January 2009 Archives

The Ultimatum Game in the Garden of Eden

… behavioral economics, game theory, and neuroscience have confirmed that human behavior is … “irrational” … the standard economic approach to climate change policy, with its almost exclusive emphasis on rational responses to monetary incentives, is seriously flawed. In fact, monetary incentives may actually be counter-productive.”
— John M. Gowdy   http://www.economics.rpi.edu/workingpapers/rpi0701.pdf

So completely settled is the science of global warming that arguments among climatologists are now mostly about the “when?” and the “how bad?”     DawnCityCrspp.jpg
No one wants the climate to destabilize, few want to hear much more about global warming, and damn few want to make the necessary changes to face the problem.   It’s necessary to move beyond the hard sciences if our goal is to discover how to best mitigate and adapt.   We must engage other disciplines in our effort.

Even though reacting to climate change requires a colossal and unified crusade, there is no assurance - neither scientific, nor human - that we will prevail.   We may all agree that we must survive, but the hard science says survival could go either way.   The most active variable in the equation is the human one.   Now, more than any other time, our future depends on controlling our output of greenhouse gases.

To build the necessary world-wide campaign we must expand our studies to include political science, public policy, law, marketing, persuasion, and other soft sciences.   In order to build, sustain and enforce cooperative efforts, both the leaders and participants in this campaign need a prerequisite understanding of human psychology, economics, game theory, and behavioral psychology.

Ultimatum2.jpg The fields of behavioral economics and behavioral finance attempt to integrate psychology with economic theory.   Researchers use a range of observations and surveys, but may draw upon one deceptively simple experiment to measure the satisfaction, trust and the fairness of simple economic transactions.   It is called the Ultimatum Game.

The experiment goes like this:   With only two subjects, one receives a sum of money that both will agree on how to split.   One decides how much to give to the other - the other person may accept or reject the offer.   If accepted then both keep whatever money they hold.   However, if the other person rejects the offer - then by refusing - prevents both of them from getting any cash.   Game over; the test only is given once.

Results differ; many test subjects settle on a 50%-50% split.   Some accept a smaller percentage - but rarely less than 20%.   Interestingly, the data for Western subjects measures slightly more - 30-40%… suggesting a greater willingness to cut off all wealth gain until reaching a higher fairness level.   It is important to remember that recipients know the rules of the game, know the total cash amount in the game and know the consequence of their decision to accept or reject. 

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When pondering ramifications, economists prefer to think of humans as rational actors who would logically choose the best deal in any situation.   Rational actions are easier to formulate and model.   However, an irrational choice - like rejecting all money and ending play with nothing tangible - is harder to understand.   Does the player have an irrational sense of fairness?   Or do players expect a certain level of shared suffering or shared reward?

Because the Ultimatum Game uses real money, it may connect with reality in ways that other games might not.   Depending on the weight of the irrational, players of the Ultimatum Game finish with cash or with nothing .   Every day in the real world, the owners and consumers of carbon based energy grow richer or poorer, stronger or weaker, healthier or ill, depending on their energy transactions.   It may be fueling transportation, heating homes, or providing electricity for manufacturing.   Slowly, as these consumers begin to understand that all fossil fuels increase CO2 and contribute to global warming, this means their daily energy transactions get a new variable to consider.   The rational benefit of energy begins to take on the taint of the irrational burden of knowing this is causing real damage.

Our civilization is in the midst of a real-world experimental play of the Ultimatum Game.   One player redistributes great carbon energy wealth pulled from the earth, and the other player receives the benefit of that offer.   Our incredibly cheap energy from coal, oil, and natural gas combustion all release CO2 into the atmosphere.   CO2 reacts slowly, but directly contributes to greenhouse heating in the atmosphere.   The effects of CO2, not obvious at first, is very real - it slowly traps heat, warms the atmosphere globally which destabilizes climate.   We are killing ourselves.  We can no longer exclude this fact from considered commercial transactions

Behavioral economists have another test - a related game called the Dictator game.  Here the player with cash keeps as much as they wish - whether or not an offer to share is accepted.   Predictably, dictators offer far less money to the other player, keeping a larger share of the cash.   With no real choice, the recipient player most always accepts unequal money in any amount.

In the marketplace of energy, the ultimatum and the dictator analogies apply because in our civilization game, energy is a vital element required of both commerce and survival.   The recipient player can assume both attitudes - the player demanding a fair share - at other times the player accepting whatever is offered.

Typically, fossil fuel commerce might include a privileged holder of energy wealth, sharing or selling to a less privileged player.   The less privileged ones may accept a dictated market price, favorably received until the deal changes unacceptably, the player refuses and it the becomes an ultimatum game.   Perhaps the privileged one goes too far in crossing some personally defined line.   Maybe the player senses a deceit, some manipulation, denial, an ethical transgression or other irrational motive.   Now, with new information, players must include future ramifications of any energy deal.

Both the Ultimatum and the Dictator games seem to fit into scenarios of the market play of Big Coal and Big Oil in our economy.   Carbon fuel industries - with a monopolistic lock on the market - will sell energy and heavily promote full consumption of all they can deliver.