Hard-Wired for Fairness

Fairness makes us happy:

Brain reacts to fairness as it does to money and chocolate, EurekAlert: The human brain responds to being treated fairly the same way it responds to winning money and eating chocolate, UCLA scientists report. Being treated fairly turns on the brain's reward circuitry.

"We may be hard-wired to treat fairness as a reward," said study co-author Matthew D. Lieberman, UCLA associate professor of psychology...

"Receiving a fair offer activates the same brain circuitry as when we eat craved food, win money or see a beautiful face," said Golnaz Tabibnia, a postdoctoral scholar at ... UCLA and lead author of the study...

The activated brain regions include the ventral striatum and ventromedial prefrontal cortex. Humans share the ventral striatum with rats, mice and monkeys, Tabibnia said.

"Fairness is activating the same part of the brain that responds to food in rats," she said. This is consistent with the notion that being treated fairly satisfies a basic need, she added.

In the study, subjects were asked whether they would accept or decline another person's offer to divide money in a particular way. If they declined, neither they nor the person making the offer would receive anything. Some of the offers were fair, such as receiving $5 out of $10 or $12, while others were unfair, such as receiving $5 out of $23.

"In both cases, they were being offered the same amount of money, but in one case it's fair and in the other case it's not," Tabibnia said.

Almost half the time, people agreed to accept offers of just 20 to 30 percent of the total money, but when they accepted these unfair offers, most of the brain's reward circuitry was not activated; those brain regions were activated only for the fair offers. Less than 2 percent accepted offers of 10 percent of the total money. The study group consisted of 12 UCLA students...

"The brain's reward regions were more active when people were given a $5 offer out of $10 than when they received a $5 offer out of $23," Lieberman said. "We call this finding the 'sunny side of fairness' because it shows the rewarding experience of being treated fairly."

A region of the brain called the insula, associated with disgust, is more active when people are given insulting offers, Lieberman said.

When people accepted the insulting offers, they tended to turn on a region of the prefrontal cortex that is associated with emotion regulation, while the insula was less active.

"We're showing what happens in the brain when people swallow their pride," Tabibnia said. "The region of the brain most associated with self-control gets activated and the disgust-related region shows less of a response."

"If we can regulate our sense of insult, we can say yes to the insulting offer and accept the cash," Lieberman said.

Can taking economics courses can to overcome the fairness hard-wiring?:

We Are What We Learn, by Ray Fisman, Forbes: ...[W]e put 70 Yale Law students in a computer lab, and had them play a game that would reveal to us their views on fairness. (The study, which was coauthored with Shachar Kariv and Daniel Markovits, can be found here.)

The students made 50 decisions about giving. In some cases students started with $10, and for each dollar they gave up, their (anonymous) partner in the game would get, say, $5. In this case, giving was "cheap." In others, giving was expensive (each dollar given up yielded only 20 cents for the partner).

Someone who gives a lot when it's cheap and keeps most of the pie for himself when giving is expensive focuses on efficiency: He's making sure the maximum amount is paid out to him and his partner combined. Someone who keeps 80% of the pie when it would be cheap to give is more focused on equality. Someone who always keeps everything, regardless of the price of giving, is just plain selfish, the very embodiment of the rational, self-interested Homo economicus.

It turns out that exposure to economics makes a big difference in how students split the pie, in terms of both efficiency and outright selfishness. Students assigned to classes taught by economists were more likely to give a lot when it was cheap to do so. But they were also much more likely to take the whole pie for themselves.

Comments

[evagrius]

"Apparently, taking economics courses can to overcome the fairness hard-wiring:"

Interesting if true.

Is the teaching of economics then a form of brainwashing?

I don't think it is but this certainly points to a defifiency in its teaching by most economics professors.

Perhaps courses in philosophy would add a corrective to the somewhat cramped definition of human beings as homo economicus.

[James Killus]

I've seen variations on this study, with the same results.

One of the legitimate criticisms made by those who deny the theory of evolution is that it too often winds up being turned into some form of Social Darwinism by those who teach it. Of course, many people who deny evolution nevertheless behave as Social Darwinists, so the real error is elsewhere, possibly in economics, but more likely in what has become conventional wisdom at a certain level of social class.

"Did you know," said someone to an economist, "That in Canada, they get better health care for less money?"

"That's impossible," replied the economist. "If that were true, I'd have already moved to Canada."

[gorobei]

It's fascinating that economists have been so slow to latch on to the concept of perceived fairness. It's probably the biggest factor in the employee turnover rate at most large firms.

