285–87; productivity and, 156–59, 162, 166–67, 170, 174; Putnam on, 140–41, 152–54; reform and, 162–64, 176–77; social capital and, 5, 151–57, 168–74, 177; specialization and, 160–61; statistics and, 154; teachers and, 247; technology and, 7–8, 151, 155–61, 165, 170, 173–77; voter turnout and, 175; weightless activities and, 150 Tullock, Gordon, 242 Turner, Ted, 33 Twitter, 289 Uganda, 147 ultimatum game, 116–17 unemployment, 3, 10, 43, 51, 56, 89, 107, 169, 207, 212–13, 243 unions, 15, 51, 224, 249 United Kingdom, 1, 4, 10, 66; bailouts and, 91; British Social Attitudes and, 140–41; Brown and, 93; debt of, 103–4; diversity and, 172; fairness and, 115–16, 122, 125–26, 130, 139–43; Glastonbury Festival and, 197; inequality in, 122, 125–30; institutions and, 240, 258, 260; measurement and, 198, 203, 206–7; National Health Service and, 285; National Statistics and, 203; negative savings rate in, 105; policy recommendations and, 280–88; posterity and, 93, 95, 103, 105, 111; public deliberation and, 258–59; public sector and, 248; retirement age and, 107; savings rate in, 280–82; Thatcher and, 93, 121, 211, 240, 245, 247–48; time surveys and, 206–8; trust and, 140–41, 146, 163, 168, 172; values and, 211, 223; Victorian Britain and, 28 United Nations, 297, 304n7; Brundtland Report and, 77; climate change and, 59, 62, 66, 77–78, 82–83; happiness and, 38; sustainable development and, 77; TEEB and, 78; trust and, 163–64, 176; values and, 219 United States, 4, 10, 16; additional growth in, 12; bifurcation of social norms and, 231–32; Boskin Commission and, 37; Bush and, 127–28; Cold War and, 93, 112, 147, 209, 213, 239; convergence and, 122; credibility and, 101; debt of, 101; defense budget of, 93; diversity and, 172; Easterlin Paradox and, 39–44; fairness and, 115–16, 121–22, 125–35, 140–43; Founding Fathers of, 31; happiness and, 37, 41–44; inequality in, 122, 125–31, 135, 276; institutions and, 240, 243, 251, 256, 258, 260; Kyoto Protocol and, 62; measurement and, 184, 191, 203, 206; nature and, 55, 62–63, 66; Obama and, 62, 87, 173, 260, 285, 288; policy recommendations and, 276–77, 280–88, 291; posterity and, 91–93, 97, 101, 105, 109; public deliberation and, 258–59; Reagan and, 93, 121, 127, 211, 240, 243, 247–48; savings rate in, 105, 280–82; small public sector of, 243; stimulus packages and, 91; time surveys and, 206–8; trust and, 140, 149, 171–75; values and, 209, 211, 223, 226; voter turnout and, 175; wage penalties and, 133 University of California, Berkeley, 205 University of East Anglia, 67 University of Sheffield, 224 Unto This Last (Ruskin), 27–28 U.S.

 

pages: 190 words: 53,409

Success and Luck: Good Fortune and the Myth of Meritocracy by Robert H. Frank

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Amazon Mechanical Turk, American Society of Civil Engineers: Report Card, attribution theory, availability heuristic, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, carried interest, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, en.wikipedia.org, endowment effect, experimental subject, framing effect, full employment, hindsight bias, If something cannot go on forever, it will stop, income inequality, invisible hand, labor-force participation, labour mobility, lake wobegon effect, loss aversion, minimum wage unemployment, Network effects, Report Card for America’s Infrastructure, Richard Thaler, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Rory Sutherland, side project, sovereign wealth fund, Steve Jobs, The Wealth of Nations by Adam Smith, Tim Cook: Apple, ultimatum game, Vincenzo Peruggia: Mona Lisa, winner-take-all economy

Both cognitive errors also make it more difficult to raise the revenue needed to sustain the environments we were lucky to be born into. That’s because overlooking luck’s role makes those who’ve succeeded at the highest levels feel much more entitled to keep the lion’s share of the income they’ve earned. One piece of evidence for this claim comes from laboratory experiments involving bargaining games that are played between strangers. One version, the “ultimatum game,” has two players, the proposer and the responder. The proposer is given a sum of money—say $100—and told to propose a division of it between himself and the responder. Any combination that adds up to $100 is allowed, provided the responder is offered at least $1. The responder can then either accept the offer, in which case the money is distributed as proposed; or he can reject it, in which case the $100 goes back to the experimenter and each player gets zero.

