Is Homo Economicus A Five Year Old?

Is Homo Economicus a five year old? Yoella Bereby-Meyer Shelly Fisk Ben Gurion University of the Negev

Monday, August 24, 2009

Running Head: Fairness perception

Mailing addresses Yoella Bereby-Meyer Dept. of Psychology Ben Gurion University Beer Sheva 84105, Israel [email protected]

This research was supported by the Israel Science Foundation grant number: 146/05

Electronic copy available at: http://ssrn.com/abstract=1460482

Abstract

Standard economic models assume that people exclusively pursue material selfinterests in social interactions. However, fairness considerations and factors such as trust and reciprocity affect behavior. This study examined whether negative reciprocity (punishment for unfair division) develops during childhood. Kindergarteners, second graders and sixth graders played a mini-Ultimatum Game against a human proposer or a random machine and a Dictator Game. Kindergarteners behave according to the standard economic model and show no fairness considerations. Evidence for negative reciprocity emerged by age seven. Thus, fairness considerations are not inborn but rather, develop with age.

Electronic copy available at: http://ssrn.com/abstract=1460482

Standard economic models assume that people are self-interested who seek to maximize their monetary pay-offs in social interactions. However, fairness considerations and factors such as trust and reciprocity do affect behavior. People value outcomes that fit their expectations about fairness and strongly disfavor outcomes which deviate from them (Lowenstein, Thompson & Bazerman, 1989). They tend to reward others' cooperative behaviors, while punishing the uncooperative, even when these actions of reward or punishment are costly to them (Rabin, 1993). Such fairness preferences help achieve and maintain cooperation in human societies. This study examines changes in sensitivity to fairness with age. We focused on negative reciprocity, i.e., a person's tendency to take costly actions that harm another because he/she perceived the other's intentional behavior as harmful (Cox, 2004). Currently, little is known about the developmental origins of fairness preferences (Fehr, Bernhard & Rockenbach, 2008) and specifically, about the origin of negative reciprocity. In our study, participants played the Ultimatum Game -- a two-player game often used to study fairness. Players are randomly assigned the role of proposer or responder. The proposer divides a sum of money between him/herself and the responder. The responder must decide whether to accept or reject the proposed division. If accepted, the money is divided accordingly. If rejected, neither player receives anything. The rational economic model dictates that the responder should accept any proposal greater than zero, and the proposer should offer the smallest possible amount of money. Empirical evidence contradicts this prediction. Individuals do consider fairness in their offers and choices. Proposers, on average, ask for less than 70% of the total sum. Responders often reject profitable, but unequal, offers (Guth, Schmittberger & Schwarze, 1982).

They are willing to pay to punish their opponent if he/she asked for too much. However, when the unfair offer was a result of a random device, a lower rejection rate of unfavorable outcomes was found (Blount, 1995). Much of the deviation from the rational model results from proposers' strategic considerations, as evident by differing results between the Ultimatum Game and its variant, entitled the Dictator Game, in which the responder cannot reject an offer (Forsythe, Horowitz, Savin & Sefton, 1994). Previous studies on children's fairness behavior when playing the Ultimatum Game have shown that children's tendency to reject unfair offers increases with age (eg., Murnighan & Saxon, 1998). However, it is not clear whether children aim to reciprocate and punish their opponent. If children consider reciprocity, their behavior should depend on their partners' intentional actions. Consequently, in the Ultimatum Game we compared children's responses to proposals made by a human proposer (towards whom reciprocity is sensible) to their responses to proposals from a random device. The difference between these two conditions as a function of age informs us on the development of negative reciprocity. Experiment: Participants: Fifty-eight kindergarten children (5 year old), 52 second graders (8 year

old) and 57 sixth graders (12 year old) participated in the experiment. Design: The experiment consisted of 4 conditions: proposer in the ultimatum game (PUG), proposer in the dictator game (PDG), responder in the ultimatum game with a human proposer (RUG), responder in the ultimatum game with a random device (RUGR).

The children were randomly assigned to the different conditions. The experiment was conducted with each child individually. Children were told that none of the participating children know against whom they are playing. In each condition, the experimenter ensured that the children understood the game. Procedure:

In the PUG condition, the child received 10 tokens to divide between him/her and another child. Two possible divisions were presented to him/her: an equal split (5:5) or a biased split (8:2). The child was told that the rules dictate that if the responder rejects the offer, neither of them receives any tokens. The PDG condition was identical to the PUG except that the children in the responders' mode made no decision. In the RUG condition, the child was asked to state his/her decision if the proposal will be 5:5 and if the proposal will be 8:2. The child was told that he/she will be rewarded according to the actual proposal and his/her stated response to that proposal. This "strategy method" guaranties equal numbers of observations for each division. The order of proposals was balanced across participants. In the RUGR condition the child was told that a bingo machine generates a proposed division by drawing one out of an equal number of yellow and purple balls, with yellow representing an equal split (5:5) and purple representing a biased split (8:2). The experimenter demonstrated the operation of the bingo device to the child. Subsequently, the child was asked for his/her decision in the instance that the machine draws a 5:5 and in the case that it draws an 8:2 division. It was emphasized to the child that her/his decision affects the other child.

At the end of the experiment, the children received tokens according to the game's results that could be exchanged for an educational product (e.g., pens, notebooks etc).

Figure 1 - Proportion of unfair proposals in the Ultimatum and the Dictator game as a function of age (A) and rejection rate for the unfair 8:2 proposal made by a human proposer or a random device for the three age groups (B).

Figure 1B shows that kindergarteners adhere to the standard rational economic model as they are primarily concerned with personal payoffs. They rarely reject unfair offers, regardless of the proposers' identity (child or random device). Older children were more likely to reject unfair offers from human proposers than from a random device (z=2.08 and z=2.84 for second and sixth graders, respectively, P < 0.05 for both comparisons). This behavior indicates the emergence of fairness norms and awareness of the importance of reciprocity. Similarly, as evident in Figure 1A, kindergarteners propose unfair offers at equal rates when playing either the Dictator or Ultimatum Games. Second and sixth graders propose fewer unfair offers in the Ultimatum Game than in the Dictator Game (z=-2.63 and z=-2.29 for the two age groups, P<0.01), indicating the development of strategic thinking which is sensitive to negative reciprocity.

In conclusion, this experiment's results indicate that fairness in the form of negative reciprocity evolves with age. It adds to recent finding regarding negative reciprocity (Kesar, Converse, Wang & Epley, 2008) by showing the adherence to negative reciprocity even when it is costly to the decision maker.

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