Fairness and Wall Street

Ally Bank has some commercials playing with this fairness theme -- here's one http://www.youtube.com/watch?v=nKdIKP1arF0

FYI, there have been a lot of recent studies showing that the offer made, and the minimum accepted, differ quite a lot by culture and region. See Henrich's recent article in Science for a huge recent study, showing that offers made and accepted seems to vary by community size (increasing with increasing size).

To put it another way, the average person is vindictive, willing to cut off their own nose to spite their face. Wall Streeters, on the other hand, are easy going guys who understand that it's nothing personal. ;)

I'm not convinced this behavior is not self-interest-maximizing. If people generally understand that in situations with asymmetric power arrangements like this one, the second person will balk if they are not allowed to capture at least some of the value, then the first person will offer at least the amount they think will keep the second person from balking.

It's a fairly rational arrangement, too. Clearly the second person is creating some value for the first person. Therefore she should be allowed to capture some of the value.

In a one-time game, sure, its irrational, but in a repeated game, its entirely rational.

Keep making crappy deals for me and I'll keep saying no. Eventually, your self-interest in getting a payoff will require you to offer me a better deal. If the better deal is large enough and lasts long enough, it'll more than offset the losses from saying no to the first crappy deals.

Great stuff Ezra, but remember that the rejection of an offer <30% is also a good strategy if you can credibly convince the offerer that you will stick to that strategy (even if they offer you less which is better than nothing). The tables turn when I say, "if you offer me anything less than 99% of that pot of money, then both of us get nothing." This is why it's important to be aware when you're playing a game so not to be taken advantage of.

Food for thought: is the unconscious rejection of any offer <30% an unconscious strategy or an emotional response to fairness?

In economics and politics this is one reason to have a system of checks and balances rather than just a zero-sum competition where winner takes all.

Zero-sum/winner-takes-all systems tend to be pretty unsustainable. The only reason that the investment bankers can get away with it in the near-term is because previous generations left-behind some residual value.

Food for thought: is the unconscious rejection of any offer <30% an unconscious strategy or an emotional response to fairness?

Posted by: ChrisFH

=================================

Interesting question: The response could also be viewed in light of self-preservation.

An interesting experiment would be to bring a third person into the equation as part of the two-way agreement.

Would a person accept <30 percent if the 3rd person received nothing (or some smaller percentage than he or she received)? Would the person demand an equal share for the 3rd person, or an even 3-way split?

Relative advantages may be part of the equation. The more inequality increases, perhaps the greater the perceived risks for the person with a smaller share of the pie. However, perhaps a person would accept a smaller share of the pie so long as his or her share is greater than at least one other person.

This would be an interesting test case. Maybe we're not seeing "fairness" as an objective value divorced from self-interest, but rather "fairness" viewed through the lens of self-interest and self-preservation.

This is the first article I’ve read since finding this site…and what an article!!! I’m hooked.

http://www.fuzal.com/

"Banks mislead customers, make money from betting against housing bubbles they help fuel, get bailed out with taxpayer dollars, and then pay out massive bonuses to their executives while the rest of the country is mired in a recession they caused. "

This is simply not true. See WaMu, Countrywide, etc. They blew up. Now, the bit about the executives getting away with it is true...for now, but it was the more politically connected banks that were able to get our tax dollars and escape.

Fannie and Freddie anyone? Root cause analysis points to those government sponsored monstrosities being traded up on the stock exchange, while we were we holding all of the risk exposure.

"In a one-time game, sure, its irrational, but in a repeated game, its entirely rational."

The experimental result holds for both one-time games and repeated games. Interestingly, though, it does not hold when the experimental subjects are economics students. Which, given that a lot of behavioual economics experiments are conducted on economics students, that a lot of research needs to be revisited with a more representative sample.

In one of the early experiments doing this, the average for refusing a payout was 70/30, except for one group: students who had had one year of economics. They were willing to accept 90/10.

A little knowledge of economics is a very dangerous thing indeed.

nylund is exactly right. If this is a series of games (which would more resemble real life), you want to establish a long-term equilibrium that is optimal for you, even if it means giving up some gains in the short term.

Even if it's a one-time game, as GingerYellow says, it's hard to trust that there won't somehow be a repeat of this event. Maybe that's not rational, I don't know.

Ezra says: "As the ultimatum experiments show, fairness is very important to the way most people make their economic decisions. But that particular quality is not very important to how Wall Street makes its decisions."

Um, no. Wall Street is on the other end, the "giving money" end. I don't see where the experiments show that those people are interested in fairness. They're interested in maximizing profits, just as Wall Street is.