., 4 Romney, Mitt, 84 RJR Nabisco, 51 Rosen, Sherwin, 46 S&P 500, 53 sadism, 122 Safer, Morley, 137 Sagan, Carl, 67 sales tax, 158, 159 Salomon Brothers, xiii same-sex marriage, 106–8 Sams, Jack, 35 Samuelson, Paul, 71 Saracini, Kirsten, 135 SATs, 32, 88 Scandinavian countries, 20 Schwartz, Barry, 48 Schwarzman, Stephen, 103, 104, 106 Scrabble, 82 Seattle Computer Products, 35 Seles, Monica, 46 self-control problems, 75–77 self-interest, 130 Seligman, Martin, 102 shipping costs, 42 60 Minutes, 135 skill premium, 53 Slate, 117 Smith, Adam, 52, 115, 132 Smith College, 58 Sony, 44 Soviet Union collapse, 107 Spanish National Lottery, 69 Stanford University, xv, 70 starve the beast strategy, 97 Stein, Herb, 105 Stewart, Rod, 103 student debt, 87 Success Equation, The, 69 sudden cardiac death/arrest, 2, 147 Supreme Court campaign finance rulings, 104 Surowiecki, James, 103 Sutton, Willie, 98 Switzerland, 20 tailwinds, 80, 81 Taleb, Nassim Nicholas, 72 Tangier, 87 tariff barriers, 42 tax accounting, 9, 43 tax resistance, 107 taxable consumption, 118, 159 taxation as theft, 96, 97 Thaler, Richard, 177 Tierney, John, 75 toil index, 113, 114 top marginal tax rates, declining, 88, 89 track and field records, 63, 64 Transparency International, 19 Tudor, Fredric, 36, 37 Turbo Tax, 10 Tversky, Amos, 70 Uffizi Gallery, 22 ultimatum game, 93–95 University of California at Berkeley, xv, 25, 137 University of Wisconsin, 25 Unlimited Savings Allowance Tax, 126 Valenti, Aurora, 19 value-added tax, 158, 159 Varney, Stuart, 3, 4, 7 VHS, 44, 45 Viard, Alan, 127 Wall Street, xiii Warren, Elizabeth, 12 waste, defined, 16 Watts, Duncan, 22, 23, 30, 31 Wealth of Nations, 52, 132 wedding costs, 14, 110, 111 Wedding March, 106 Weightman, Gavin, 37 White, E.

 

pages: 1,351 words: 385,579

The Better Angels of Our Nature: Why Violence Has Declined by Steven Pinker

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1960s counterculture, affirmative action, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, availability heuristic, Berlin Wall, Bonfire of the Vanities, British Empire, Broken windows theory, California gold rush, Cass Sunstein, citation needed, clean water, cognitive dissonance, colonial rule, Columbine, computer age, conceptual framework, correlation coefficient, correlation does not imply causation, crack epidemic, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, demographic transition, desegregation, Doomsday Clock, Douglas Hofstadter, Edward Glaeser, en.wikipedia.org, European colonialism, experimental subject, facts on the ground, failed state, first-past-the-post, Flynn Effect, food miles, Francis Fukuyama: the end of history, fudge factor, full employment, ghettoisation, Gini coefficient, global village, Henri Poincaré, impulse control, income inequality, informal economy, invention of the printing press, Isaac Newton, lake wobegon effect, libertarian paternalism, loss aversion, Marshall McLuhan, McMansion, means of production, mental accounting, meta analysis, meta-analysis, Mikhail Gorbachev, mutually assured destruction, open economy, Peace of Westphalia, Peter Singer: altruism, QWERTY keyboard, race to the bottom, Ralph Waldo Emerson, random walk, Republic of Letters, Richard Thaler, Ronald Reagan, Rosa Parks, Saturday Night Live, security theater, Skype, Slavoj Žižek, South China Sea, statistical model, stem cell, Steven Levy, Steven Pinker, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, theory of mind, transatlantic slave trade, transatlantic slave trade, Turing machine, ultimatum game, uranium enrichment, V2 rocket, Walter Mischel, WikiLeaks, women in the workforce

