Sunday, October 11, 2009

Fairness is Valuable

Economists often try to argue away fairness, because it is so hard to measure. What is fair from one person's perspective may not be fair from another's. I would normally agree, but I was recently reminded of a story I heard in graduate school that is used to prove that people are not always rational. It goes something like this. Two people are given a sum of money, say $100, but only one of them is allowed to divide the money up. The other person only has the choice to either accept the money given or deny the money for both people. Rational people should end up with a division of something like $99 for the divider and $1 for the acceptor. Both people are better off than they would be if the deal was denied. But, as you might imagine, the second person will often deny the money for both people if they feel it is unfair.

Many economists call this irrational. But I call it a demand for fairness. The second person assigns a value to the deal being fair, say $25. If they are offered only $1, they will deny it because it gives them -$24 of value. However if they are offered a split of $70 for divider and $30 for the acceptor, they will accept the gain of $5. Every person places a different value on fairness and some may be pretty close to zero. I'd be interested to see this experiment run with different types of people to see what characteristics of make someone desire fairness more or less.


  1. There's a significant write-up in Dixit and Nalebuff's Thinking Strategically about this. If you're not familiar - TS is a book about Game Theory with a specific emphasis on the Economic side.

    The important thing to remember is that this decision is not made "in a vacuum". The divider KNOWS that the acceptor gets to choose whether anybody makes any money. Given that knowledge, all the acceptor (denier) has to do is make a credible claim that he will only accept the split if it meets his criteria. That claim has the potential to reverse your split - from $99 for the divider to $99 for the acceptor.

    The MUCH better way to handle this is used classically for splitting an order of something (dessert, the last piece of pie [which becomes two pieces after it's split], etc.). You have a divider and an acceptor, BUT the acceptor gets to choose which of the divided pieces he wants. Divider splits 99/1, acceptor gets 99. Divider splits 50/50, everybody comes out equal.

  2. Traci and I sometimes use that split method for leftovers.

  3. Leave it to Dixit and Nalebuff to come up with a strategy moms have been using with their kids for years. Maybe researchers should be studying the world's moms for insight into game theory.

    What great names...


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