Archive - May 24, 2012

All you need to read.

The ballot box and economics textbook are on a collision course around the world, and we thought Nic Colas' (of ConvergEx) analysis of what behavioral economists call The Ultimatum Game was worth a refresher.  That’s where two strangers divide a fixed sum of money, with one person proposing a split and the other accepting or rejecting it.  It’s a one-shot deal, so the proposer tries to work out the minimum amount required to get the other person to go along.  Classical economics says that a $1 proposal out of a $100 pot should work, but in real life (and this study has been done everywhere from the rainforests of South America to the bars of Pittsburgh) it takes 25-50% offers to win the day.  Nic found three recent updates to the Ultimatum Game that each speak directly to the current political state of play in Europe and the United States.  One shows that proud people (or those led by nationalist-minded politicians, perhaps) need higher offers in order to accept a split. The second shows that the Game works even for small amounts.  The last – and the first such study we've ever seen from a mainland Chinese university – shows that worries over social status complicate the already difficult mental calculus of "How much is enough?" Classical economics would say – and you will hear a lot of policymakers echo – that the Greeks should take whatever deal they can.  Something is better than nothing.  However, all the lessons of the Ultimatum Game studies point to an entirely different conclusion.