Self-help justice: Black, 1983; Daly & Wilson, 1988. 194. Vengeful anger as a recalibration mechanism: Sell, Tooby, & Cosmides, 2009. 195. Target must know he has been singled out: Gollwitzer & Denzler, 2009. 196. Audience effects on revenge: Bolton & Zwick, 1995; Brown, 1968; Kim, Smirth, & Brigham, 1998. 197. Audience effects on fights: Felson, 1982. 198. Ultimatum game: Bolton & Zwick, 1995; Fehr & Gächter, 2000; Ridley, 1997; Sanfey et al., 2003. 199. Ultimatum game in the scanner: Sanfey et al., 2003. 200. Moralization Gap and escalation of revenge: Baumeister, 1997. 201. Boys in backseat: D. Gilbert, “He who cast the first stone probably didn’t,” New York Times, Jul. 24, 2006. 202. Two eyes for an eye: Shergill, Bays, Frith, & Wolpert, 2003. 203. Just deserts as justification of criminal punishment: Kaplan, 1973. 204.

Experiments have shown that people punish more severely, even at a price that is greater than the amount out of which they have been cheated, when they think an audience is watching.196 And as we saw, men are twice as likely to escalate an argument into a fight when spectators are around.197 The effectiveness of revenge as a deterrent can explain actions that are otherwise puzzling. The rational actor theory, popular in economics and political science, has long been embarrassed by people’s behavior in yet another game, the Ultimatum game.198 One participant, the proposer, gets a sum of money to divide between himself and another participant, the acceptor, who can take it or leave it. If he leaves it, neither side gets anything. A rational proposer would keep the lion’s share; a rational respondent would accept the remaining crumbs, no matter how small, because part of a loaf is better than none. In actual experiments the proposer tends to offer almost half of the jackpot, and the respondent doesn’t settle for much less than half, even though turning down a smaller share is an act of spite that punishes both participants.

In actual experiments the proposer tends to offer almost half of the jackpot, and the respondent doesn’t settle for much less than half, even though turning down a smaller share is an act of spite that punishes both participants. Why do actors in these experiments behave so irrationally? The rational actor theory had neglected the psychology of revenge. When a proposal is too stingy, the respondent gets angry—indeed, the neuroimaging study I mentioned earlier, in which the insula lit up in anger, used the Ultimatum game to elicit it.199 The anger impels the respondent to punish the proposer in revenge. Most proposers anticipate the anger, so they make an offer that is just generous enough to be accepted. When they don’t have to worry about revenge, because the rules of the game are changed and the acceptor has to accept the split no matter what (a variation called the Dictator game), the offer is stingier.

 

pages: 313 words: 95,077

Here Comes Everybody: The Power of Organizing Without Organizations by Clay Shirky

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Andrew Keen, Berlin Wall, bioinformatics, Brewster Kahle, c2.com, crowdsourcing, en.wikipedia.org, hiring and firing, hive mind, Howard Rheingold, Internet Archive, invention of agriculture, invention of movable type, invention of the printing press, invention of the telegraph, jimmy wales, Kuiper Belt, lump of labour, Mahatma Gandhi, means of production, Merlin Mann, Nash equilibrium, Network effects, Nicholas Carr, Picturephone, place-making, Pluto: dwarf planet, prediction markets, price mechanism, prisoner's dilemma, profit motive, Richard Stallman, Ronald Coase, Silicon Valley, slashdot, social software, Stewart Brand, supply-chain management, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, transaction costs, ultimatum game, Yogi Berra

Yochai Benkler, a legal scholar and network theorist and author of The Wealth of Networks, calls nonmarket creation of group value “commons-based peer production” and draws attention to the ways people are happy to cooperate without needing financial reward. Wikipedia is peer production par excellence, set up to allow anyone who wants to edit an article to do so, for any and all reasons except getting paid. There’s an increasing amount of evidence, in fact, that specific parts of our brain are given over to making economically irrational but socially useful calculations. In one well-known experiment, called the Ultimatum game, two people divide ten dollars between them. The first person is given the money and can then divide it between the two of them in any way he likes; the only freedom the second person has is to take or leave the deal for both of them. Pure economic rationality would suggest that the second person would accept any split of the money, down to a $9.99-to-$.01 division, because taking even a penny would make him better off than before.

