Bargaining and Psychology Lecture One: The Structure & Evolution of Preferences

1. Bargaining and Psychology Lecture One:The Structure & Evolution of Preferences Keith Chen, Nov 3rd 2004

2. Plan of Action Overall: • Broadly: Whirlwind tour of Biology, Psychology and Experimental Economics. • Provide a toolbox of insights from these disciplines: • a conceptual framework through which to understand the interpersonal / cultural aspects of negotiations.

3. Plan of Action Today: • Basic departure from the self-interested model: Fairness, Altruism & Spite. • How do we begin to conceptualize and measure notions of Fairness / Blame / Blameworthiness? Economic Experiments. • Framing, Cultural & SES Effects • Stability and Strategies: my work on the evolution of Altruism and Fairness Preferences.

4. Economic Experiments • Rules of the Road for all Economics Experiments: • NO DECEPTION (on my part)! • Real stakes!! • Ask that you play within the rules: • Do your best and think hard about the game.

5. Ultimatum Game: • The rules of the game: • You will be randomly paired with someone else in the class; this pairing will remain completely anonymous. • One of you will be chosen (by coin flip) to be either the Proposer or the Responder in this experiment, and one pair will be randomly chosen to play for $100. • The Proposer gets to make an offer to split $100 in some proportion with the Responder. So the proposer can offer $x to the responder, proposing to keep $100-x for themselves. • The Responder must decide what is the lowest amount offered by the proposer that he / she will accept; i.e. “I will accept any offer which is greater than or equal to $y.” • If the responder accepts the offer made by the proposer, they split the sum accordingto the proposal. If the responder rejects, both parties lose their shares.

6. Ultimatum Game: • Cross-Cultural Variation that tracks social structure: Henrich et al. • Variation in predictions for first and second answer: • Different levels of rationality • The beauty-contest game. • When self-interest becomes less stable (weaker consequences,) fairness has more room to emerge?

7. Fairness in the Market • Constraints are based more on notion of what is normal rather than “objective” justice; KaKnTh • Reference Transactions • History of previous transactions (Q2) • Market (nominal) Prices (Q4) • Posted (list, nominal) Prices (Q5) • Occasions for Pricing Decisions / Reference Profits • Protecting Profits (Q9) • Profit Increases (Q11) • Increases in Market Power • Punishment

8. Economic Fairness:Surveys & Framing Effects Reference Points, Regret & Framing.

9. Effect of Knowing Alternate Outcomes • Larrick & Bowles: References Affect Bargaining • People are risk-averse when they won’t know the outcome of an alternate gamble • People are more risk-neutral when they will be told the alternate gamble outcome • Coin flip +$0/+$200 vs. $90 guaranteed • People are willing to pay a “regret premium” to avoid discovering the outcome • Negotiators who won’t get feedback on a foregone alternative are more likely to reach agreement

10. Surveys Say: • There is a temporal pattern to regret (Bowles) • In the short term, people regret actions taken more than inaction • In the long term, people regret inaction more than action • Train-Track surveys, Glaeser-Sacerdote work on sentencing (VHS +56% women, -53% black) • Takeaway: reference points strongly effects their perceptions of Fairness.

11. Culture, Blame & Attribution • South vs. North • East vs. West (collectivist vs. individualist) • Rich vs. Poor (the illusion of control.) • Economic Position and in/out-group • Jews, Chinese & Copts • Ultimatum Games in Other Cultures.

12. The Theory of Reciprocal Altruism / Cooperation • Why study reciprocal play in animals? • Examining Animals gives us: • Perspective on cross-cultural validity of game-theory. • Way of thinking about how fairness is either cultural or biological, socially constructed or evolutionary.

13. Subjects: Cotton-top Tamarins: a cooperative breeder

14. Apes Old World monkeys New World monkeys

15. Experimental Setup: barrier receiver actor food tool tray

16. Condition 1 Condition 2 Condition 3 & 4 Condition 5 w. barrier no barrier Training & Solo Conditions

17. Intentionality?

18. First Game A Simple Reciprocation Game S2 S1 S2 S1 Experiment 1 tests for: (i) Contingent cooperation (ii) Recognition of reputation Setup: trained vs untrained actors

19. SH: 100% Altruist JG: 100% Defector

21. Untrained Actors Reciprocation Game 2a: S2 S1 S2 S1 Experiment 2a tests for: Reciprocal strategies between untrained actors

23. One fixed session Reciprocation Game 2b: 3 sessions of: 1 session: 1 final session

25. Selfish Altruism Reciprocation Game 3: S2 S1 S2 S1 Experiment 3 tests for: Recognition of byproduct altruism, or “selfish” altruism

27. New Experiment:3 Year Old Kids

28. Subjects: Cotton-top Tamarins: a cooperative breeder

29. Apes Old World monkeys New World monkeys

30. Experimental Setup: barrier receiver actor food tool tray

31. Condition 1 Condition 2 Condition 3 & 4 Condition 5 w. barrier no barrier Training & Solo Conditions

32. Intentionality?

33. First Game A Simple Reciprocation Game S2 S1 S2 S1 Experiment 1 tests for: (i) Contingent cooperation (ii) Recognition of reputation Setup: trained vs untrained actors

34. SH: 100% Altruist JG: 100% Defector

36. Untrained Actors Reciprocation Game 2: S2 S1 S2 S1 Experiment 2 tests for: Reciprocal strategies between untrained actors

38. Selfish Altruism Reciprocation Game 3: S2 S1 S2 S1 Experiment 3 tests for: Recognition of byproduct altruism, or “selfish” altruism

40. Play with Humans Reciprocation Game 4: S2 S1 S2 S1 human Experiment 4 tests for: Recognition of unintentional altruism, when a human pulls.

43. Biology: Strong evidence of Reciprocal Altruism. Evidence Tamarins are quite sophisticated about reciprocal play. Economics: Sophisticated play not confined to humans. Informs parsimony, suggests wide scope for theory. Preferences such as Altruism seem universal and shaped by evolved cognitive structures. Tamarin Conclusions:

44. More complex division tasks: Ultimatum, dictator and public goods games The use of fiat money: Recognition of Common Value Basic tests of Rational Preferences Risk preferences (and biases) Capuchin Experiments:

45. Trained Capuchin monkeys to know that “tokens” can be traded for different foods, at different prices with different RAs. New: The Payoffs can be risky. Capuchin Money and Trading

46. Three Conditions: Searched for foods for which each actor consumed a relatively interior bundle. A compensated halving of one good’s price A money-illusion condition Capuchin Money and Trading

47. Capuchin Money and Trading

48. Capuchin Money and Trading

49. Now have subjects trained on a five-arm mechanism, allows two subjects to play either an ultimatum or dictator setup. Broader Tasks:

50. Biology: Strong evidence of Reciprocal Altruism. Evidence Tamarins are quite sophisticated about reciprocal play. Economics: Sophisticated and interactive behavior not confined to humans. Informs parsimony, suggests wide scope for theory of fairness. Conclusions: