Bargaining and Psychology Lecture One:

The Structure & Evolution of Preferences Keith Chen, Nov 3rd 2004

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.

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.

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.

Ultimatum Game: The rules of the game:

1. You will be randomly paired with someone else in the class; this pairing will remain completely anonymous.

2. 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.

3. 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.

4. 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.”

5. If the responder accepts the offer made by the proposer, they split the sum according to the proposal. If the responder rejects, both parties lose their shares.

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?

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

Economic Fairness:Surveys & Framing Effects

Reference Points, Regret & Framing.

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

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.

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.

The Theory of Reciprocal Altruism / Cooperation

• Why study reciprocal play in animals?

1. 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.

Cotton-top Tamarins: a cooperative breeder

Subjects:

NewWorldmonkeys

OldWorldmonkeys

Apes

barrier

actor

receiver

tray

tool

food

Experimental Setup:

Training & Solo Conditions

w. barrier

Condition 1 Condition 2

Condition 3 & 4 Condition 5

no barrier

Intentionality?

First GameA Simple Reciprocation Game

Experiment 1 tests for: (i) Contingent cooperation (ii) Recognition of reputationSetup: trained vs untrained actors

S1S2 S1S2

SH: 100% Altruist JG: 100% Defector

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Pulls for Alt.

Pulls for Def.

Pulling for the Altruist by Trial

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Pulls for Alt.

Odd Trials

Even Trials

Untrained ActorsReciprocation Game 2a:

Experiment 2a tests for:Reciprocal strategies betweenuntrained actors

S1S2 S1S2

Description of the Model Chi Sqr. Er. Rate Post. Prob. Param. Adj. Cond.Prob.Predictions of a linear fit. 37.66 0% 2.0295E-204 3 0.000Pull then imitate. 10.82 41% 1.0452E-205 2 0.000Pull if last 2 trials were pull. 16.56 34% 9.1842E-200 2 83.168Pull if last 3 trials were pull. 14.16 33% 1.0454E-200 2 9.467Play what opponent has done most. 11.98 39% 4.3737E-203 2 0.040Play what opponent did most over last 3 moves. 22.37 39% 1.9999E-202 2 0.181Play what opponent did most over last 5 moves. 19.84 38% 3.4967E-201 2 3.166Play the historic dist. of your opponent's play. 8.59 49% 5.6628E-206 2 0.000history only goes back 3 moves. 11.48 37% 1.1650E-202 2 0.105history only goes back 5 moves. 11.15 36% 4.5700E-203 2 0.041Play a Beta=1/2 weighted historic distribution. 15.11 37% 1.6596E-203 2 0.015Optimally fit Beta to the data. 14.88 36% 2.1978E-203 3 0.001Play a cut off rule at 1/2. 10.57 43% 2.9351E-207 2 0.000Play a cut off rule at 1/2 using the fit Beta. 26.08 22% 5.9163E-204 3 0.000Play what has the highest historic payoff. 2.63 44% 1.5320E-207 2 0.000Mix in proportion to historic payoffs. 3 41% 1.2272E-206 2 0.000See discussion section for governing dynamic. 6.41 29% 4.0656E-201 2 3.682An optimally fit Beta stimulus-response model. 6.55 27% 4.2224E-201 3 0.134

One fixed session

1 finalsession

Reciprocation Game 2b:

3 sessions of:

1 session:

Unconditioned Play with Altered 4th Session Payoffs

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ulls Altered payoff session,

subjects always pulled

Selfish AltruismReciprocation Game 3:

Experiment 3 tests for:Recognition of byproduct altruism,or “selfish” altruism

S1S2 S1S2

Pulling with a "Selfish" Partner

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0.50.6

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Selfish Partner w. Selfish

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New Experiment:3 Year Old Kids

Cotton-top Tamarins: a cooperative breeder

Subjects:

NewWorldmonkeys

OldWorldmonkeys

Apes

barrier

actor

receiver

tray

tool

food

Experimental Setup:

Training & Solo Conditions

w. barrier

Condition 1 Condition 2

Condition 3 & 4 Condition 5

no barrier

Intentionality?