See also Twitter Thailand, 2006 military coup Thurmond, Strom Tit-for-Tat strategy Torvalds, Linus Tragedy of the Commons transaction costs collapse, collective action and communities of practice and defined and e-mail fitness landscape and group activities and hierarchies and intersection with power law distributions of participation Linux and need for bargains new social tools and in organizations social capital and Stay at Home Moms Meetup group example travel, communications tools as substitute Trithemius, Johannes trolling Trow, George W.S. Twitter Tyler, Josh Ultimatum game Unix U.S. Army, as hierarchical institution USA Today user-generated content Viegas, Fernanda Voice of the Faithful (VOTF) Wales, Jimmy Wasik, Bill Watkins, Sherron Wattenberg, Martin Watts, Duncan weblogs. See also LiveJournal as alternative to publishing audience for audio Boing Boing Coalition for an Airline Passengers’ Bill of Rights as example of Small World networks flash mobs and initial development interactivity potential journalistic privilege and mass amateurization and vs. newspapers participation imbalance power law distribution and role in 2006 Thailand military coup scale issue social limits as social tool stolen Sidekick and vs.

 

pages: 405 words: 130,840

The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom by Jonathan Haidt

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crack epidemic, delayed gratification, feminist movement, Ignaz Semmelweis: hand washing, invisible hand, job satisfaction, Lao Tzu, meta analysis, meta-analysis, Peter Singer: altruism, placebo effect, prisoner's dilemma, Ralph Waldo Emerson, stem cell, Steven Pinker, telemarketer, the scientific method, ultimatum game, Walter Mischel

T h e "organ" is a metaphor—nobody expects to find an isolated blob of brain tissue the only function of which is to enforce reciprocity. However, recent evidence suggests that there really could be an e x c h a n g e organ in the brain if we loosen the meaning of "organ" and allow that f u n c - tional systems in the brain are often c o m p o s e d of widely separated bits of neural tissue that work together to do a specific job. S u p p o s e you were invited to play the "ultimatum" game, which economists invented16 to study the tension between fairness and greed. It goes like this: Two people c o m e to the lab but never meet. T h e experimenter gives one of them—let's suppose it's not you—twenty one-dollar bills a n d asks her to divide them between the two of you in any way she likes. S h e then gives you an ultimatum: Take it or leave it. T h e catch is that if you leave it, if you say no, you both get nothing.

.- Imagination, Cognition, and personality, 9, 1 85—21 1. Sampson, R. J. (1993). Family management and child development: Insights from social disorganization theory. Vol. 6 of J. McCord (Ed.), Advances in criminological theory (pp. 63—93). New Brunswick, NJ : Transaction Press. Sanfey, A. G., Rilling, J. K., Aronson, J. A., Nystrom, L. E., & C o h e n , J. D. (2003). The neural basis of economic decision-making in the ultimatum game. Science, 300, 1755-1758. Sartre, J. P. (1989/1944). No exit and three other plays. (S. Gilbert, Trans.). New York: Vintage International. Schatzberg, A. F„ Cole, J. O., 8c DeBattista, C. (2003). Manual of Clinical Psychopharmacology, (4th Ed.). Washington, D C : American Psychiatric Publishing. Schkade, D. A., 8c Kahneman, D. (1998). Does living in California make people happy? A focusing illusion in judgments of life satisfaction.

 

pages: 411 words: 80,925

What's Mine Is Yours: How Collaborative Consumption Is Changing the Way We Live by Rachel Botsman, Roo Rogers

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Airbnb, barriers to entry, Bernie Madoff, bike sharing scheme, Buckminster Fuller, carbon footprint, Cass Sunstein, collaborative consumption, collaborative economy, Community Supported Agriculture, credit crunch, crowdsourcing, dematerialisation, disintermediation, en.wikipedia.org, experimental economics, George Akerlof, global village, Hugh Fearnley-Whittingstall, information retrieval, iterative process, Kevin Kelly, Kickstarter, late fees, Mark Zuckerberg, market design, Menlo Park, Network effects, new economy, new new economy, out of africa, Parkinson's law, peer-to-peer lending, Ponzi scheme, pre–internet, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Robert Shiller, Robert Shiller, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Simon Kuznets, Skype, slashdot, smart grid, South of Market, San Francisco, Stewart Brand, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thorstein Veblen, Torches of Freedom, transaction costs, traveling salesman, ultimatum game, Victor Gruen, web of trust, women in the workforce, Zipcar

