Behavioral Theories Applied To Online Communities

Behavioral Theories Applied to Online Communities Behavioral Economics Organizational Science

Nicoleta Brad Social Computing Class 2009-10

Behavioral Economics •Wikipedia – The Prisoners Dilemma •Ernst Fehr, Urs Fischbacher, Simon Gacher (2002) - Strong Reciprocity, Human Cooperation and the Enforcement of Social Norms

•Dan Ariely - ―Predictably Irrational‖

Prisoner’s dilemma • The prisoner's dilemma constitutes a problem in game theory. It was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W. Tucker formalized the game with prison sentence payoffs and gave it the "prisoner's dilemma" name (Poundstone, 1992). • In its classical form, the prisoner's dilemma ("PD") is presented as follows:

• Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies (defects from the other) for the prosecution against the other and the other remains silent (cooperates with the other), the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

Strong Reciprocity, Human Cooperation and the Enforcement of Social Norms • Many people have a tendency to voluntarily cooperate, if treated fairly, and to punish no cooperators. This type of behavior is called ‗strong reciprocity‘. • A key fact about human society is the material incentives to cheat on implicit or explicit cooperative agreements (material incentive to cheat is probably the rule rather than the exception).

• This paper provides strong evidence in favor of a cooperation enhancing force that has so far been largely neglected ‗strong reciprocity’. • A person is a strong reciprocator if she is willing  to sacrifice resources to be kind to those who are being kind (= strong positive reciprocity)  to sacrifice resources to punish those who are being unkind (= strong negative reciprocity).

• The essential feature of strong reciprocity is a willingness to sacrifice resources for rewarding fair and punishing unfair behavior even if this is costly and provides neither present nor future material rewards for the reciprocator.

Evolutionary Theory and Strong Reciprocity • The puzzling question to be solved by evolutionary theory is, how strong reciprocity could survive in human evolution – the presence of strong reciprocators greatly increases and stabilizes human cooperation. • This paper claims that all major evolutionary theories of altruism and cooperation cannot account for strong reciprocity and that is quite provocative. • The argument is that the observed experimental behaviors cannot be rationalized as adaptive behaviors by these evolutionary models. These theories predict that strongly reciprocal behavior cannot prevail in an evolutionary equilibrium - in equilibrium strong reciprocators and purely selfish humans coexist.

Evidence and Consequences of Strong Reciprocity • The Enforcement of ―Nonbinding‖ Agreements • Punishment in Bilateral Bargaining Situations • Multilateral Cooperation and Punishment Opportunities • Strong Reciprocity as a Norm Enforcement Device

The Enforcement of “Nonbinding” Agreements • In many bilateral one-shot encounters in real life people behave in a reciprocally fair way. A good example is the exchange between a taxi driver and his passenger in a big city (one-shot PD – the probability of future interaction is very low and the taxi driver first has to decide whether to cooperate/drive or not).

• Subjects always interact anonymously with each other and reciprocal behavior is costly in terms of real money for the reciprocator. • It is also worthwhile to stress that strong positive reciprocity is not diminished if the monetary stake size is rather high (strong positive reciprocity are observed in such diverse countries as Austria, Germany, Hungary, the Netherlands, Switzerland, Russia and the U.S). • Strong reciprocity substantially contributes to the enforcement of cooperative agreements in bilateral sequential exchanges

Punishment in Bilateral Bargaining Situations • People frequently break off bargaining with opponents that try to squeeze them - desire to take revenge and to retaliate in response to harmful and unfair acts.

• This can be illustrated by so-called ultimatum bargaining experiment - two subjects have to agree on the division of a fixed sum of money. Person A, the Proposer, can make exactly one proposal of how to divide the amount. Then person B, the Responder, can accept or reject the proposed division. In the case of rejection both receive nothing whereas in the case of acceptance the proposal is implemented.

• A robust result in this experiment is that proposals that give the Responder positive shares below 20 percent of the available sum are rejected with a very high probability

• This shows that Responders do not behave in a selfinterest maximizing manner. • In general, the motive indicated for the rejection of positive, yet ‖low‖, offers is that subjects view them as unfair. • As in the case of positive reciprocity, strong negative reciprocity is observed in a wide variety of cultures, and that rather high monetary stakes do not change or have only a minor impact on these experimental results.

