People Care about Fairness

The ultimate game: Two volunteers (who are otherwise strangers to each other) are told that they are going to play a game and could win a total of Rs 1000. Before they play, they learn the rules. The game begins with a coin toss, which is used to assign the volunteers to the roles of player A and player B. Player A’s job is to propose a division of the Rs1000 prize between himself and the other player. After player A makes his proposal player B decides whether to accept or reject it. If he accepts it, both players are paid according to the proposal. If player B rejects the proposal both players walk away to the proposal. If player B rejects the proposal both players walk away with nothing. In either case, the game then ends.

Before proceeding stop and think about what you would do in this situation. If you were player A, what division of the Rs1000 would you propose? If you were player B, what proposals would you accept?

Conventional economic theory assumes in this situation that people are rational if wealth maximizes. This assumption leads to a simple prediction: Player A should propose that he gets Rupees 900 and player B gets Rs100, and player B should accept the proposal. After all once the proposal is made, player B is better off accepting it as long as he gets something out of it.  Moreover, because player A knows that accepting the proposal is in player B’s interest player A has no reason to offer him more than Rupees 100.

Yet when experimental economists ask real people to play the ultimatum game, the results are very different from this prediction. People in the role of player B usually reject proposals that give them only Rs100 or a similarly small amount. Knowing this, people in the role of player A usually propose giving player B much more than Rs100. Some people will offer a 50-50 split, but it is more common for player A to propose giving player B an amount such as Rs300 or Rs400 keeping the larger share for himself. In this case player B   usually accepts the proposals.

The natural interpretation is that people are driven in part by some innate sense of fairness. A 99-1 split seems so wildly unfair to many people that they reject it, even to their own detriment. By contrast, a 70-30 split is still unfair, but it is not so unfair that it induces people to abandon their normal self-interest.

Throughout our study of household and firm behaviour the innate, sense of fairness has not played any role. But the results of the ultimatum game suggested that perhaps it should. Some economists have suggested that the perceived fairness of what a firm pays its workers should also enter the picture. Thus, when a firm has an especially profitable year, workers (like player B) may expect to be paid a fair share of the prize, even if the standard equilibrium does not dictate it. The firm (like player A) might well decide to give workers more than the equilibrium wage for fear that the workers might otherwise try to punish the firms with reduced effort, strikes or even vandalism.

People are in consistent overtime:

Imagine some dreary task, such as doing your laundry, shovelling snow off your driveway, or filling out your income tax forms. Now consider the following questions:

*Would you prefer (A) to spend 50 minutes doing the task right now or (B) to spend 60 minutes doing the task tomorrow?

* Would you prefer (A) to spend 50 minutes doing the task in 90 days or (B) to spend 60 minutes doing the task in 91 days?

When asked questions like these, many people choose B to question 1 and A to question 2 . When looking ahead to the future they minimize the amount of time spent on the dreary task. But faced with the prospect of doing the task immediately (as in question1) they choose to put it off.

In some ways this behaviour is not surprising: Everyone procrastinates from time to time.

Many times, in life, people make plans for themselves but they fail to follow through. A smoker promises himself that he will quit, but within a few hours of smoking his last cigarette he craves another and breaks his promise.  A person trying to lose weight promises that he will stop eating dessert but when the waiter brings the dessert cart, the promise is forgotten. In both cases, the desire for instant gratification induces the decision maker to abandon his past plans.

Some economists believe that the consumption saving decision is an important instance in which people exhibit this inconsistency over time. For many people, spending provides a type of instant gratification. Saving, like passing up the cigarette or the dessert, requires a sacrifice in the present for a reward in the distant future. And just as many smokers wish they could quit and many overweight individuals wish they ate less, many consumers wish they saved more of their income.

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