Ultimatums and dictatorship: fairness shines through

We all know that human beings are not rational. Yet the economists’ myth of homo economicus, the economically rational human being, persists in theories and in how much of our financial system works. However, it is clear that most people are not narrowly rational in the way the myth would indicate. Instead, most favour fairness.

The leading example of an experiment which gives the lie to the myth of homo economicus, and which has been tested over years in multiple experiments around the world, is the ultimatum game.

The ultimatum game works like this. One individual is given the scope to split a pot of value between themselves and another, and to present the other with a portion of the total. The recipient simply has the choice to accept this sum, or to refuse it. Refusal means neither party receives anything. Our plain understanding of economics would tell us that the recipient should accept any offer above zero, because they have nothing else to gain and will gain something, even if it is a paltry sum, by accepting. Refusal cuts off their nose to spite someone else. In the world of homo economicus, the recipient would accept any positive offer. 

The problem is, many people do simply refuse benefits, and many refuse even substantial ones — as high as 35%, even 40%, of the original sum. This refusal is a rebuke to the unfair divider of the pie in the first place, a punishment for a failure to be fair. In the real world of a fair humanity, the punishment of unfairness is seen as worthwhile, even though it means sacrificing even substantial personal benefits.

Economists were so affronted by this result and the way in which it challenges the idea of homo economicus, that they have tested and retested the experiment and developed variants to help understand what comes to them as a surprise. The evidence is that this tendency to fairness holds true across societies, around the world. There is a variation between what tends to be seen as acceptable (there are some societies where offers greater than 50% of the original are made, and even some where they have been refused — hyper-fair societies these might be called) but the simple fact is that mostly most everywhere people want to be fair to each other.

These findings about fairness appear to hold even when basic needs are substituted for money. A team at the Wellcome Trust Centre for Neuroimaging played a version of the ultimatum game offering water to a group that they had made thirsty through a saline drip. All believed that they were playing the game with peers, sharing out a 500ml bottle of water. In fact, those carrying out the study played the part of the proposer and all participants were offered an eighth of the total, just 62.5ml. Most rejected this unfair offer even though they knew it meant they could not slake their thirsts for another hour.

The dictator game avoids the second half of the ultimatum game. Instead, an individual is given a pot to be split between themselves and one other person. The recipient is just that, and can have no influence whatsoever on what they receive and what the dictator retains. Unsurprisingly, the levels of sharing of the pot are much lower in the dictator game, and awards of nothing are much more common (if the game is played repeatedly, usually these become the most common). But this sharing of nothing is far from universal, and awards of even half of the pot are not unusual even in the dictator game. Operating (in the ultimatum game) with two individuals having a role to consider what is fair leads to a more even allocation of the pot, but the dictator game shows the power of fairness within a single human brain where the individual can face no negative consequences but their own conscience. Fairness appears to be a communal activity but one whose importance drives many of us to internalise it fundamentally.

Punishment seems to be a reinforcing element of the communal process of fairness. In a sense, the recipient’s decision in the ultimatum game can be seen as a decision to punish the person making the offer. Punishment proves very powerful in other experiments. One form of unfairness is to free-ride on others, contributing nothing to a community but taking the benefit of others’ generosity — or greater sense of fairness. Free-riding is what homo economicus would do. A further set of experiments show that most people are willing even to spend further for the community benefit by paying to punish those who do free-ride. Inevitably, the result of such punishment of free-riders is that they contribute much more towards the level of the community norm, and all benefit as a result. The experiments show that even the threat of such punishment is enough to change the behaviour of many free-riders.

But in the absence of scope to punish free-riders the fair behaviour of the group as a whole rapidly begins to erode. Most people offer their fair cooperation conditionally and if they find that they are simply exploited they will withdraw it, accepting that the norm for this group is low fairness and cooperation. The group as a whole suffers more as a result. But if the conditional cooperation is reciprocated across the group (perhaps with the benefit of the threat or reality of punishing free-riders) then it becomes a firmly self-reinforcing norm.

Fairness is fundamental to how people in fact act. We are not homo economicus, but rather the evidence shows that we want to live in a fair society. In future blogs we shall explore how we can build an economy that works with the grain of this human spirit, rather than counter to it.

Some further reading on ultimatum and dictatorship games:

An experimental analysis of ultimatum bargaining, Werner Güth, Rolf Schmittberger, Bernd Schwarze, Journal of Economic Behavior & Organization, Volume 3, Issue 4 (1982)

Human responses to unfairness with primary rewards and their biological limits, Nicholas Wright, Karen Hodgson, Stephen Fleming, Mkael Symmonds, Marc Guitart-Masip, Raymond Dolan, Scientific Reports, volume 2, Article number 593 (2012)

On the Nature of Fair Behavior, Armin Falk, Ernst Fehr, Urs Fischbacher, Economic Inquiry 41(1):20-26 (2003)

Fairness and Retaliation: The Economics of Reciprocity, Ernst Fehr, Simon Gachter, Journal of Economic Perspectives, Volume 14, Number 3 (2000)

Fairness and survival in ultimatum and dictatorship games, Andrew Schotter, Avi Weiss, Inigo Zapater, Journal of Economic Behavior & Organization, vol. 31(1) (1996)