Multilateral Cooperation and Punishment Opportunities • How people behave in n-person situations? • What are the interaction structures which enable the selfish types to induce the strong reciprocators to behave non-cooperatively and what are the structures that enable the strong reciprocators to force or induce the selfish types to behave cooperatively? • Fehr and Schmidt show that in an n-person public goods game with a heterogeneous population of players, full defection by everybody is likely to be the unique equilibrium in the game without punishment while full cooperation can be an equilibrium in the game with punishment.

Strong Reciprocity as a Norm Enforcement Device • Many small scale societies are characterized by extensive food-sharing. • To examine whether food sharing is a social norm that is enforced by social sanctions Fehr and Fischbacher (2001a) conducted a game called ―third party punishment game‖ which has three players. Player A receives an endowment of 100 tokens of which he can transfer any amount to player B. Player B has no endowment and no choice to make. Player C has an endowment of 50 tokens and observes the transfer of player A. After this player C can assign punishment points to player A. For each punishment point assigned to player A player C has costs of 1 token and player A has costs of 3 token. Since punishment is costly a selfinterested player C will never punish. However, if there is a sharing norm player C will punish player A if A gives too little.

• In case that player A transferred nothing she received on average 9 punishment points from player C, i.e. the payoff of player A was reduced by 27 tokens. This means that in this three-person game it was still beneficial, from a selfish point of view, for player A to give nothing compared to an equal split, say. If there is more than one player C, who can punish player A, this may, however, no longer be the case. • The question is to what extent cooperation norms are sustained through the punishment of free-riders by third parties. • It turns out that punishment by third parties is surprisingly strong. It is only slightly weaker than second party (within group) punishment.

Proximate Mechanisms behind Strong Reciprocity • Within economics, one feasible explanation of the results presented so far is that agents have social preferences which take into account the payoffs and others intentions. • Social preference theories only capture proximate mechanisms driving the observed behaviors. They do not aim at explaining the ultimate sources of strong reciprocity. • Cultural anthropologists and evolutionary psychologists have sought to explain the origin of strong reciprocity. • One idea is that in the ancestral past, people mostly engaged in repeated games with people they knew. Evolution created specialized cognitive heuristics for playing repeated games efficiently.

• The conclusion is that in the unnatural habitat view, subjects cannot ―turn off‖ the habitual behavior shaped by repeated-game life in the ancestral past, when they play single games with strangers in the lab (the capacity to distinguish temporary one-shot play from repeated play). • But, in the experiments the vast majority of the Responders increase their acceptance thresholds in the reputation condition relative to the baseline condition. Moreover, there is not a single subject that reduces the acceptance threshold in the reputation condition relative to the baseline in a statistically significant way. This contradicts the hypothesis that subjects do not understand the difference between one-shot and repeated play. • A plausible alternative hypothesis is that Responders face strong emotions when faced with a low offer and that these emotions trigger the rejections; and this is what theories of social preferences do.

Predictably Irrational: The Hidden Forces That Shape Our Decisions • The author, Dan Ariely, challenges readers' assumptions about making decisions based on rational thought. • ―Once you see how systematic certain mistakes are--how we repeat them again and again--I think you will begin to learn how to avoid some of them". • People are not the rational ―homo economus‖ of classical economics, but they are irrational in predictable ways.

• Most customer comparisons are relative, rather than absolute: you compare something you‘re thinking of purchasing with other similar things, rather than judge the features and price in a vacuum (the role of the decoy effect in the decision process). • Anchoring has large effects on prices - Once we buy a product at a certain price, we become "anchored" to that price, i.e. we associate the initial price with the same product over a period of time (like the Tahitian black pearl). • ―FREE!‖ has a striking effect on people, causing them to make irrational decisions. With the opportunity to receive something for FREE! the actual value of the product or service is no longer considered. The emotional charge that we perceive what is being offered has immensely more value than it really is.

• Social interaction and market interaction are two distinct fields, and mixing them can have unintended consequences. Social norms—which include friendly requests with instant payback not being required—and market norms—which account for wages, prices, rents, cost benefits, and repayment being essential. Experiments also showed that offering a small gift would not offend anybody (the gift falls into social norms), but mentioning the monetary value of the gifts invokes market norms. • People‘s emotional state can have a major impact on their decision making process. High-emotion situations such as anger, frustration, and hunger have the potential to trigger effects on decision-making. In such situations our behavior is fully controlled by emotions.

