AIG and Inequality

I know, I know: everybody is sick of hearing about those AIG bonuses. But bear with me for one more blog post, because I think the swell of populist anger can actually illuminate something interesting about the human response to inequality.

Consider the ultimatum game, that simple economic task where one person (the proposer) is given ten dollars and told to share it with another person (the responder). The proposer can divide the money however they like, but if the responder rejects the offer then both players end up with nothing.

Classical economic theory makes two predictions about the outcome of the ultimatum game: the offers will always be unfair, and the unfair offers will always be accepted. Since both players are rational, they understand that a small amount of money is still better than no money at all. Reason and greed should trump ethical notions of fairness.

But that isn't what happens. Experiment after experiment has demonstrated that most proposers offer about $4, which is rather fair and utterly irrational. Why do proposers engage in such generosity? Because they are able to imagine how the responder will feel if they make an unfair offer. Proposers know that a lowball proposal will make the responder angry, which will lead them to reject the offer, which will leave everybody with nothing. So the proposers suppress their greed, and equitably split the ten dollars. They understand that maintaining the appearance of fairness is better for everybody.

However, there's one easy way to change the behavior of people during the ultimatum game. When people are given a test before the money is distributed - and it doesn't matter what the test is - and then the "high scorers" are given the $10 to distribute, responders are willing to accept unfair offers. In other words, people are willing to tolerate inequality when they think it's deserved. This is why people weren't outraged when Wall Street handed out obscene bonuses last year - they assumed the executives deserved the payout. But now we know better.

When this sense of fairness breaks down, bad things start to happen. One of the more powerful examples of this behavior comes from Franz de Waals and Sarah Brosnan, who trained brown capuchin monkeys to give them pebbles in exchange for cucumbers. Almost overnight, a capuchin economy developed, with hungry monkeys harvesting small stones. But the marketplace was disrupted when the scientists got mischievous: instead of giving every monkey a cucumber in exchange for pebbles, they started giving some monkeys a tasty grape instead. (Monkeys prefer grapes to cucumbers.) After witnessing this injustice, the monkeys earning cucumbers went on strike. Some started throwing their cucumbers at the scientists; the vast majority just stopped collecting pebbles. The capuchin economy ground to a halt. The monkeys were willing to forfeit cheap food simply to register their anger at the arbitrary pay scale.

This labor unrest among monkeys illuminates our innate sense of fairness. It's not that the primates demanded equality - some capuchins collected many more pebbles than others, and that never created a problem - it's that they couldn't stand when the inequality was a result of injustice. Humans act the same way. When proposers do something to deserve their riches, nobody complains. But when they get rewarded for no reason and then refuse to fairly distribute their reward, people get furious. They begin doubting the integrity of the system, and become more sensitive to perceived inequalities. They reject the very premise of the game.

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The ultimatum game is a simple experiment with profound implications. The game goes like this: one person (the proposer) is given ten dollars and told to share it with another person (the responder). The proposer can divide the money however they like, but if the responder rejects the offer then…

This is why (for example) conservatives frame the estate tax as a death tax (Isn't it unfair take somebody's hard earned money away from where they wanted it to go just because they died?) while liberals frame it as an entitlement tax. (Isn't it unfair that the children of rich people--the "trust fund babies"--who did nothing to earn that wealth aren't taxed like the rest of us who have to work for our money?) I think that half (yes, that was totally arbitrary) of all politics comes down to being good at either highlighting or hiding the unfairness in the system.

That's quite interesting... I have read about the ultimatum game before, but I've never heard of the variant with the initial test. A friend of mine actually participated in an iterated ultimatum game a little while ago where a group of participants were randomly paired and assigned the role of either proposer or receiver. I'm not sure what the outcomes were, but I'm curious how iteration would change things. I wonder if people would start paying attention to who was a stickler for fairness and who was a miser when it came to proposals or not.

Yeah, I do think the comparison between Cebus and sapien behavior is justified. Although what we conceive of as "reward" isn't so bound to the banality of whether or not we received a tasty treat, it no less has to do with material needs and comforts--in our efforts to pay for education, medical bills, and taxes. And when a class of people struggles with these, there's plenty of blame to go around: federal government, state government; Democrats, Republicans.

It's interesting, though--surely, if people last year, and the year before that (and before that), had been shown how "Wall Street" fits into the big picture of economic inequality, they'd certainly have been unhappy then, as well. And there are always gov't projects full of wasteful funding, that could have (or should have) been cut out.

So why the outrage now?

Surely, "media" has been a big (if not main) arbiter of this. I'd like to see how media and scapegoating is brought into the picture when studying the neural mechanisms that shape outrage, and other forms of political belief.

By Walker T. Fester (not verified) on 18 Mar 2009 #permalink