Priceless: The Myth of Fair Value (and How to Take Advantage of It) (18 page)

“My Israeli game theory professor was proud to note that Israel is one of the few places where low offers were given and accepted” in the ultimatum game, economist Presh Talwalkar wryly noted. For what it’s worth, the “Israeli myth” owes to a 1991 study comparing behavior in Pittsburgh, Ljubljana, Jerusalem, and Tokyo. The most common proposer offer was 40 percent among Israelis, versus 50 percent for Americans. That’s not much of a difference, really (as we will see). But it led to a mystique of Israelis as the chosen rational people—or else it played into the old Shylockian stereotypes. One of the four-city study’s coauthors, Hebrew University’s Shmuel Zamir, recalls a young Israeli coming up to him, “visibly upset.” He complained, “I did not earn any money because all the other players are
stupid
! How can you reject a positive amount of money and prefer to get zero? They just did not understand the game! You should have stopped the experiment and explained it to them.”

When Colin Camerer described this “crosscultural” study to UCLA anthropologist Robert Boyd, Boyd objected that it was no such thing. “Pittsburgh is not a culture,” he said, “it’s a place on a map.”

To an anthropologist, all four cities were part of the same homogenized global culture. The story got more interesting when one of Boyd’s grad students, Joe Heinrich, performed ultimatum game experiments with the Machiguenga people of eastern Peru. “He came back and said, can you come and look at my data?” recalled Camerer. “So I went over to UCLA, and Joe said, ‘I think I made a mistake because they made a lot of low offers, and they were all accepted. Except for one, and that was even suspicious because I had a Spanish-speaking assistant with me who spoke the local dialect, and that guy kind of bullied him into it: “I don’t think you should take that.” So I think they
all
were accepted.’ ”

The Machiguenga are among the most asocial peoples on earth.
They don’t cooperate on building schools or irrigation systems as neighboring peoples do. They rarely interact with those outside their clan. The Machiguenga don’t even use proper names for outsiders (much as Westerners don’t use proper names for sparrows). “They’d say ‘the guy in the red shirt’ or ‘the real tall guy,’ ” explained Camerer. “It’s like the opposite of
Cheers
: nobody knows your name.”

Heinrich’s discovery was deeply ironic. Finally, in the Peruvian outback, he had discovered people who behaved the way traditional economists postulated. They were people with no economy to speak of.

“We both expected the Machiguenga to do the same as everybody else,” Boyd said. “It was so surprisingly different that I didn’t know what to expect anymore.” The finding precipitated an ambitious effort to compare ultimatum game play among the globe’s cultures, a sort of human genome project of bargaining behavior. The MacArthur Foundation kicked in money, followed by the National Science Foundation.

One hypothesis was that ultimatum game behavior was a function of the importance of markets within a culture. “That’s actually a tricky thing to measure,” admitted Camerer. At one meeting, Oxford’s Abigail Barr suggested that the anthropologists line themselves up against a wall according to how market-oriented the cultures they studied were. The most market-oriented were to be at one end, and the least market-oriented at the other. The anthropologists were to have discussions with their neighbors, comparing their field cultures, and to swap order as necessary. “We called this the Barr scale,” Camerer said. “Absent a better scale, it was pretty good.”

They found that the kind of behavior seen with European or North American college students appears to exist wherever there is a market economy. It does not require industrialization. The Orma people of Kenya live by trading cattle. A study put their average offer at 44 percent, in line with Western cultures. Whatever the differences between African cattle traders and American day traders, both cultures put a premium on members who make the best deals. That means naming prices fair enough to be accepted, and knowing a rip-off when you see it.

Where game behavior is much different, it is in relatively isolated, small-scale cultures. There can be great differences in game play between nearby cultures (that are likely to be close genetically). This supports the idea that the ultimatum game is a cultural X-ray (in Camerer’s
words), a way of understanding how societies deal with economic inequality.

Many nonmarket cultures are founded on elaborate codes of social cooperation. The Lamalera whalers of Indonesia and the Aché hunter-gatherers of eastern Paraguay are societies in which the most esteemed members contribute to a hunt and share the meat generously. When these people play the ultimatum game, they are “hyperfair.” Proposers offer
more
than 50 percent of the prize to responders.

The Au and Gnau of Papua New Guinea are hyperfair, and responders typically
reject
offers of more than 50 percent. In Au and Gnau culture, gifts and favors come with strings attached. They create an obligation to reciprocate, and most people would prefer not to have that burden. “Offering too much money, rather than being extremely generous, is actually being kind of mean,” Camerer explained. “Adam Smith had this famous quote, ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.’ That invites the interpretation that markets flourish when people are just looking out for themselves. The message of this study was, cultures where people trade a lot seem to have this norm of fair sharing. In cultures where they don’t trade a lot, the norm is, just keep whatever you’ve got and I don’t expect you to give me anything, so I’m going to settle for a pittance.”

The closest species to
Homo sapiens
is not the mythic
Homo economicus
but the authentic
Pan troglodytes
, the chimpanzee. A 2007 study by Keith Jensen, Josep Call, and Michael Tomasello, all of the Max Planck Institute for Evolutionary Anthropology, Leipzig, found that chimps were more selfish (“rational”) than humans.

In their ingenious experiment, two chimps in adjacent cages faced a cabinet containing two sliding drawers. Each drawer had two trays of raisins, one tray for each chimp. The proposer chimp had to pick a drawer and tug on a rope to slide it within reach of the responder. Then the responder had to grab a projecting rod and pull the drawer’s trays within reach of the cage. This allowed each chimp to eat the raisins in its respective tray.