• The lack of self-control on people is explained by the author with two states in which they make their judgments—cool and hot state. In our cool state we make rational long-term decisions, whereas in our hot state we give in to immediate gratification and put off our decisions made in the cool state. With proper motivations such as deadlines and penalties, people are more willing to meet those deadlines or long-term goals. • The idea of ownership makes us perceive the value of an object to be much higher than if we do not own the object. Ariely gives three reasons for which we do not always think rationally when it comes to our possessions:  First, ownership is such a big part of our society that we tend to focus on what we may lose rather than on what we may gain.  Second, the connection we feel to the things we own makes it difficult for us to dispose of them.  Third, we assume that people will see the transaction through our eyes.

• Ariely states that expectations shape stereotypes. Stereotypes provide us with knowledge before the actual experience and thus influence our perceptions. ―Expectations can influence nearly every aspect in one‘s life.‖ He gives a convincing argument that expectations can override our senses, partially blinding us from the truth.

Organizational Science James Surowiecki - ―The Wisdom of Crowds‖ Cass Sunstein - ―Infotopia: How Many Minds Produce Knowledge‖ (2006)

The Wisdom of Crowds • Key Points:  “Under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them. Groups do not need to be dominated by exceptionally intelligent people in order to be smart.”

• One way to take advantage of this wisdom of crowds is through the use of ‖prediction markets‖ - where people buy and sell probabilities as if they were stocks. • In the right circumstances, prediction markets are an excellent way of turning the knowledge of many people into reasonably accurate predictions.

• Not all crowds (groups) are wise. According to Surowiecki, these key criteria separate wise crowds from irrational ones:  Diversity of opinion - Each person should have private information even if it's just an eccentric interpretation of the known facts.  Independence - People's opinions aren't determined by the opinions of those around them.  Decentralization - People are able to specialize and draw on local knowledge.  Aggregation - Some mechanism exists for turning private judgments into a collective decision.

The Difference Difference Makes • A crowd can‘t be wise if everyone always picks the same answer as everyone else. • Diversity is important to ―wise crowds‖, because it expands the range of possible solutions proposed. • In large groups, diversity comes naturally, but in smaller groups, it‘s necessary to support and actively encourage it, to avoid the dangers of ―groupthink‖. • When people give in to their conformist tendencies, and are afraid to stick their necks out, the quality of decisions suffers.

Monkey See, Monkey Do: Imitation, Information Cascades, and Independence • Independence of action and thought is important for the wisdom of crowds. If everyone thinks alike, then they‘re less likely to arrive at a good answer to a given problem, because they‘re less likely to fall into ―groupthink‖. •

―The more influence we exert on each other, the more likely it is that we will believe the same things and make the same mistakes‖.

• Herding behavior often occurs because people seek safety in numbers, but it can lead to problematic results when independence is required.

• ―Information cascades‖ are what occurs when an initial decision is made by a few people, and then is more or less accepted uncritically by more and more people.

• Luckily, for most people, the more important a decision is, the more likely they are to examine the facts themselves, rather than simply fall in line. • If you‘re trying to harness the wisdom of crowds, you must attempt to have all decisions made at the same time, rather than one at a time (Information cascades actually work reasonably well much of the time, but the basic problem is that they are a sequential, rather than parallel process).

Putting the Pieces Together • Decentralized, aggregate behavior is a key aspect of things like free market economies and flocks of birds. • Decentralization allows people, or more generally, components of a system, to act freely and independently of one another, and still interact to produce coordinated results. • Linux is cited as an example of a decentralized system with a central aggregator - Linus Torvalds.

• The ‗best‘ solutions are not selected by popular vote, but by Linus, who is responsible for taking the results of the decentralized development process, and aggregating them into something useful by selecting the ‗best‘ bits and pieces.

• One other important aspect is the decentralization of the intelligence community, and the negatives involved in the difficulty of sharing information (predict and prevent the 9/11 attacks - the problem, however, was not decentralization, but decentralization with no way to aggregate the results into something useful).

Shall We Dance?: Coordination in a Complex World • ―Coordination Problems‖, which are defined as problems that don‘t necessarily have an objectively ―correct‖ answer, but which are framed in terms of coordinating actions with everyone else‘s actions. • One solution to coordination problems is central planning - having one omniscient authority that makes some calculations and tells everyone how to act as a consequence. This is, however, often not possible, feasible, or desirable.

