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Is Altruism Rational?

October 17, 2014

In a game first popularized in the academic literature in the early 1980s, two people are invited separately to play a game, with a monetary prize. The players are acting anonymously, playing the game via a computer terminal. The game, widely known these days as the ‘Ultimatum Game’, involves one of the players, who we will call Jack, being given £50, say, by the experimenter. He must now decide whether or how much he should offer the other player, who we will call Jill. Remember that Jack and Jill don’t know each other, and will remain anonymous to each other. The game is only played once, so there is no comeback from Jill whatever Jack does. There is, however, one consideration for Jack to think about. If Jill turns down the offer, they both walk away empty-handed. So how much should Jack offer Jill? And how much will he? Traditional economic theory about rational behaviour would suggest that Jack, as a profit-maximizing agent, should offer Jill a very small amount, and that Jill should accept this very small amount rather than get nothing. In fact, early experimenters who put real people into this scenario usually found that the amount of money offered lay somewhere between 50-50 and 65-35. Sometimes, nevertheless, the second player was indeed offered only a small amount, and in those cases where this was less than 30% of the prize, usually refused. In other words, when Jill was offered less than £15 of the £50, she usually walked away from the deal, leaving both with nothing. Is this reconcilable with rational economic behaviour? One explanation that is often proposed is that offers of less than 30% or so are considered as desultory, even insulting, and Jill is getting utility (as economists would call it) from punishing Jack. Yet the low offer made by Jack is not in fact a personal insult, and arises as part of the design of the game. Indeed, neither player will ever know who the other person is. It is certainly not profit-maximizing behaviour by Jill. Is there another explanation? One explanation that makes some sense, proposed in the mid-1980s by the distinguished mathematician and game theoretician, Robert Aumann, is that people tend to evolve rules of thumb according to which they behave in their day-to-day lives. One such rule he identifies as “Don’t be a sucker; don’t let people walk all over you.” This might indeed work well as a general rule for Jill to live by, insofar as it helps build up her reputation for people’s future reference. But in this particular situation, turning down £15 does nothing to build up her reputation, because she is anonymous. Aumann’s explanation is that Jill doesn’t think like that. She has built up this rule-of-thumb behavioural code over a lifetime, and will not so easily abandon it a particular context, when the situation is different. This is what we might call ‘bounded rationality’, in that people do not usually consciously maximize in each decision situation, but instead use rules of thumb that work well “on the whole”. So, that leaves a couple of questions. The first is whether Jack is being rational when he offers a small slice of the cake to Jill, and the second is whether he is he being altruistic or self-interested when he offers her a bigger slice?   Reference: Robert Aumann, Rationality and Bounded Rationality: The 1986 Nancy L. Schwartz Memorial Lecture.

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