A sense of fair play does pay

6th November, 2010

I recently had the dubious pleasure of having to deal with someone who is successful and indeed popular, and yet a stubborn, selfish bully when he thinks nobody is looking. It moved me to speculate on an old question: do nice guys finish first, or last?

No doubt whole libraries are filled with psychological and historical research on the topic. To an economist, the natural way to understand such questions is to turn to game theory, which is a way of turning decisions into a simplified mathematical format. Specifically, game-theoretic decisions are those with more than one player, where each player’s choices alter the other players’ incentives.

In one of the simplest games, “Ultimatum”, one player (Abby) receives an envelope containing 100 one-dollar bills. She has to decide how much to offer to the second player (Zach). Zach either accepts this ultimatum, or both players lose everything. If Zach is motivated only by cash, then a single dollar will be enough to get him to agree. Real people have other concerns, and when the game is played in the laboratory, the first player usually offers a more even split, and tends to regret it if her offer is too miserly.

Ultimatum is a fascinating game: Molly Crockett of the University of Cambridge is part of a team examining whether people play Ultimatum differently when drugs are used to lower their serotonin levels. (They do, rejecting more unfair offers.) John List of the University of Chicago has shown that what people offer and accept is highly sensitive to the experimental context – for instance, whether the initial money was perceived as having been earned.

But Ultimatum also tells us something about what Thomas Schelling, winner of the Nobel Prize for economics in 2005, called “strategic pre-commitment”. Imagine Zach walking into the room and announcing, “I’ve given my wallet to the experimenter and told him to throw it down the garbage chute if I accept an offer of less than $50.”

If that’s a believable statement, two things follow: that Zach will regret it bitterly if Abby actually offers him $45, because he will either lose $45 or lose his wallet; and that Abby would be wise to offer a 50-50 split.

Zach’s pre-commitment has cut off his options but is likely to make him better off. Such tactics have a long history – witness Cortés scuttling his fleet to keep his men from fleeing back to Cuba. (The counter-move is even older: Scipio, the Roman general who defeated Hannibal, advocated building a “golden bridge” for an enemy in retreat.) More recently, there are traffic wardens who cannot cancel a parking ticket once their handheld computers have started the process.

An alternative, and much simpler, pre-commitment is to acquire a reputation for being someone who would rather die than accept less than $80 out of every 100.

Such tactics work very well, for a while. Schelling pointed out that toddlers and terrorists have a tremendous advantage in any negotiation because both are immune to reason. They can demand everything, and often get it. (I can’t advise on the subject of dealing with terrorists, but I can attest that most negotiations with two-year-olds go better if conducted at home, rather than in a restaurant, train or bookshop.)

All this is very frustrating for those of us who advocate a bit of give and take in life, but there is a consolation: there’s good reason to believe that co-operative people tend to find each other and do very well sharing and sharing alike. As for greedy bullies, they can do well toe-to-toe with reasonable people, but not so well when they meet other greedy bullies. Two people who won’t back down is a recipe for a well-deserved disaster.

Also published at ft.com.

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