How does a system that shuttles vast quantities of used goods among distant strangers work so well? For decades behavioral economists wondered whether our sense of fairness is as much a part of human nature as is our obvious sense of competition. The answer to this question is critical to redistribution markets. People’s ability to determine what is fair and what is not plays a big role in making these peer-to-peer reuse systems work. In the “ultimatum game,” the classic experiment in behavioral economics that attempts to understand how fairness works, two people are paired together. Player A, randomly assigned, is known as the proposer. He or she is handed a sum of ten $1 bills (the total amount is irrelevant). The proposer’s job is to decide how the $10 should be split and to make an offer. No dialogue or negotiation between the players is allowed.

 

pages: 208 words: 67,582

What About Me?: The Struggle for Identity in a Market-Based Society by Paul Verhaeghe

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Berlin Wall, call centre, cognitive dissonance, deskilling, epigenetics, Fall of the Berlin Wall, Francis Fukuyama: the end of history, income inequality, invisible hand, jimmy wales, job satisfaction, knowledge economy, knowledge worker, Louis Pasteur, market fundamentalism, Milgram experiment, new economy, post-industrial society, Richard Feynman, Richard Feynman, Silicon Valley, stem cell, The Spirit Level, ultimatum game, working poor

The human variant is a decision taken online by anonymous shareholders that has extremely negative consequences for unseen workers. Modern warfare is an even better example: when you’re looking at a screen, killing isn’t so very different from playing computer games. Even the consoles are identical.) Interestingly, the above two experiments were based on an economic experiment involving human participants, known as the ultimatum game. Two players take part. One of them can decide how a sum of money is to be divided between them. The other can either accept or reject the proposal; if it is rejected, neither gets anything. Note that neither player has to do anything to get the money; it’s just about distribution. Time and again, it emerges that the second player would rather go empty-handed than accept a proposal whereby he or she gets a little and the other gets a lot, ‘because that isn’t fair’.

 

pages: 265 words: 69,310

What's Yours Is Mine: Against the Sharing Economy by Tom Slee

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4chan, Airbnb, Amazon Mechanical Turk, asset-backed security, barriers to entry, Berlin Wall, big-box store, bitcoin, blockchain, citizen journalism, collaborative consumption, congestion charging, Credit Default Swap, crowdsourcing, data acquisition, David Brooks, don't be evil, gig economy, Hacker Ethic, income inequality, informal economy, invisible hand, Jacob Appelbaum, Jane Jacobs, Jeff Bezos, Khan Academy, Kibera, Kickstarter, license plate recognition, Lyft, Mark Zuckerberg, move fast and break things, natural language processing, Netflix Prize, Network effects, new economy, Occupy movement, openstreetmap, Paul Graham, peer-to-peer lending, Peter Thiel, pre–internet, principal–agent problem, profit motive, race to the bottom, Ray Kurzweil, recommendation engine, rent control, ride hailing / ride sharing, sharing economy, Silicon Valley, Snapchat, software is eating the world, South of Market, San Francisco, TaskRabbit, The Nature of the Firm, Thomas L Friedman, transportation-network company, Uber and Lyft, Uber for X, ultimatum game, urban planning, WikiLeaks, winner-take-all economy, Y Combinator, Zipcar

People giving blood for social reasons will naturally avoid giving if they do not meet the blood system’s requirements, but people giving for money are more likely to give even if their blood may be dangerous to recipients. Screening becomes far more important. There are many other examples where money and gifts are not interchangeable. Sending flowers after a date means one thing, leaving a $50 bill means something else. Offering someone money to step ahead of them in a supermarket queue is unlikely to be successful. Paying money for votes is incompatible with the democratic process. The “Ultimatum Game,” a simple two-player exercise that illustrates cultural notions of fairness, shows why alienation increases along with the money involved. In this game, a pot of $100 is assigned to one player, who must make a take-it-or-leave-it offer of a portion of the pot to a second player. The size of the offer is up to the first player. If the second player accepts the offer then both take their portion of the pot, but if the second player rejects the offer then the pot must be returned and both players are left penniless.

