Tuesday, November 22, 2005

More on Self Interest and Altruism

Over on the Productivity Shock Blog (www.productivityshock.com) Jason Briggeman discusses some experimental work of professor Ernst Fehr (University of Zurich, Institute for Empirical Research in Economics), delivered at a meeting of the Southern Economics Association on the week-end in Washington.

Fehr uses a version of the game discussed in the previous post,this time called the Ultimatum Game. Fehrs data showed:

On average, player A offers 40% of the pot to player B.
Player B rejects all offers of 5% or less, but accepts all offers of 50% or more. Between 5% and 50%, the larger the offer, the more likely that B will accept.

Jason Briggeman comments: “To put it mildly, those results are open to other interpretations.” He then offered a different interpretation amounting to a ‘proof’ of self-interest being the motivation:

Offering about 40% maximizes A's expected return given B's expected behavior. (This assumes that Player A has
rational expectations about B's behavior, but that is a good assumption considering that few people are surprised by the research results.)
My proof that Player B acts from self-interest is necessarily indirect, but it's pretty simple:
If self-interested motivation really were disproved by the fact that B sometimes rejects A's offer, then altruistic motivation would certainly be disproved by the same fact.
B's near-universal rejection of 0% offers and near-universal acceptance of 50-50 splits cannot suffice to prove egalitarian motives, because by the same logic B's near-universal acceptance of (extremely rare) 100% offers would prove self-interest.

Since the evidence for B's altruistic and egalitarian motivations is so weak, and considering that self-interested motivation readily explains almost everything else in such games (e.g., player A's behavior in this game), Q.E.D.”

Fehr’s own explanation is quoted by Briggeman:

“If others know that I am content with a small share, they are likely to make me low offers; if I am known to become angry when facing a low offer and to reject the deal, others have an incentive to make me high offers. Consequently, evolution should have favored emotional responses to low offers. Because one-shot interactions were rare during human evolution, these emotions do not discriminate between one-shot and repeated interactions. This is probably an important reason why many of us respond emotionally to low offers in the Ultimatum Game. We may feel that we must reject a dismal offer in order to keep our self-esteem. From an evolutionary viewpoint, this self-esteem is an internal device for acquiring a reputation, which is beneficial in future encounters.”

I have my own suspicions of altruism as an explanation for much, except in the form of reciprocation (when it ceases to be pure altruism). Reciprocation, unlike negotiation, is an implicit transaction: to do you a favour of some kind and I expect a favour in return at some other time in the future. Should the favour not be reciprocated when it is appropriate for you to do so, I shall pass on any opportunity to do you another favour. The sequence of reciprocal favours terminates with you.

Chimpanzees appear to practice this exchange in that portion of their mutual grooming sessions that are voluntary (others are compulsory). They groom certain members of the group but not others, and the ones they volunteer to groom are the chimps that have groomed them in the past. I suggest that reciprocation behaviours preceded negotiation behaviours where the transaction is explicit (‘Give me some of what I want and I shall give you that which you want’, as Adam Smith expressed it in “Wealth of nations”). While implicit reciprocation exchanges can occur without speech and language – the chimps – there are benefits in having speech and language for explicit negotiation transactions.

The division of behaviours into either pure altruistic or pure self-interest is part of the problem in discussions of evolutionary ‘fitness’, as is self-interest as it is understood in economics. Humans practise mixed motives in their behaviours. We get into tangles when we interpret from familiar chains of reasoning (like Bernard Mandeville) to produce ‘altruism is really self-interest’.

In my view, Adam Smith was more accurate when he made his famous quotation that we will be more likely to transact for our dinner from the Butcher, Brewer and Baker by appealing to their self-interest (offering them money) than to their benevolence (nobody, other than the Deity, who has everything, can altruistically supply our dinners for our lifetimes, and then at an extremely low standard of living). To serve our self-interest – our eating to survive and reproduce – we serve the self-interest of others. That part of the exchange transaction is usually overlooked by economists – if the parties to a negotiation remained trapped in their own self-interest they would seldom complete their transaction.

Back to Fehr’s claims and Briggeman’s ‘proof’. Transaction behaviours, the origins of which Smith did not speculate about, though he linked them to the faculties of languages and reason, were not one-off events. They were learned over many transactions and many examples of their alternative, violent plunder. If Ultimatum is played repetitively the number of failed transactions declines – people learn how to make the outcomes more reasonable (though still unequal). I mentioned in the previous post about sellers almost always quoting a higher opening price for an object than buyers offer as their opening price. (I should also add that no matter how high a price a seller receives for something they would be happier with still more; and no matter how low a buyer pays for something they would prefer to pay even less.)

Fehr misses something he should have known as his institute studies labour relations, namely negotiation behaviour; Briggeman’s proof is a logical ('Miseian' in scope) statement (I am reading ‘Human Action’ presently and have covered so far only one third of it), which like all logic depends on the premise. I am not happy with his premise, as the above shows.


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