Nice little article introducing neuro-economics

[hmkpoker]

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I will go back to reading the article, to see if there is some worthwhile insight, but I have temporailly stopped after reading this:

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IMAGINE that you are sitting next to a complete stranger who has been given £10 to share between the two of you. He must choose how much to keep for himself and how much to give to you.

He can be as selfish or as generous as he likes, with one proviso: if you refuse his offer, neither of you gets any money at all. What would it take for you to turn him down?

This is the scenario known to economists as the ultimatum game. Now the way we play it is generating remarkable insights into how the human brain drives financial decisionmaking, social interactions and even the supremely irrational behaviour of suicide bombers and gangland killers.

According to standard economic theory, you should cheerfully accept anything you are given. People are assumed to be motivated chiefly by rational self-interest, and refusing any offer, however low, is tantamount to cutting off your nose to spite your face.

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This is just stupid. This ridiculous result does not in any way depend on "standard economic theory", it depends on suckers.

This scenario becomes precisely clear when we realize that it is exactly symmertic, i.e. it does not matter which person is "given" the $10 initially; both players must agree on the split for either to be paid. The only possible rational solution is to offer and accept only $5.

Any player who accepts less than $5 has not thought about the game thoroughly (and hence is not "perfectly rational", in the game theoretic sense).

A player who accepts $0 rather than agreeing to $4 has made precisely no worse of a mistake than the player ending up with $0 after holding out for $6.

There is nothing at all in this game that confounds "standard economic theory."

This article better pick up fast.

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Calm down.

The proposed situation in the article is SINGULAR. Non-iterated. The tendency for people to turn down any quantity, assuming that this action will have no impact on the future, is irrational.

However, I agree that it's a poor analog of economics.

[Borodog]

The human reaction, though, is exactly what we expect, because there is a selective advantage to fairness, because in the real world (the economic world) these "games" are almost never single. Almost all economic interactions are "iterated"; hence there is a selective advantage to holding out for "fairness", even if the individual doesn't consciously realize it. This is NOT in conflict with any economic analysis. Essentially, what I'm saying is that the "sense of righteous indignation at unfairness" acts to lower the individual's time preference.

This: "Our ancestors were better at surviving if they were bloody-minded." is particularly stupid. The article is making the point that it is precisely the fair, and those that hold out for fairness that are better at surviving, not the "bloody-minded."

This is right in line with the post I've been thinking about making that makes the points that human beings are "domesticated", i.e. we've been inadvertantly bred to get along with other humans in groups just the way we inadvertently bred wolves into dogs and wild grains into wheat and corn. We're domesticated, bred to cooperate. But because of the massive advantages of specialization and the division of labor, we've also been bred to "truck and barter", in the words of Adam Smith, as well as to bargain and haggle hard.

[Darryl_P]

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Can those core values ever be irrationally constructed?


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I don't think so. Rationality can only start from a set of givens. It cannot start from a vacuum. The givens, by definition, must come from a source outside of rationality and are therefore neither rational nor irrational.

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[One of the best examples I can think of is a no-talent adolescent with dreams of hitting it big in the music industry and becoming a rock star. It's not that uncommon of a scenario, but the fulfillment of those wishes is EXTREMELY uncommon. Most adolescents don't realize (or defiantly ignore) just how difficult and unlikely such a result is, and almost all eventually become disappointed. Some become slacking adults with similarly juvenile aspirations that are impossible.


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True, and I would argue that neither their actions per se nor the values behind them are irrational. They may say a lot of irrational things when discussing their actions, though, indicating they have not fully come to terms with their own state of being. In fact, I'd say that happens in over 99% of the cases.

One possible rational explanation for their actions is that they want to test themselves to see how far they can go. They can maximize their chances relative to their own abilities if they truly believe they can reach the top. Tricking themselves to overvalue their chances is one of their internal techniques to maximize their expected utility. I'm not saying this is necessarily how it is for everyone, just one possibility to show there exist scenarios in which behaving that way may not be irrational.

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I consider rational paradigms to be those that are conducive to actions that are most likely to result in happiness (the definition of which is unfortunatel complicated), while factoring in the dimension of time (an action that yields immediate happiness at the expense of future happiness, like shooting heroin, is not always rational). What do you think?

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I agree with what constitutes a rational paradigm and also with the extreme difficulty in defining happiness (for ourselves, leave alone for others), especially over long periods of time. And I would even argue that the heroin shooter might actually be maximizing his own long-term happiness by shooting heroin (!), assuming he knew enough about the effects of the drug before getting into it. For whatever reason, testing the limits might be of extremely high value to him. Only he can know that. If it's of high enough value, then taking huge risks would be the rational course of action for him. As an outside observer, I would sooner assume there is something about his underlying values that makes his actions rational than assume that he's not acting in accordance with his own underlying values. The reason is simply based on the statistics of prior observations that I have made in situations when I've been able to get a lot of information and analyse things deeply.

[hmkpoker]

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The human reaction, though, is exactly what we expect, because there is a selective advantage to fairness, because in the real world (the economic world)these "games" are almost never single. Almost all economic interactions are "iterated"; hence there is a selective advantage to holding out for "fairness", even if the individual doesn't consciously realize it. This is NOT in conflict with any economic analysis. Essentially, what I'm saying is that the "sense of righteous indignation at unfairness" acts to lower the individual's time preference.

