Monday, 16 June 2014

Trust and Economics

It is not from the fury of the murder-suicideer that we expect the carnage, but from their regard to their own self interest.
I might have to get that printed a T-shirt. In case you don't recognize the quotation, it is a spoof of Adam Smith's intellectually bankrupt assertion from the Wealth of Nations:
It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest.
And this is pretty much just not true. Working for money is one of many complex factors that gets people to do the things they do. We are social animals and feel social responsibility. Except, that is, for economists.

A variety of experiments have been concocted to perform on people to determine the extent to which they are driven by self-interest and the extent to which they are driven by other factors. In the Ultimatum Game Player A gets to divide $10 be players A and B, then B can either accept the split or reject it. If B accepts then A and B get their money as assigned by A. If B rejects then A and B both walk away with nothing.

In another game a large number of players can assign $10 as they choose to a private or public account. All funds they assign to the private account are kept, all funds that are assigned to the public account are multiplied by a factor greater than one and then distributed equally among all players, including those that put nothing into the public account.

And we all know the famous prisoner's dilemma where you can defect or cooperate. A fairly typical payout scheme is that is both players cooperate they are both paid $3, if both defect they are both paid $1, but if one cooperates and the other defects then the defector gets $5 and the cooperator gets nothing.

If self-interest were the only determining factor, then player A in the Ultimatum game would always give only the smallest unit allowable to player B - either one dollar or one cent depending on the rules - and player B would accept the split since something is better than nothing. Everyone would put all funds into the private account. All players would always defect.

Instead real people offer an even split in the Ultimatum game more often than any other split. Real people tend to put about half of their money into the public account. Real people cooperate quite a bit of the time.

Real people who are in the field of economics, however, defect the majority of the time, put 20% or less into the public account and split the ultimatum game around 8-2 or 7-3. The latter is a concession to the fact that they know that other people have a misguided sense of fairness even if they themselves don't.

What's interesting is that in two of these games there is a real payout for cooperation. The multiplier on the public purse is greater than one, so the maximum payout is achieved when all players put all money into the public purse. The sum of two cooperations is greater than the sum of a cooperation and a defection, so the maximum value is achieved when all players always cooperate. In the game I described last week with the chimps, while the chimps conformed better to game theory, the humans walked away with larger payouts.

The ultimatum game rewards cooperation as well, but only from the second player. If the first player splits 6-4 then you'd be hard pressed to find a second player who wouldn't accept. So the fact that people split 50-50 does suggest that the decision is being made more on the principle of fairness than on the principle of maximizing return.

Of course how they play these games shows that it is the economists, much more often than the rest of the population, have an extremely misguided sense of fairness. In each case they play the game with one goal: to ensure that no one else does better than them. The kind of "self-interested" behaviour that is engaged in with bad splits and defection has an interest in "winning" not in achieving the maximum benefit for yourself. It contains more spite than actual self-interest.

To the economically trained, fairness is a kindergarten student's stunted idea of fairness - fairness for myself only. This explains why great inequality can be seen as fair. As long as the economist themself is not in poverty everything is fine. They back the side that supports the wealthy because that way they are part of the winning team.

But it's no wonder that economists see others as inherently untrustworthy, after all, they spend their time around other economists. What is a wonder is that we've collectively taken people who want to build a society without trust - despite the obvious and empirically verifiable value of trust - and decided to elevate them to positions of high importance. So I suppose that too much trust can be a bad thing. After all, you may end up trusting an economist.

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