Economics

Guth, Schmittberger, and Schwarze's “An Experimental Analysis Of Ultimatum Bargaining” challenges itself to experimentally “investigate the so-called ultimatum bargaining behavior.” The authors achieve their goal. But they fail in their presentation.

The authors run simple and complicated ultimatum games on economics graduate students (who had no training in game theory). In the simple game, the first subject is given an endowment. He takes an amount for himself. What is left goes to the second subject. The second subject either accepts the first subject's decision or cancels the trade leaving both subjects with nothing. In the complicated game the first subject is given an endowment of black and white chips. The first subject chooses a mix of white and black chips and sends it to the second subject. The second subject can either take the mix chosen by the first subject or take what the first subject has left. These black and white chips are worth different values to the first subject than the second subject.

The results of these games are interesting. Some subjects choose egalitarian splits. Some subjects choose less egalitarian splits. Some subjects choose to leave with nothing. When the endowments differ, subjects choose somewhat different splits. Subjects play the easy and complicated games differently. Experience changes decisions.

But the authors refuse to stop there. They choose to examine economic theory. This approach is common to experimental economics. Experimental economists test economic theory. That is what they do.

Refuting economic theory cannot be done with experiments. Economic theory does not concern itself with human behavior. It is normative theory. The authors even call game theory predictions normative solutions. Nash equilibriums entail what should be. Players should only care about their own payoffs. They should be economically rational. It does not say anything about “what is” or human behavior. At best economic theory provides a way of thinking. A way of approaching problems. Playing the Nash equilibrium ensures a type of outcome. At worst economic theory is “vain playing with mathematical symbols” (from Ludwig von Mises' Human Action). No sane person who has ever spent more than three minutes in a modern grocery store could defend economic theory's positive predictions.

Now this situation does not doom economic experiments or economics. The results of economic experiments are interesting without their insistence to test game theory. They suggest positive behavioral hypothesis. They suggest how complicated human beings are.

In particular this paper's easy games suggest a significant percentage of people care about equality. People do not take all of the money for themselves, and people will punish players at the expense of their own income. Players behave differently when the stakes change and when they have more experience with the game. Also players have different expectations when they are the first and second subject. Some players do not follow “the golden rule of treating people like you want to be treated.” They reject offers as the second subject that they would have offered as the first subject.

The complicated games yield somewhat different results. The game is contrived so two possible mixes make both players payoffs as high as they can be. These mixes make sense. They are envyfree, Pareto optimal, and Nash equilibriums. But players do not necessarily choose these “superior” mixes. And sometimes the secon subject will not choose the bundle that generates the most income for himself. These results might occur because subjects did not understand the game, but again, it seems some subjects prefer equality and will sacrifice their own and total income for equality.

But these results say nothing about Nash equilibriums, Pareto optimality, or any other economic theory. Economic experiments explicitly confront human behavior. Economic theory does not concern itself with reality. As Ludwig von Mises said about economic theory, “...it did not deal with real living beings, but with a phantom “economic man,” a creature essentially different from real men.” This does not mean economic theory is fruitless. It still provides a systematic way of thinking through problems, but it is foolish to confuse economic theory with reality.