Undercover Economist

How an inconvenient economist upset the cool crowd

At a recent conference on experimental economics, John List, professor of economics at the university of chicago, shared a beer with other delegates and opined, “I think I used to be the most hated guy in this field.” His drinking companions jovially assured him that he still was.

So why the sharp elbows from his colleagues? Quite simply, List’s attention to the nuts and bolts of experimental method has demolished some of the most cherished results in the cool field of behavioural economics.

Consider a class of experimental games much cited by those who dispute the classical model of rational economic choice. There is the “ultimatum” game, in which player A (Anna) is given $10 and asked how much, if any, she proposes to offer to player B (Bernard). Bernard can accept the offer, but if he rejects it, neither Anna nor Bernard get anything. If Anna and Bernard were rational income-maximisers, Anna would offer one cent and Bernard would accept it as better than nothing. This never happens, so Anna and Bernard are not rational income-maximisers.

Then there is the “dictator” game, introduced by Jack Knetsch, the Nobel laureate Daniel Kahneman and Richard Thaler, co-author of Nudge and perhaps the world’s leading behavioural economist. In the “dictator” game, Anna divides the $10 as before, but Bernard cannot reject her offer, so Anna can’t lose. Nevertheless, Anna will often throw Bernard two or three dollars. A third game, “gift exchange”, begins with Bernard offering Anna a payment. Anna then decides how to respond – effectively, an initial peace offering followed by “dictator”.

The results are astonishingly consistent: these games seem to demonstrate a taste for fairness. People offer more than they have to, reject unequal offers and reciprocate generosity. This has been a thorn in the side of conventional economics for more than 20 years.

List’s contribution – well described in the forthcoming Superfreakonomics – has been to show that these results stem from the experimental set-up. In one set of experiments, he gently varied the rules of “dictator”. Anna, in addition to dividing up the $10 between herself and Bernard, was given the option to take a further dollar from Bernard. This option should be irrelevant. Because most Annas offer money to Bernard, they should hardly be tempted to pick his pocket. But in fact, when offered the chance to take money, far fewer Annas decide to give Bernard anything and one in five actually took Bernard’s dollar. Another experiment showed that Anna’s willingness to take from Bernard was dramatically less if she thought Bernard had earned his money. As the experimenter, List found he could nudge his subjects into being generous or mean with small variants in the set-up.

Another round of experiments, which List proudly describes as his best, were conducted at a baseball card convention. (List is a long-time baseball card collector.) List set up a baseball card trade to mimic the “gift exchange” game, and showed that baseball card traders behave just like laboratory subjects when they know they are in an experiment. But many traders didn’t know they were being watched, and they behaved far more selfishly.

Rather than re-establishing the primacy of rational choice theory, List’s experiments show that psychological factors are important – but far more subtle and complex than previous experimenters seem to have appreciated. If he undermines hard-earned reputations elsewhere in the field, tough. Nobody ever said academia was an altruistic profession.

Also published at ft.com.