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Powerful Tools for Interpersonal Decisions

Emotional reactions are soon to be part of the outcomes of games, something wrapped into the utility values assigned those outcomes. Emotion isn’t seen as something that should shape the strategies players taken games, but emotion does matter.

Emotions, powerful tools for interpersonal decisions

In 2000 the state of Colorado passed legislation that set a maximum loan rate that payday lenders could charge. The assumption was that setting the maximum rate with lower rates overall, but exactly the opposite happened: rates went up. Before the legislation passed, the market in these loans was competitive. Different lenders would undercut each other.

They’d rather everyone charge high loan rates but they wouldn’t just raise their own rates unilaterally. Then, when the new law passed the maximum loan rate established a focal point and lenders could collude by all charging that same maximum rate. This collusion was most pronounced in the larger market. Before they had been the most competitive but now the lenders could coordinate on their pricing.

Our emotions also provide a powerful tool for interpersonal decisions. I didn’t mention emotion when I introduced the basic principles of game theory nor when I talked about how game theorists find solutions to games. That’s because emotion isn’t part of game theory. Emotional reactions are soon to be part of the outcomes of games, something wrapped into the utility values assigned those outcomes. Emotion isn’t seen as something that should shape the strategies players taken games, but emotion does matter. Let me give you one striking example, the ultimatum game.

Suppose you come to the laboratory you are told that you’re going to play a two-person game. Your partner in the game is anonymous, it’s someone in another room, you can’t communicate with them, don’t know them and won’t find out anything about that player, let’s call them the proposer, begins again with $20 they then have to propose a division of that $20. They’ll give you some and keep the rest and then you can respond to their offer. If you don’t accept their offer and no one gets any money. It’s called the ultimatum game, because it’s a take it or leave it offer.

Low and high stake emotions

There’s one shot, no negotiation. So you sit in the laboratory room and wait for their proposal. They propose to keep $19 and give you only one dollar. What do you do? Do you accept the dollar or do you reject their offer and then walk away with nothing? In cases like this, responders almost always reject the offer, they often get angry turn down the money and walk away with nothing. You might think that’s because one dollar is essentially worthless, but in the game I just described people still commonly reject offers of 2, 3, 4 even 4 dollars.

Only when the split seems closer to fair say when the proposer offers eight dollars out of 20 do the responders accept the ultimatum nearly all the time. You may still be thinking that’s not that much money even a poor college students might act in irrational ways when faced with small stakes. So let me tell you about some variations of this experiment. In one case the experimenters tested US college students using payouts of $400.

The proposers could offer any amount of the responders and if that’ll offer was accepted they get to keep the rest for themselves. So some proposers offer about $30. You know to a college student that’s a meaningful amount of money for a five-minute experiment
the responders rejected those offers more than half the time. Some proposers offer about $60, the responders rejected those offers more than 1/4 of the time. So college students will turn down $30 or even $60 if the offer seems unfair.

If that still doesn’t seem meaningful to you consider this example. Economists have run variance of the ultimatum game in a number of different countries including some were the standard of living is much lower than in the United States. That allows him to run the same experiments with very large stakes. Now there is considerable variability across individuals and cultures, but people still sometimes turn down offers equivalent to several days wages or even more if those offers seem unfair.

The power to influence

Behavior in the ultimatum game just doesn’t make sense. Why would people reject large sums of money that are given to them by an anonymous other person?  Just because the offer seems unfair! It isn’t because people don’t want the money!  There’s a related game called the dictator game, it has a same basic format with one key difference, the offer can be rejected. So, if the dictator players handed $20 at the start of the game they can decide how much they want to keep for themselves and how much they want to give to the other person.

Suppose that you are in one of those experiments and the anonymous dictator player keeps $18 and gives two dollars to you. The experimenter replaces two dollars and table in front of you, would you just storm out of the room? Probably not! People receiving money in dictator games don’t turn down the money they’ve just been given. So what’s different about these two games? The ultimatum game, were people sometimes turned out even large amounts of money in the dictator game, where they don’t.

The key difference is that the responder in the ultimatum game has the power to influence the proposer, but only if they behave irrationally.