This: "Our ancestors were better at surviving if they were bloody-minded." is particularly stupid. The article is making the point that it is precisely the fair, and those that hold out for fairness that are better at surviving, not the "bloody-minded."


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This is true, but note that fairness is not useful in the modern (capitalist) world. Evolution took us through eons of savage hobbesian anarchy, and took the priviledged few species to anarcho-socialism, where animals usually had enough resources to fit immediate needs, and were better off with the "I'll scratch your back if you scratch mine" mentality. For small tribes, this is excellent.

However, when we took the great leap forward, we established a system that is very counter-intuitive. The concept of private property is unappealing when you are starving and someone else has a bounty of food; while it seems unfair, it is the threat of punishment that prevents the starving man from stealing. While private property rights coupled with the threat of punishment for aggressors was the best productivity incentivizer ever, we're still left with evolutionary baggage that makes it seem exploitative and wrong.

This isn't the only case where evolution screws us. When the well-being of an animal is threatened (often by the presence of a predator), it will biologically trigger an autonomic response: heart and lungs will accelerate, muscular nutrients are secreted, digestion is inhibited, spatial awareness is increased, and prefrontal activity is inhibited. The reason is that it is advantageous for the animal to be prepared for a situation where he is going to either kill something or run like hell. That's very important in the animal world, but in the modern world it can be a liability. A dangerous operation will naturally have the same effect on a doctor, however, being primed to run or kill with a scalpel in his hand is very disadvantageous. Human beings who are less affected by the autonomous nervous system are much more ideal for high-stress white-collar positions, as they are able to be logical or diplomatic under pressure. (Hence, why personality is so important for many employers; risk-taking preference is much more demonstrable in personality than in IQ tests)

So with all this evolutionary baggage, human beings are left intuitively judging fairness to be right, even in large economic systems where it is simply not practical. That's why people are so naturally inclined toward socialism and hating the rich.

[Borodog]

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The human reaction, though, is exactly what we expect, because there is a selective advantage to fairness, because in the real world (the economic world)these "games" are almost never single. Almost all economic interactions are "iterated"; hence there is a selective advantage to holding out for "fairness", even if the individual doesn't consciously realize it. This is NOT in conflict with any economic analysis. Essentially, what I'm saying is that the "sense of righteous indignation at unfairness" acts to lower the individual's time preference.

This: "Our ancestors were better at surviving if they were bloody-minded." is particularly stupid. The article is making the point that it is precisely the fair, and those that hold out for fairness that are better at surviving, not the "bloody-minded."


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This is true, but note that fairness is not useful in the modern (capitalist) world.

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What color is the sky in Crazy World?

What happens to economic exchangers who habitually do not act fairly to the other party to the exchange?

[FortunaMaximus]

Vanilla.

They topple over in the end if they're noticed taking edges for too long. There's a causative effect there too that isn't mentioned. Cold dishes are generally the sweetest of all.

[Propertarian]

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This is just stupid. This ridiculous result does not in any way depend on "standard economic theory", it depends on suckers.

[/ QUOTE ] Standard economic theory = neoclassical economics, not Austrian Economics. This paragraph goes against what is predicted in this situation by neoclassical economics; namely,

Person Y gets the money and must split with X. Y will pick 1 cent (or whatever the minimu is), knowing that X is a hom-o economicus who will always take something over nothing. X will accept the offer, because he prefers the outcome of one penny to zero cents (which would be his outcome if he rejected the offer).

[Propertarian]

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It would be equally preposterous to think that any such nature is static.

[/ QUOTE ] Correct; mutation and natural selection are the only constants in human nature i.e. a very slow process of change is the only constant.

[Rduke55]

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This scenario becomes precisely clear when we realize that it is exactly symmertic, i.e. it does not matter which person is "given" the $10 initially; both players must agree on the split for either to be paid. The only possible rational solution is to offer and accept only $5.

Any player who accepts less than $5 has not thought about the game thoroughly (and hence is not "perfectly rational", in the game theoretic sense).

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I'm confused as to why you're so fired up about this.

[hmkpoker]

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The human reaction, though, is exactly what we expect, because there is a selective advantage to fairness, because in the real world (the economic world)these "games" are almost never single. Almost all economic interactions are "iterated"; hence there is a selective advantage to holding out for "fairness", even if the individual doesn't consciously realize it. This is NOT in conflict with any economic analysis. Essentially, what I'm saying is that the "sense of righteous indignation at unfairness" acts to lower the individual's time preference.

This: "Our ancestors were better at surviving if they were bloody-minded." is particularly stupid. The article is making the point that it is precisely the fair, and those that hold out for fairness that are better at surviving, not the "bloody-minded."


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This is true, but note that fairness is not useful in the modern (capitalist) world.

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What color is the sky in Crazy World?

What happens to economic exchangers who habitually do not act fairly to the other party to the exchange?

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I'm referring to fairness of result, not fairness of opportunity. In tribal anarchy, one who produces a lot has his resources consumed by the tribe...of course, this isn't a problem with small populations, since your tribe members are your closest friends and family.