My evidence is anecdontal, but after being at ten or so firms during both good and bad times, I have a sense of what makes people stay or leave...

1. Tell everyone they will get an X% end-of-year bonus based on whatever, then pay it. Most stay.
2. Let them find out that a few people got secret extra-bonuses. Lot of people quit.
3. Tell 'em you pay for performance, then pay it. Most stay.
4. As 3, but reneg. Quitters galore.

I've worked on Wall Street (where every employee is basically privately told his compensation at year's end with most of the time being spent explaining why it's a fair number,) and firms where the employee bonus number is sent via a to-all email. As long as what a firm says and does are aligned, most people see the deal as fair, and stick with it assuming it's roughly the contract they want.

Oh, I saw a couple of firms that disproportionately promoted attractive women, etc, (in non-client facing roles.) It was sad, but funny, to watch their collapses.

[OhNoNotAgain]

"It's fascinating that economists have been so slow to latch on to the concept of perceived fairness. It's probably the biggest factor in the employee turnover rate at most large firms."

Indeed. It's also a major factor in how your customers perceive you as a company. With my software company, I try to ensure that our prices are not only competitive, but that they are fair value for what we're providing. Customers resent being charged licensing fees for no apparent reason other than the fact that the fees are based upon a number of users, especially when our efforts and input do not correspond to the number of users. In other words, they are smart enough to know that increasing the number of users does not make things harder for us in terms of development, nor does it add any extra requirements other than support. They would much rather be charged for the support that they require, or something concrete that they can perceive as a fair exchange. As a result, we experience *extremely* high customer retention rates and are much more easily forgiven when we "trip up" and make a mistake. Furthermore, customers stay by us even when times are economically tough, and even if there are competitors that are cheaper, numerically. Our experience indicates to us that being fair in the business world can also be a positive for the bottom line.

[cb]

Do we have the causation the right way around here? Is it economics students learning to be selfish, or the selfish being attracted to economics? (I say this as an economist.)

Incidentally, I don't necessarily interpret the behaviour as "homo economicus". It could just as easily be a high time discount factor. Split-the-dollar games have a different equilibrium in a repeated context when your partner cares about fairness, than in the one-shot context.

If these were all law students, they must have all known each other. So either the selfish players:
(a) did not take into account that they would be interacting with these people in future, if not in this game;
(b) were incapable of recognising that their partner might care about fairness (were unable to reason about other people's motivations); or
(c) knew the structure of the game and the other player's motivations, but didn't care (because their high time discount factor led them to discount any negative future consequences).

I've seen these results before and am not convinced that they capture a teaching effect, rather than a self-selection of the socially incompetent. (This would also be consistent with the ongoing high fraction of males in economics, while other professions including law are seeing a progressively increasing fraction of female students, because social incompetence in Western societies is concentrated amongst males.)

[Winslow R.]

"It's also a sobering message for teachers such as myself. The students in my classroom will venture forth into the world of business and management, carrying with them some of the viewpoints and attitudes that I choose to emphasize in my lectures"

Wow, growing inequality/efficiency is caused by economics teachers :)

4 Categories of leaders.

Efficiency/Equality - Clinton?
Inefficiency/Equality - Castro?
Efficiency/Inequality - Pinochet?
Inefficiency/Inequality - Bush?

Seems plausible the chaos of the Great Depression/WWII tilted teachers/leaders (Keynes/FDR) towards the importance of equality.

Post-war boom tilted teachers (Friedman/Reagan) towards the idea of efficiency.

Perhaps an efficient level of equality eludes us because it is unstable, so we inevitably end up with an inefficient inequality which is also unstable. Things then become so bad that teachers/leaders change.

Kind of like a tennis match going back and forth.

Personally, I believe the economic system is unstable due to inherent flaws (bank subsidies etc.) that inevitably lead to inefficient inequality.

Kind of like playing pool on a titled table.

[reason]

Winslow,
increasing returns to scale, combined with money makes money, are all you need for inequality. Before you start messing with the financial system and its problems.

[Brock]

Here's the thing that always puzzles me about these experiments.

If the subject does her efficiency calculation at the meta-level, there's really no reason to prefer giving the experimental partner $50 to keeping $10 for oneself. After all, the subject's choice is not creating or destroying any wealth, just reallocating it among the three beings: the subject, her partner, and the psychology department.

Any gain to the subject or her partner is an equal loss to the psychology department.