• Coordination problems are often quite difficult to solve; • In some cases, cultural references help by giving us reference points or norms; •

Conventions also lower the amount of thinking you have to do about certain situations - it‘s easier just to follow the rules or guidelines rather than make a conscious decision after weighing all the possibilities;

• Markets can also be effective coordination mechanisms; Real markets often lack lots of information and yet they work (Markets aren‘t perfect, of course, but they are often the best, way of coordinating disparate buyers and sellers).

Society Does Exist: Taxes, Tipping, Television, and Trust • Cooperation problems are superficially similar to coordination problems, but with a key difference: coordination problems can be solved with all players acting in their own interests, whereas cooperation problems require players to ―look at the bigger picture‖, as part of an organization or society. • Behavioral studies have demonstrated that people will forego a reward in a simple game in order punish someone perceived to be playing unfairly, even when doing so does not benefit them at all.

• As Axerold put it in his classic ―The evolution of Cooperation‖ ―The foundation of cooperation is not really trust, but the durability of the relationship…Weather the players trust each other or not is less important in the long run then whatever the conditions are ripe for them to build a stable pattern of cooperation with each other‖ • Trust is often secondary to long term relationships in terms of promoting ‗fair‘ behavior: if you know you‘ll see someone again and again, you‘re less likely to attempt to cheat them.

• Capitalism works in part because it‘s possible to trust those beyond an established circle of friends and family, and only works where there are institutions that promote this trust. When you are reasonably certain that you can buy a product and that it will work as advertised, you don‘t need to inspect in detail each and every thing that you purchase. This makes the flow of goods and services, and increases the general welfare of a society.

Failures of crowd intelligence • Surowiecki asserts that what happens when the decision-making environment is not set up to accept the crowd, is that the benefits of individual judgments and private information are lost and that the crowd can only do as well as its smartest member, rather than perform better (as he shows is otherwise possible). • Extremes:  Homogeneity - the need for diversity within a crowd is needed to ensure enough variance in approach, thought process, and private information;  Centralization - The Columbia shuttle disaster, which is blamed on a hierarchical NASA management bureaucracy that was totally closed to the wisdom of low-level engineers

 Division – crowds work best when they choose for themselves what to work on and what information they need. (Surowiecki cites the SARS-virus isolation as an example in which the free flow of data enabled laboratories around the world to coordinate research without a central point of control.)  Imitation - Where choices are visible and made in sequence an information cascade can form in which only the first few decision makers gain anything by contemplating the choices available: once past decisions have become sufficiently informative, it pays for later decision makers to simply copy those around them. This can lead to fragile social outcomes.  Emotionality - Emotional factors, such as a feeling of belonging, can lead to peer pressure, herd instinct, and in extreme cases collective hysteria.

Infotopia – How many minds produce knowledge • A Possible Future • True Stories • A problem and Some Solutions • Information Cocoons and Wikis • Deliberation, Democracy and ―Particles of Reason‖ • Beyond Deliberation

A possible Future • Predictions when this book was published (2006) considered that the rise of new methods of obtaining information will dramatically change businesses, governments and individual lives. • Collaborative projects are growing in quality and scale to the benefit of people; many of these projects are open to everybody in the world (you can find the judgment of people about everything: books, restaurants, goods, services, etc.).

• The most significant changes will be seen in the public institutions (concerns about national security for example)

• Wikis are used for internal documentation but with strict security; departments personnel manual is a wiki and new requirements and procedures can be instantly entered and made available to employees. • Prediction Markets (markets in which ordinary people are permitted to invest in, or bet on what is likely to happen) are used by public and private institutions all over the world; they rely on them to foresee the likely fates of their own products and services or to predict accurately that an apparently unfriendly nation did not in fact, have weapons of mass destruction.

• People believe though that the most dramatic development is the growing movement toward ―open source science‖. • ―Open source science‖ - is about harnessing the latent creativity of a very large number of people who are out of the loop right now.

True Stories • One example of ―prediction market‖ was tried by Google with a very innovative method; they created a prediction market in which the employees could place bets about a variety of outcomes of importance to the company. • These predictions turn out to be very accurate. • Dispersed knowledge within the company has been accurately aggregated this way. • Many employees, each with private information, have offered their own opinions and the sum of those opinions is usually right

A problem and Some Solutions • Information is widely dispersed in society; people have bits of information from which others might benefit. • Unfortunately groups and institutions fail to obtain the information that individuals have and as a result they make avoidable mistakes and sometime disastrous mistakes. • How might groups elicit the information they need?