First GameA Simple Reciprocation Game

Experiment 1 tests for: (i) Contingent cooperation (ii) Recognition of reputationSetup: trained vs untrained actors

S1S2 S1S2

SH: 100% Altruist JG: 100% Defector

0

0.1

0.2

0.3

0.4

0.5

0.6

1 2 3 4

Session

Fre

qu

en

cy o

f P

ulls

Pulls for Alt.

Pulls for Def.

Pulling for the Altruist by Trial

0

0.1

0.2

0.3

0.4

0.50.6

0.7

0.8

0.9

1

1 3 5 7 9 11 13 15 17 19 21 23

Trial #

Fre

qu

ency

of P

ulls

Pulls for Alt.

Odd Trials

Even Trials

Untrained ActorsReciprocation Game 2:

Experiment 2 tests for:Reciprocal strategies betweenuntrained actors

S1S2 S1S2

Description of the Model Chi Sqr. Er. Rate Post. Prob. Param. Adj. Cond.Prob.Predictions of a linear fit. 37.66 0% 2.0295E-204 3 0.000Pull then imitate. 10.82 41% 1.0452E-205 2 0.000Pull if last 2 trials were pull. 16.56 34% 9.1842E-200 2 83.168Pull if last 3 trials were pull. 14.16 33% 1.0454E-200 2 9.467Play what opponent has done most. 11.98 39% 4.3737E-203 2 0.040Play what opponent did most over last 3 moves. 22.37 39% 1.9999E-202 2 0.181Play what opponent did most over last 5 moves. 19.84 38% 3.4967E-201 2 3.166Play the historic dist. of your opponent's play. 8.59 49% 5.6628E-206 2 0.000history only goes back 3 moves. 11.48 37% 1.1650E-202 2 0.105history only goes back 5 moves. 11.15 36% 4.5700E-203 2 0.041Play a Beta=1/2 weighted historic distribution. 15.11 37% 1.6596E-203 2 0.015Optimally fit Beta to the data. 14.88 36% 2.1978E-203 3 0.001Play a cut off rule at 1/2. 10.57 43% 2.9351E-207 2 0.000Play a cut off rule at 1/2 using the fit Beta. 26.08 22% 5.9163E-204 3 0.000Play what has the highest historic payoff. 2.63 44% 1.5320E-207 2 0.000Mix in proportion to historic payoffs. 3 41% 1.2272E-206 2 0.000See discussion section for governing dynamic. 6.41 29% 4.0656E-201 2 3.682An optimally fit Beta stimulus-response model. 6.55 27% 4.2224E-201 3 0.134

Selfish AltruismReciprocation Game 3:

Experiment 3 tests for:Recognition of byproduct altruism,or “selfish” altruism

S1S2 S1S2

Pulling with a "Selfish" Partner

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Selfish Partner w. Selfish

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Play with HumansReciprocation Game 4:

Experiment 4 tests for:Recognition of unintentionalaltruism, when a human pulls.

S1S2 S1S2

human

Pulling for the Human Compared to Pulling for the Defector

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Pulling for the Human Compared to Pulling for the Defector

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Tamarin Conclusions:

Biology:1. Strong evidence of

Reciprocal Altruism.

2. Evidence Tamarins are quite sophisticated about reciprocal play.

Economics:1. Sophisticated play not

confined to humans.

2. Informs parsimony, suggests wide scope for theory.

3. Preferences such as Altruism seem universal and shaped by evolved cognitive structures.

Capuchin Experiments:

• 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 Money and Trading

• 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

• 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 TradingBaseline and Compensated Price Shift

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Capuchin Money and TradingBaseline and Money Illusion Condition

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Broader Tasks:

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

Conclusions:

Biology:

1. Strong evidence of Reciprocal Altruism.

2. Evidence Tamarins are quite sophisticated about reciprocal play.

Economics:

1. Sophisticated and interactive behavior not confined to humans.

2. Informs parsimony, suggests wide scope for theory of fairness.