Maybe the economics students are not more selfish. Maybe they're more likely to see through the experimental facade.

[reason]

Brock,
are you saying that economics student no longer know how to play act?

[reason]

That reminds me of the story of the economist and the note lying on the ground.

[Winslow R.]

Reason: "increasing returns to scale, combined with money makes money, are all you need for inequality."

'Increasing returns to scale' derive directly from how the financial system funds corporations (stocks at 0% and AAA bonds at 4-5%) more cheaply than small business. Give small business access to credit at the same rate and there would be greatly reduced 'returns to scale'.

'Money makes money' is swamped by leverage makes money. Leverage is monopolized by the financial industry, money, not so much.

" Before you start messing with the financial system and its problems."

Not too often you hear, 'the worst financial crisis since the Great Depression', kind of hard to let the opportunity for change pass unnoticed.

Perhaps you could help me understand why tax farming is considered bad economics yet interest farming is not?

[reason]

Software is costly make, very cheap to copy. Same with industrial design. Finance is not the only reason for increasing returns to scale. Leverage doesn't make money, it just increases both risk and reward. But someone with 10 million in financial assets never needs to work any more. If holding great wealth is not made more costly, inequality will continue to increase. Has no one ever played monopoly.

No Winslow I don't buy this one problem swamps all others view. And international finance (with the assymmetric pressures on deficit countries and surplus countries) is another still bigger disaster (because of the distorting effects it has the terms of trade). And no I'm not a fan of leverage for everyone, I would like to see of it full stop.

[reason]

oops ...
less of it full stop.

[Winslow R.]

"Software is costly make, very cheap to copy. Same with industrial design. Finance is not the only reason for increasing returns to scale."

Return to scale require large investments in capital.
http://en.wikipedia.org/wiki/Returns_to_scale
Don't you think how those returns are distributed are determined by how that capital is financed?

"Leverage doesn't make money, it just increases both risk and reward."

Reward is money made? Risk is socialized so is not money lost? Leverage creates leveraged debt which earns money?
http://en.wikipedia.org/wiki/Fractional-reserve_banking

"But someone with 10 million in financial assets never needs to work any more."

Raging inflation would make this untenable.

"If holding great wealth is not made more costly, inequality will continue to increase. Has no one ever played monopoly."

Okay, but you assume a world with limits. I'd like to think problems with world limits can be overcome through increasing technology - expand the monopoly board.

"No Winslow I don't buy this one problem swamps all others view."

Yes, that is my view. I have a difficult time redistributing wealth through taxation beyond what a nation requires to protect that wealth. I'd rather create a system where wealth wasn't automatically concentrated by redistributing access.

"And international finance (with the assymmetric pressures on deficit countries and surplus countries) is another still bigger disaster (because of the distorting effects it has the terms of trade)."

I see this problem disappearing once governments feel no pressure to 'peg' their currencies/limit inflation. Governments should be concerned about optomizing growth. Right now, given the low labor participation rate here in the U.S., the government should be investing in a sustainable future, damn the dollar.

"And no I'm not a fan of leverage for everyone, I would like to see [less] of it full stop."

Not sure how to interpret this comment. I too would like to see less of it, 5x instead of 33x. To get there, you need to expand access to leverage. Do the math.

[Patricia Shannon]

Winslow R. says...

"But someone with 10 million in financial assets never needs to work any more."

Raging inflation would make this untenable.

They can invest in the stock market and live on part of the interest, can't they?

[Winslow R.]

"They can invest in the stock market and live on part of the interest, can't they?"

Not likely. Look at the stock market performance during the 70's. In a raging inflation, the place to be is in nonfinancial assets.

http://finance.yahoo.com/echarts?s=%5EDJI#chart4:symbol=^dji;range=19650104,19800701;charttype=line;crosshair=on;ohlcvalues=0;logscale=on

[Patricia Shannon]

But in other threads, we have people insisting that the stock market is a great place to invest.

[Winslow R.]

"But in other threads, we have people insisting that the stock market is a great place to invest."

Over the long run, it's not too shabby. For those that have better things to do than think about money, a broad portfolio like anne suggests is recommended.

[Patricia Shannon]

I guess that would mean mutual funds? Otherwise, most people couldn't afford it, what with fees and minimum number of shares. At least, that's my impression. And I believe I remember seeing articles about problems with some mutual funds, fraud, excessive fees, churning.

[reason]

"But in other threads, we have people insisting that the stock market is a great place to invest."

When everybody believes that, it isn't true anymore.