Ultimate envy

By now, only the most fundamentalist of libertarians cling to the belief that humans behave as Homo Economicus, the mythical self-interested rational agent on which much of free market economic thinking is based.  Studies of real humans behaving in the real world (or at least in research laboratory settings) have revealed that we all exhibit a variety of cognitive biases, and that these biases affect our decision-making in such a way that we regularly diverge from ‘rational’ behaviour.

If you wish, you could join the Less Wrong crowd who have, in recent years, been attempting to modify their own behaviours so that they conform better to pure rationality.  Their reasons for doing so vary, but include something along these lines: perfect rationality results in the best approximation of a condition conducive to human happiness. At a minimum, rationality is less wrong than what we have now.

It is not hard to demonstrate irrational behaviour among humans. One of the more compelling ways to do so is to ask people to participate in the Ultimatum game. A darling of neuroeconomists, in the Ultimatum game both you and a partner are given a sum of money (for best results, real money is used), let’s say $20.  Your partner is given the task of deciding how to divide the money between the two of you. Your task is to decide whether you accept the partner’s offer, in which case you both keep the money, or reject it, in which case you both get nothing.  If the partner offers you $10, the decision is easy and you both get 50% of the winnings.  But when the partner is viewed as acting unfairly, offering only $1 out of the $20 pot (5%), people often reject the offer. [Similar effects are seen if the pot is $200, but if the pot because sufficiently large – say a million dollars, most people say yes to an offer of only 5%.] The perfect rationalist idealized as homo economicus would never do such a thing – why, after all, would anyone turn down a free dollar?  The Less Wrong crowd would take a moment to consider what cognitive biases might cause individuals to turn down a free dollar under such circumstances, and work to try and nullify them. Real people in the real world turn down unfair offers with regularity.

What sorts of cognitive biases cause people to spurn an offer of free money? In the Ultimatum game, it seems that the unfairness causes people to feel pangs of disgust, and this emotional response is thought to modify rational thinking. The phenomenon is also a form of altruistic punishment, and has long been thought to act as a sort of social glue: members of society punish people who act unfairly, even if they do so at a cost to themselves. Put into this context, it might make a bit of sense to act this way – perhaps rationality plays out not in the self-interested way that libertarian economists would have us believe, but rather in the buttressing of a social order way that, in the long run, serves the interests of everyone.

Or so the theory goes. Continue reading