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Re: Money isn't everything

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  • leif_ericssen
    I was amused by the article when I read it. One of the questions I have when I read of economic experiments is the context - how realistic (relevant to what we
    Message 1 of 3 , Jul 10, 2007
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      I was amused by the article when I read it.

      One of the questions I have when I read of economic experiments is
      the context - how realistic (relevant to what we see and do in real
      life) is the arranged situation?

      I'm familiar with the ultimatium game and the normal rationale of the
      participants, that it is free money for both, therefore the money
      should be split 50/50%. The 60/40% vs 87.5/12.5% offer/accept
      scenario is an extreme difference, but we can probably find a real
      life example somewhere that is similar.

      I agree that people think more in terms of seeking relative than
      absolute prosperity, but I still don't know about the correct
      relative weight of sociobiology rationales or cultural/social
      conditioning as the best way of explaining it.

      Jan

      --- In Behavioral-Finance@yahoogroups.com, "pgreenfinch"
      <pgreenfinch@...> wrote:
      >
      > Thanks Martin
      >
      > That raises a fundamental puzzle about rationality. What
      > is it exactly? Can we safely define what is "rational"
      > or "irrational"?
      >
      > Certainly to define (economic) rationality as behaving
      > according to one's self-interest, measured in monetary
      > terms, is reductive. A broader definition is needed.
      > The broadest one might be:
      > "To act in a consistent way with one's preferences"
      >
      > But this does not solve the puzzle, it just transforms it
      > into another: "Can we judge if a preference is rational
      > or irrational?"
      >
      > As I said in the last newsletter, BF might be too focused
      > on what it calls "anomalies". Maybe a too normative concept
      > as it supposes we agree first on relevant human norms, at
      > least relative to financial behavior. A bit frightening,
      > no?
      >
      > Peter
      >
      > --- In Behavioral-Finance@yahoogroups.com, Martin Sewell
      > <M.Sewell@> wrote:
      > >
      > > [ source: http://www.economist.com/displaystory.cfm?
      > story_id=9433782 ]
      > >
      > > Money isn't everything
      > >
      > > Jul 5th 2007
      > > From The Economist print edition
      > > Men with a lot of testosterone make curious economic choices
      > >
      > > PSYCHOLOGISTS have known for a long time that economists are
      wrong.
      > > Most economists--at least, those of the classical persuasion--
      > believe
      > > that any financial gain, however small, is worth having. But
      > > psychologists know this is not true. They know because of the
      > > ultimatum game, the outcome of which is often the rejection of
      free
      > money.
      > >
      > > In this game, one player divides a pot of money between himself
      and
      > > another. The other then chooses whether to accept the offer. If
      he
      > > rejects it, neither player benefits. And despite the instincts of
      > > classical economics, a stingy offer (one that is less than about
      a
      > > quarter of the total) is, indeed, usually rejected. The question
      > is, why?
      > >
      > > One explanation of the rejectionist strategy is that human
      > psychology
      > > is adapted for repeated interactions rather than one-off trades.
      In
      > > this case, taking a tough, if self-sacrificial, line at the
      > beginning
      > > pays dividends in future rounds of the game. Rejecting a stingy
      > offer
      > > in a one-off game is thus just a single move in a larger
      strategy.
      > > And indeed, when one-off ultimatum games are played by trained
      > > economists, who know all this, they do tend to accept stingy
      offers
      > > more often than other people would. But even they have their
      > limits.
      > > To throw some light on why those limits exist, Terence Burnham of
      > > Harvard University recently gathered a group of students of
      > > microeconomics and asked them to play the ultimatum game. All of
      > the
      > > students he recruited were men.
      > >
      > > Dr Burnham's research budget ran to a bunch of $40 games. When
      > there
      > > are many rounds in the ultimatum game, players learn to split the
      > > money more or less equally. But Dr Burnham was interested in a
      game
      > > of only one round. In this game, which the players knew in
      advance
      > > was final and could thus not affect future outcomes, proposers
      > could
      > > choose only between offering the other player $25 (ie, more than
      > half
      > > the total) or $5. Responders could accept or reject the offer as
      > > usual. Those results recorded, Dr Burnham took saliva samples
      from
      > > all the students and compared the testosterone levels assessed
      from
      > > those samples with decisions made in the one-round game.
      > >
      > > As he describes in the Proceedings of the Royal Society, the
      > > responders who rejected a low final offer had an average
      > testosterone
      > > level more than 50% higher than the average of those who
      accepted.
      > > Five of the seven men with the highest testosterone levels in the
      > > study rejected a $5 ultimate offer but only one of the 19 others
      > made
      > > the same decision.
      > >
      > > What Dr Burnham's result supports is a much deeper rejection of
      the
      > > tenets of classical economics than one based on a slight
      > > mis-evolution of negotiating skills. It backs the idea that what
      > > people really strive for is relative rather than absolute
      > prosperity.
      > > They would rather accept less themselves than see a rival get
      > ahead.
      > > That is likely to be particularly true in individuals with high
      > > testosterone levels, since that hormone is correlated with social
      > > dominance in many species.
      > >
      > > Economists often refer to this sort of behaviour as irrational.
      In
      > > fact, it is not. It is simply, as it were, differently rational.
      > The
      > > things that money can buy are merely means to an end--social
      > > status--that brings desirable reproductive opportunities. If
      > another
      > > route brings that status more directly, money is irrelevant.
      > >
      >
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