Saturday, January 30, 2010

The Dictator Game

I'm reading "Super Freakonomics" and came across an interesting story. Somehow, it seems I always end up reading something relevant to the days events. The day I read this happened to be a couple of days before the State of the Union address.

The economic games/experiments described in "Super Freakonomics" helped me understand why the President and Congress are so quick to take our money.

There are two classic games "Ultimatum" and "Dictator" used as experiments by economists for determining human behavior.

In Ultimatum, there are 2 players. One is given $20 and is asked to offer any amount to the second player. If the second player rejects the offer, neither player gets any money. The average offered was $6. It was usually rejected if it was less than $3.

In Dictator, the main difference was that the second player got no input. Surprisingly, the "dictators" were very generous.

An economist, John List, thought these experiments didn't agree with real human behavior. He tried a couple variations:

The first variation: Dictator game with an additional option of being able to take $1 from the second person. The result was that fewer people gave money. The power to take people's money (taxation) makes you less generous!

The second variation: the Dictator game, but the first person is told that the second person also was given $20. They are told that they can still give any portion of their money, or take any of the second persons money. The result was that only 10% gave money, more than 60% took money, and most surprising more than 40% took ALL the money. Taking money from the rich makes you want to take ALL the money!

3. The final version of the game was the same as the last version, except that both players had to WORK for the $20. The result was that only 28% of the players took money away and 2/3 neither gave nor took a penny. We respect other people's property more when everyone works for what they have!

The last version is my favorite. I think it is evidence that a free-market economy is the best option. So what does this have to do with the State of the Union address this week?

Congress and the President are acting like dictators in game 2. What they don't realize is that they are actually playing the "Ultimatum" game and the American voter is about to "reject" their offer and vote them out of the dictator position. Test results won't be in until November.

1 comment:

Kevin said...

Slightly tangential, but Steven Pinker's marvelous The Blank Slate has some discussion of these and other lines of research, most of which tend to support the notion of a strong inborn human nature shaped by evolution.

The other problem with Congress and the Democrats in general is that they strongly tend to static economic analysis, while the real economy is a hugely complex nonlinear dynamical system. But you knew that already...