 

pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

Standard economic theory provides a clear prediction: the first player keeps all of the $100 for himself. Yet in practice, the first player gives the second something, though usually less than half.14 A related experiment gives even stronger evidence of the importance that individuals attach to fairness: most individuals would rather accept an inefficient outcome—even hurting themselves—than an unfair one. In what is known as the ultimatum game, the second player has the right to veto the division proposed by the first player. If the second player exercises his veto, neither party gets anything. Standard economic theory suggests a clear strategy: the first player keeps 99 dollars for himself, giving 1 dollar to the other player, who accepts it, because 1 dollar is better than zero. In fact, offers typically average about 30 to 40 dollars (or 30–40 percent of the total sum in a game with different quantities), and the second player tends to veto the allocation if he is offered less than 20 dollars.15 He is willing to accept some inequity—he realizes he is in the less powerful position—but there is a limit to how much inequity he will stand for.

It shows that fairness is construed not, or not only, in terms of what the other player gets, but also in terms of what the other player gets relative to his worst possible outcome. The realization that he could abuse the second player even more, by taking something from him, makes the first player feel better about a more unfair division. See List, “On the Interpretation of Giving in Dictator Games,” Journal of Political Economy 115, no. 3 (2007): 482–93. 15. For a discussion of these outcomes (and the sums people will accept or veto in ultimatum games), see Colin Camerer and Richard Thaler, “Anomalies: Ultimatums, Dictators and Manners,” Journal of Economic Perspectives 9, no. 2 (1995): 209–19. 16. For a sample of the large literature, see, e.g., Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness and the Assumptions of Economics,” Journal of Business 59, no. 4 (1986): S285–S300; Gary E. Bolton and Axel Ockenfels, “ERC: A Theory of Equity, Reciprocity, and Competition,” American Economic Review 90, no. 1 (March 2000): 166–93; Armin Falk, Ernst Fehr, and Urs Fischbacher, “On the Nature of Fair Behavior,” Economic Inquiry 41, no. 1 (January 2003): 20–26; Daniel Kahneman, Jack L.

 

The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank

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carbon footprint, carried interest, Cass Sunstein, clean water, congestion charging, corporate governance, deliberate practice, full employment, income inequality, invisible hand, Plutocrats, plutocrats, positional goods, profit motive, Ralph Nader, rent control, Richard Thaler, Ronald Coase, Ronald Reagan, sealed-bid auction, smart grid, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, trickle-down economics, ultimatum game, winner-take-all economy

The first fan is probably guilty of a cognitive error. People typically seem to regret the decisions they make on the basis of such errors once they become aware of them. Under the “.  .  .  without Regret” heading, I listed studies that describe departures from the predictions of standard rational choice models that people do not seem to regret. A case in point is the way people typically react to one-sided offers in the so-called ultimatum game. In this game, the experimenter gives one subject some money—say, $100—and then tells him to propose a division of that sum between himself and a second subject. If the second accepts, each walks away with the amount proposed. For instance, if the first proposes “$60 for me and $40 for you” and the second accepts, the first gets $60 and the second gets $40. But here’s the twist: if the second subject rejects the proposal, the $100 reverts to the experimenter, and each subject receives nothing.

 

pages: 302 words: 83,116

SuperFreakonomics by Steven D. Levitt, Stephen J. Dubner

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agricultural Revolution, airport security, Andrei Shleifer, Atul Gawande, barriers to entry, Bernie Madoff, call centre, clean water, cognitive bias, collateralized debt obligation, credit crunch, Daniel Kahneman / Amos Tversky, deliberate practice, disintermediation, endowment effect, experimental economics, food miles, indoor plumbing, John Nash: game theory, Joseph Schumpeter, loss aversion, Louis Pasteur, market design, microcredit, Milgram experiment, oil shale / tar sands, patent troll, presumed consent, price discrimination, principal–agent problem, profit motive, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, South China Sea, Stephen Hawking, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, ultimatum game, urban planning, women in the workforce, young professional

