In the past few weeks, I was fascinated to watch the spectacle of Goldman Sachs and the other of the big four banks thumbing their nose at the public and President Barack Obama by pledging billions in record bonuses at the same time that a stellar lineup of celebrities volunteered to man the phones during a telethon designed to entice ordinary working people to cough up donations for Haiti.
The contrast between the two scenarios particularly fascinated me because at the moment, I am immersed in studying fairness.
Fehr on fairness
The aptly named Swiss economist Ernst Fehr from the University of Zurich, now based at the Massachusetts Institute of Technology, has made his life’s work the study of the economics of fairness. Fehr has conducted the most well known studies demonstrating not only that that people are inherently fair and generous, but also have an inherent abhorrence of what he likes to call ‘inequity aversion’.
Fehr has exhaustively tested out his theory with the classic game- theory study called the Ultimatum Game. In this game, groups of volunteers are randomly paired although never allowed to meet. The pairs are then split off into ‘proposers’ and ‘responders’. The proposer is given a sum of money — say $10 — and allowed to offer the responder any amount of money, from $1 to $10, that he sees fit, while the responder’s job is simply to accept or reject the offer.
If he accepts it, he will receive the sum designated, while the proposer keeps the rest. If the responder rejects the offer, however, both leave empty-handed.
This is a one-time-only offer; both parties know there is no possibility of holding out for a better deal.
If human beings were innately selfish, it would make perfect sense for the proposer always to make the most derisory offer, and to keep the lion’s share, and it would also benefit the responder always to accept it, as something, no matter how little, is better than nothing.
Furthermore, there is no social pressure as they will never be given the other’s identity or interact again.
However, in practice, this almost never happens. Although about a quarter of people in total will act for self-interest, the most common offer is 50 per cent, and the overall average ranges between 43-48 per cent. Even though they stand to lose, the average person would rather share equally with people he hasn’t met and never will meet again.
Even more interesting, people tend to punish those who push the boundaries of unfairness. Those playing Ultimatum Game generally reject any offer below 20 per cent. If they’re playing with $10, any offers of $2 or below are rejected.
An impulse to punish
Social scientists call this impulse ‘altruistic punishment’ – our desire to punish unfairness, even at a cost to ourselves. This tends to suggest that we have a strongly honed sense of fair play, or what Fehr and his colleagues refer to as strong reciprocity — the will to cooperate with others and to punish those who violate the social contract of cooperation.
So strong is this impulse in human beings that we are willing to to cut off our own nose, so to speak. We would rather go home empty-handed than allow someone to take more than their fair share.
Save our parks
The domino effect of unfairness has been proved in game theory, with a game called the ‘Public Goods’, another standard in experimental economics. This game is designed to test how people behave when asked to contribute to something that could benefit the entire community but one in which they have no personal motivation to give.
It’s a bit like asking people to voluntarily pay taxes in order to maintain the parks in California. In this scenario, a number of participants are given tokens, which are redeemable at the end for money. They’re allowed to secretly decide how much of it to keep and how much to put into a common pot.
The experimenters will then award some percentage of the total, such as 40 per cent, in the pot to everyone playing.
The most strategic players will soon realize that the best you can do under any circumstance, regardless of what anyone else does is not to put anything into the pot, but to keep all your money yourself, lest you become victim to freeloaders.
However, this almost never happens among the wide number of experiments carried out by Fehr and other social psychologists; most people add something to the pot and the average is for people to give up half their tokens to the public good.
However, a very different scenario emerges during games run as a ‘repeat’ after 10 rounds. In that instance, as Fehr discovered. the enormous initial impulse to give rapidly fades so that by the final rounds, nearly three-quarters of all people contribute nothing and a large further batch, close to nothing.
When interviewed later, those participants who’d initially been generous grew increasingly furious at the freeloaders, who were contributing nothing and retaliated in the only mode of punishment they had: to stop contributing to the public fund.
This is a salutary lesson to the bankers as well as all the rest of us. Our entire society entirely rests upon a sense of fairness among the population. Take far more than your fair share and ultimately all of society’s cooperation falls apart.
The rich get poorer
That is evident in the research carried out by Richard Wilkinson and Kate Pickett in their book Spirit Level: Why More Equal Societies Always Do Better. After researching the social conditions of virtually every Western country, Wilkinson and Pickett discovered that in countries of the very rich with giant income disparity, everybody — both the most affluent and the very poorest — suffer from higher rates of ill health, higher crime rates, mental illness, environmental problems and violence.
The UK, the US and many countries in Europe, with their vast difference between rich and poor, are among the worse off in virtually every social indicator than countries like Sweden, with less wealth disparity in the population.
My husband Bryan came up with an ingenious idea that just might redeem the banks in the public eye and restore community spirit.
Here’s what you do, Goldman Sachs. Simply take half the bonus money you and the rest of the big four are planning to pay out in bonuses, pledge it to Haiti and you more than cover the $12 billion needed to rebuild the country.
A word to Julia Roberts; get off the phone with Joe Sixpack and have a word with GS’s Lloyd Blankfein. He hasn’t much time for Barack, but he might just listen to you.