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Ananish Chaudhuri, Experiments in Economics: Playing Fair with Money, Routledge, Oxon, 2009, pp.249, $37.75, Soft.
A typical assumption made in the economic models is that an individual makes choices that maximise only his own profits or utility, thereby ignoring the profits or utility of other individuals that he may interact with. While this assumption is correct in many economic settings there is perhaps an equal number of situations where the behaviour of individuals contradicts the implications of this assumption. Economists have usually observed such contradictions in laboratory experiments where human subjects are asked to make economic decisions in environments that simulate an abstract economic model.
Take the Ultimatum Game for instance. A "proposer" is asked to propose a split of say 100 rupees between himself and a "responder." For instance, the proposer could propose that he receive 40 rupees and the responder receive 60 rupees. If the responder accepts the split each player receives the amount proposed. The interesting feature of the game is that if the responder rejects the split, neither player receives any money.1 An economic model based on the assumption above would predict that the proposer should offer a very small amount-say a rupee-to the responder who should accept that amount since receiving a very small amount is better than not receiving anything. Yet this prediction is not borne out in the experiments where pairs of human subjects are asked to play this game with real money in a computer laboratory setting. It is found that responders often reject proposals that give them up to 25% of the amount-on-the-table (Chapter 2). What explains this deviation from what economic theory predicts? It turns out that players care about the payoffs of other players- that is they care about their relative standing-and would therefore rather be in a situation where both players are equally worse off-receiving a payoff of zero each-rather than one where the rival player has substantially more money than them. As a result, proposers too tend to make offers that are fairer, more equitable, than those predicted by theory, often offering up to 50% of the money on the table to the responder.