., 16 Teller, Edward, 181 terrorism aftereffects of, 66 and banks, 89–95 bio-, 74 costs of, 65–66, 87 definitions of, 63–64 effectiveness of, 65 prevention of, 87–92 purpose of, 64 terrorists biographical background of, 62–63 goals of, 63–64 identification of possible, 90–95 and life insurance, 94 methods used by, 88 and profiles of, 90–95 revolutionaries as different from, 63–64 See also September 11, 2001 Thirty-Eight Witnesses (Rosenthal), 126 Thomas, Frank, 116 Time magazine, shark story in, 14 Title IX, 22 “To Err Is Human” (Institute of Medicine report), 204 “too big to fail,” 143 traffic deaths, 65–66, 87 trash-pickup fees, 139 trees, and climate, 186 trimmers, price of, 35 trophy wives, 52–53 Trotsky, Leon, 63 trust and altruism, 116,117 and baseball card experiment, 116,117 typical behavior, 13–14,15–16 Uganda, babies in, 57–58 Ultimatum (game), 108–9, 110, 113 unintended consequences, law of, 6–8, 12, 138–41 United Kingdom banks in, 89–95 climate change in, 166 University of Chicago List appointment at, 118 MBA study of graduates of, 45–46 urban planning conference, and horse problem, 10 users versus sellers, 25–26 Variable X, 95 Vaux, Calvert, 42 Venkatesh, Sudhir, 26, 28, 29, 30, 32–37, 38, 40–42, 70–71 Vice Commission, Chicago, 23–24, 26 Vienna General Hospital (Austria), 137–38, 203–4 Vietnam War, 146 violence and prostitutes, 38 visas, 66 volcanic eruptions, 176–77, 188–90, 192 volunteers, in experiments, 121 Vonnegut, Bernard, 191 Vonnegut, Kurt, 191 wages and gender issues, 21–22, 44, 45–47 as incentives, 46–47 and sex-change operations, 47–48 teachers and, 44 walking, drunk, 2–3, 12, 14, 96 “war on drugs,” 25 warm-glow altruism, 124 washing hands, 203–8, 209 Washington, D.C., shootings in, 64, 66 Washington Hospital Center emergency medicine at, 66–73, 75, 81 and September 11, 66–67, 68 Weber, Christopher, 167 Weitzman, Martin, 11, 12, 169 welfare program, data about, 27–28 whaling, 142–43 white slavery, 23 wind farms, 187 wind-powered fiberglass boats, 202 Wiswall, Matthew, 48 women as CEOs, 44–45 difficulties of, 20–22 discrimination against, 21–22, 45 as doctors, 80–81 as dominant in prostitution, 23–26, 40 and feminist revolution, 43–44 in India, 3–8, 14 men compared with, 20–21 as prostitutes, 54–55 shift in role of, 43–44 in sports, 22 as teachers, 43, 44 wages for, 21–22, 44, 45–46 Women’s National Basketball Association (WNBA), 22 Wood, Lowell, 181,182,184–85,186, 192,194,197,198–99 World Health Organization (WHO), 5 World Trade Center, 15 World War II, use of data in, 147 Yale-New Haven Hospital, monkey experiment at, 212–16 Zelizer, Viviana, 200 Zimbardo, Philip, 123 Zyzmor, Albert, 59 About the Authors STEVEN D.

 

pages: 412 words: 115,266

The Moral Landscape: How Science Can Determine Human Values by Sam Harris

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Albert Einstein, banking crisis, cognitive bias, endowment effect, energy security, experimental subject, framing effect, hindsight bias, impulse control, John Nash: game theory, loss aversion, meta analysis, meta-analysis, out of africa, pattern recognition, placebo effect, Ponzi scheme, Richard Feynman, Richard Feynman, risk tolerance, stem cell, Stephen Hawking, Steven Pinker, the scientific method, theory of mind, ultimatum game, World Values Survey

., & Smith, S. (2002). Improved optimization for the robust and accurate linear registration and motion correction of brain images. Neuroimage, 17 (2), 825–841. Jenkinson, M., & Smith, S. (2001). A global optimisation method for robust affine registration of brain images. Med Image Anal, 5 (2), 143–156. Jensen, K., Call, J., & Tomasello, M. (2007). Chimpanzees are rational maximizers in an ultimatum game. Science, 318 (5847), 107–109. Jensen, K., Hare, B., Call, J., & Tomasello, M. (2006). What’s in it for me? Self-regard precludes altruism and spite in chimpanzees. Proc Biol Sci, 273 (1589), 1013–1021. Johnson, S. A., Stout, J. C., Solomon, A. C., Langbehn, D. R., Aylward, E. H., Cruce, C. B., et al. (2007). Beyond disgust: Impaired recognition of negative emotions prior to diagnosis in Huntington’s disease.

