Danny ChaiGregg Easterbrook is rapidly becoming my favorite writer, and his Tuesday Morning Quarterback column on ESPN.com my favorite weekly reading on the web. It’s just a fantastic column, well-written, passionate about football, intelligent, interesting, erudite, funny, wide-ranging, and with not so subtle hints of his Christian faith. Also, after being a long time sceptic of global warming, he came to the light this year. Another plus.
The wide-ranging part of his column is something I particularly like, since my interests are similarly wide-ranging. I quoted before his thoughts on happiness. He recently wrote something about economic theory that I found really compelling as well. As with the former, these passages appear in an NFL column. How odd.
Economists call it the Ultimate Game, and have long contended it proves Homo sapiens insufficiently logical. Here’s the situation. Two strangers are brought together by a third person who holds $1,000. He tells them the money is theirs to divide on these terms: Stranger A must propose how to split the $1,000, and Stranger B must either accept or reject A’s offer. That concludes the game, no second round. Classical economists maintain Stranger A should say, “I propose that I get $999 and you get $1,” and Stranger B should immediately respond, “I accept.” Pure economic theory says A should maximize his gain by shafting B out of every possible farthing, while B should calculate that since his sole choice is between $1 and nothing, $1 is better. Yet researchers have played this game with volunteers in many nations, and it never works the way theory says. The bare-minimum offer is always rejected. Generally, A must offer at least 30 percent or B says no and both players get nothing. Classical economists have long harrumphed that B’s response when the game is played with real money shows human beings are too emotional and insufficiently focused on maximizing outcomes.
This pot was stirred last week when researchers led by Dario Knoch of the University of Zurich reported that using magnets to disrupt the right prefrontal cortex of volunteers playing Stranger B caused them to become much more willing to accept low offers. Now, if someone was using magnetic waves to scramble parts of your brain, your bargaining skills might decline, too. (“Herr Professor Doktor, ve haff discovered zat when ve knock der volunteers unconscious mit ein sledgehammer, zey refuse to aufgeparticipatehaffen* in the experiment.”) But I think tests like the University of Zurich study only point to the Ultimate Game being so flawed that it mainly shows us faults of classical economics.
First, the game assumes money is superior to all other forms of possessions, including psychological well-being. But the world doesn’t work that way. If I am Stranger B and accept the $1 offer, I have a dollar bill but also feel like a total dupe: And how can being made to feel like a dupe be worth a mere dollar? Any small-percentage offer accepted by B would make B feel unhappy and taken advantage of, while rejecting the small-percentage offer gives B the pleasure of feeling retribution was achieved against A. Once the offer gets up to around 30 percent, then the value of the money might equal whatever unpleasant thoughts B will experience when seeing A cackling and counting a larger pile of loot. Reactions like rejecting very low offers do not, as classical economists maintain, show that B fails to understand economics. They show that B understands money is not everything!
Next, people in the B role might derive long-term benefits from refusing low offers, and these benefits might exceed the value of the money forgone. In his important new book “The Origin of Wealth,” Eric Beinhocker speculates that the kind of circumstances in which B refuses a too-low offer are “the cornerstone for social cooperation that is essential for wealth creation.” In order for the free market to serve the overall welfare of society, Beinhocker maintains, all must mutually agree not to participate in arrangements that exploit those with weak bargaining positions. Society must be structured such that A would feel ashamed of offering only $1 to B, and would offer a fair sum in order to feel good about the transaction. If parties in strong positions offer fair sums, the result is mutually beneficial trading for everyone, including the strong. (Are you listening, Wal-Mart?) “The Origin of Wealth” is a major new book that ought to be commanding significant attention. Beinhocker, a management consultant for McKinsey & Company, argues persuasively that market economics is not a war of all against all. Market economies do best, Beinhocker says, and the welfare of society rises most, when people voluntarily take each other’s interests into account.
Finally, TMQ contends economists misunderstand their own Ultimate Game because the focus of discussion is always on what Stranger B will accept. The key to this puzzle is not B but Stranger A — who is a total, utter idiot for offering only $1 because this insures A gets nothing! Offers in which A seeks to claim the lion’s share are irrational on A’s part, because such offers will fail. I would argue there is only one wise offer for A to make: that they each get $500. A 50/50 split is sure to be accepted, thus insuring Stranger A of pocketing $500. A fair-minded person playing the A role would offer a 50/50 split because it is fair; economically this is also the logical move, because it guarantees a successful transaction. By focusing on whether B will accept an inequitable offer, economists skip over how dumb it is for A to make such an offer. By contrast, fairness leads to benefits for both parties, which is the big point of “The Origin of Wealth.”
(*Note: Tuesday Morning Quarterback has long contended that any verb can be converted into pseudo-German using the formula aufgeXXXXXhaffen. Thus to jog becomes to aufgejoggenhaffen, etc.)
I’d only heard the traditional analysis before, but when I think about what he’s saying, a lot of it makes sense. Anyway, his columns are packed with thought-provoking stuff like that. Great reads.