1. Use statistical average of the independent judgments of their members. 2. Use deliberation and ask for the rezoned exchange of facts, ideas and opinions on the independent judgments; organize anonymous votes. 3. Use the price system and develop some kind of market through which group members or outside the group, buy and sell in the basis of their judgement 4. Use the internet to obtain the information and perspectives of anyone who cares to participate (massive surveys, deliberative forums, prediction markets, books and resources that anyone can edit and open participation combined with some kind of process for filtering and screening)

• All of the above mentioned methods have great potential but all of them also can run in serious difficulties. • It is easy now to obtain the views and collaboration of many people but also every day, likeminded people can and do sort themselves into echo chambers of their own design, leading to errors, undue confidence, and unjustified extremism. • Some of these problems might be reduced through careful institutional design and through understanding of how healthy aggregation of information can be made to occur.

Information Cocoons and Wikis • Information cocoons – communication universes in which we hear only what we chose and only what comforts and pleases us. • Information cocoons are very unhealthy and companies which forms them are unlikely to prosper, some will actually fail (the decisions will not be adequately challenged from their inside). • Wikis – human knowledge can be seen as a wiki – what we know accumulates over time as each person obtains access to information held by widely diverse others and also contribute to that information.

• The development of cumulative knowledge has become much faster and much easier (within second you can find what we know/think about cars, restaurants, movies, etc.; in a few seconds more you will be participating to this knowledge). • Amazon.com - aggregates information both through ranking system and through customers reviews, which can be both helpful and numerous. The advantage of aggregated information is that, most of the time, it is very accurate.

Deliberation, Democracy, and “Particles of Reason” • Most of the time, private and public institutions prefer to make decisions through some form of deliberation. • Carl Schmit, critic as well as theorist of democracy wrote: ―Parliament is … the place in which particles of reason are strewn unequally among human beings gather themselves and bring public power under their control‖. • If our goal is to have access to multiple ―particles of reason‖, the best path is deliberation.

• Often deliberation does not lead to a better decision  Informational influences, which cause group members to fail to disclose what they know out of respect for the information publicly announced by others;  Social pressure, which lead people to silence themselves to avoid the disapproval of peers and supervisors

• These two forces can lead to extremism or to a consensus of falsehood rather than truth which do not correct but amplify individual errors. • 2003 investigation of failures at NASA surrounding the explosion of the space shuttle Columbia – the agency failed to elicit competing views, including those based on information held by agency employees. (The agency culture pressures people to follow a party line).

Beyond Deliberation • A possibility to obtain access to the knowledge that is held by many minds (to avoid the dangers presented so far) is to build on the price system. • Markets produce prices for goods and services by incorporating dispersed information held by numerous people (strong incentives to get it right; even if some information may remain hidden, it is not for long as people tend to act on that information for profit reasons and that information very soon become known).

• Recent evidence (the current recession we face) shows that markets are subject to the same problems that infect deliberation (inflated prices, stocks, cars, real estate). • A new innovation the ―prediction markets‖ do very well because they are so effective at pooling information. The resulting forecasts incorporate and provide a lot of knowledge. • Through prediction markets people can invest in the probability that certain events will occur and they will gain or lose money as a result (major businesses use them).

• What is the best way to ensure innovation? • ―Given enough eyeballs, all bugs are shallow.‖ a famous slogan made by Eric Raymond an open source theorist, is hardly limited to software (biotechnology and medicine, might ultimately save lives especially, but not only , in poor countries).

• Open source pool information and creativity not always because of economic incentives, but sometimes because people like to contribute to improvements. • Wikis of various source often work well as devices for aggregating dispersed information • The rise of Blogs which enable ordinary people to reach a significant audience are a way of making more bits of information enter the public domain

• The conclusion which comes out from the author is that all these ways we have pinpoint to help us aggregate information have pros and cons. There are many successful examples of wikis, share software, blogs and the process of deliberation and prediction markets and we need to learn from these examples but we also need to be careful with the negative part which can lead to information cocoons, extremism, half-truths, falsehood, confusion, self-promotion and lies.

Behavioral Theories Applied to Online Communities

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