 

pages: 685 words: 203,949

The Organized Mind: Thinking Straight in the Age of Information Overload by Daniel J. Levitin

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airport security, Albert Einstein, Amazon Mechanical Turk, Anton Chekhov, big-box store, business process, call centre, Claude Shannon: information theory, cloud computing, cognitive bias, complexity theory, computer vision, conceptual framework, correlation does not imply causation, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, en.wikipedia.org, epigenetics, Eratosthenes, Exxon Valdez, framing effect, friendly fire, fundamental attribution error, Golden Gate Park, Google Glasses, haute cuisine, impulse control, index card, indoor plumbing, information retrieval, invention of writing, iterative process, jimmy wales, job satisfaction, Kickstarter, life extension, meta analysis, meta-analysis, more computing power than Apollo, Network effects, new economy, Nicholas Carr, optical character recognition, pattern recognition, phenotype, placebo effect, pre–internet, profit motive, randomized controlled trial, Skype, Snapchat, statistical model, Steve Jobs, supply-chain management, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Turing test, ultimatum game

A fire isn’t put out by the fire chief This section borrows liberally from Simon, H. A. (1957). Administrative behavior: A study of decision-making processes in administrative organization (2nd ed.). New York, NY: Macmillan, p. 2. including the insula and amygdala Sanfey, A. G., Rilling, J. K., Aronson, J. A., Nystrom, L. E., & Cohen, J. D. (2003). The neural basis of economic decision-making in the ultimatum game. Science, 300(5626), 1755–1758. responsible for the fight-or-flight response Basten, U., Biele, G., Heekeren, H. R., & Fiebach, C. J. (2010). How the brain integrates costs and benefits during decision-making. Proceedings of the National Academy of Sciences, 107(50), 21767–21772. we bring to decision-making is partly illusory de Waal, F. B. M. (2008). How selfish an animal? The case of primate cooperation.

 

pages: 687 words: 189,243

A Culture of Growth: The Origins of the Modern Economy by Joel Mokyr

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Andrei Shleifer, barriers to entry, Berlin Wall, clockwork universe, cognitive dissonance, Copley Medal, David Ricardo: comparative advantage, delayed gratification, deliberate practice, Deng Xiaoping, Edmond Halley, epigenetics, Fellow of the Royal Society, financial independence, framing effect, germ theory of disease, Haber-Bosch Process, hindsight bias, income inequality, invention of movable type, invention of the printing press, invisible hand, Isaac Newton, Jacquard loom, Jacquard loom, Jacques de Vaucanson, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, knowledge economy, labor-force participation, land tenure, law of one price, Menlo Park, moveable type in China, new economy, phenotype, price stability, principal–agent problem, rent-seeking, Republic of Letters, Ronald Reagan, South Sea Bubble, statistical model, the market place, The Structural Transformation of the Public Sphere, The Wealth of Nations by Adam Smith, transaction costs, ultimatum game, World Values Survey, Wunderkammern

This work has successfully addressed a whole set of issues of supreme importance to economists such as household behavior and female labor force participation, corruption, and migration (Fernández, 2011). It also draws heavily on experimental data, which suggest that culture modifies behavior in many ways that qualify and nuance the standard economic assumptions of individual utility maximization in such obvious set-ups as simple ultimatum games (Bowles, 2004, pp. 110–19). A recent essay by Rodrik (2014, p. 189) complains that ideas are “strangely absent” from modern models of political econom—but the same might be said about models of economic growth and innovation, though recent work has made a beginning at coming to grips with the cultural roots of these phenomena (Spolaore and Wacziarg, 2013). Most research by economists on culture as they see it focuses primarily on social attitudes, beliefs, and preferences supporting informal and formal institutions that increase cooperation, reciprocity, trust, and the efficient operation of the economy (Guiso, Sapienza, and Zingales, 2008; Bowles and Gintis, 2011).