In a typical setup, one drawer contained a fair split of five raisins in both trays. The other drawer had a greedy split, eight raisins in the proposer’s tray and two in the responder’s. Seventy-five percent of the time,
the proposer chimps picked the greedy split. Ninety-five percent of their slighted partners let them get away with it. They accepted the two raisins rather than punishing. “It thus would seem,” Jensen’s group concluded, “that . . . one of humans’ closest living relatives behaves according to traditional economic models of self-interest, unlike humans, and that this species does not share the human sensitivity to fairness.”

The brightest minds of economics had labored for a century on a powerful mathematical theory based on marvelously simple premises: that choices reveal authentic preferences and that reserve prices are real. There was no easy way to retrofit economic theory to fluid prices and constructed preferences. “I don’t know how much [Amos] anticipated the effect on economics,” Barbara Tversky said. “He must have anticipated some of it because he read Savage.” She added, “Economists, some of our closest friends, still don’t get it at all.”

It was not just economists who were uneasy with the new psychology. At a Jerusalem dinner party in the early 1970s, Kahneman was asked what he was working on. He started to explain the heuristics and biases research when a visiting American philosopher turned away. “I am not really interested in the psychology of stupidity,” he said.

That reaction was prophetic. Heuristics and biases rubbed some people the wrong way. To catalog the limitations of human rationality was perceived in some quarters as nihilistic, threatening, and/or postmodern. The “irony” of Kahneman and Tversky’s research program, not to mention its abiding scientific curiosity, got overlooked.

“Human incompetence is presented as a fact, like gravity,” complained University of Iowa psychologist Lola Lopes. She blamed Kahneman and Tversky for letting their “evident exasperation with their subjects’ answers” color the wording of their 1974
Science
article. As journalists discovered Tversky and Kahneman’s work, their inevitable simplifications only irked the critics more. Lopes quoted a
Newsweek
piece offering the breezy factoid that most people are “woefully muddled information processors who often stumble along ill-chosen shortcuts to reach bad conclusions.”

A key document of the critique was Oxford philosopher L. Jonathan Cohen’s article, “Can Human Irrationality Be Experimentally Demonstrated?” Cohen’s thinkpiece, along with twenty-nine responses by noted philosophers, psychologists, and mathematicians, filled a rollicking 1981 issue of
The Behavioral and Brain Sciences
. Cohen advanced an argument that only a philosopher’s mother could love: Humans are the only possible standard of rationality; ergo, nothing humans do, including their performance in behavioral experiments, can prove humans to
not
be rational.

Other critics, among them Harvard cognitive scientist Steve Pinker, wondered how evolution would permit such things. We can’t be all
that
stupid, or we’d be dead already. Gerd Gigerenzer of the Max Planck Institute for Human Development in Berlin—best known to Americans from Malcolm Gladwell’s book
Blink
—felt heuristics to be parlor tricks, contingent on trivial details of the experiment and basically not all that important. For Gigerenzer, the story getting lost in the heuristics hoopla was how accurate hunches are. In making this case, he took a tendentious spin on what Kahneman and Tversky were saying. (One person close to both told me succinctly: “Gigerenzer was lying.”)

Most would agree that evolution is not a Santa Claus that gives us everything we might wish for. It is more a loving parent that gives us what’s realistic. As early as 1954, Ward Edwards remarked that it might be “costly” to have self-consistent preferences. The design of the human mind entails complex trade-offs. Survival often requires us to make quick decisions without complete knowledge of the problem. The mind is presumably optimized for mostly accurate hunches and an improvisitory approach that constructs desires and beliefs on the fly. This can lead to inconsistent prices and choices—if you look hard enough for them.

Do these inconsistencies matter, then? Perhaps they didn’t much in the world of our distant ancestors. But things have changed in the past few millennia (a blink of the eye in evolutionary terms). Inventions like writing, numbers, law, and money have introduced new types of challenges. Today’s conflicts are resolved by committing to a number—a
price, a wage, a boundary, a no-fly zone—that casts a shadow far into the future. In these situations, we can have cause to regret the arbitrary in our choosing and pricing. As Tversky and Kahneman wrote, “Incoherence is more than skin deep.”

Ward Edwards lived long enough to see his reputation eclipsed by those of his former students. He too became an acerbic critic of Tversky and Kahneman’s work. “Why are experts interesting only if they are not too expert?” Edwards asked in a 1975 article. He answered his own question: “I believe the answer is that psychologists want to believe in the severity of human intellectual limitations.”

Edwards was married to the understandable position that a heuristic was a “lapse in judgment” to be “cured,” in Colin Camerer’s analysis. Edwards could never understand why heuristics had suddenly become the focus of attention. To him, the younger generation was obsessing over the flaws in the marble and ignoring the statue.

In defense of his position, Edwards remarked that people could not drive cars unless they could judge uncertainties accurately, that heuristics “may explain how to get to a mental hospital, but not how to get to the moon.” (Years later, Kahneman would recall that unkind crack in his Nobel Prize autobiography.) “We frequently hear about human memory limitations,” wrote Edwards, “suggesting that we can remember somewhere between seven and twelve things at a time. But I know someone who can quote from memory all of Shakespeare. When we see comparable feats on the stage, we are so little surprised that we do not even comment on them, preferring to discusses shades of interpretation of character. We frequently hear of human irrationality; it would be difficult to imagine that men so limited could produce a single issue of a newspaper, much less of
Scientific American
.”

I asked Kahneman why Edwards had never embraced the heuristics research. He quickly corrected the question: “Not only did he not embrace it, he was
annoyed
. He was quite upset with us.” Kahneman then gave this explanation: “In the first place, what we did was very much in his face . . . So that’s one thing. The other is—and I have a lot of sympathy because it’s one of those things that happen in science regularly—when something half-new comes on the scene, there is a big asymmetry. People who are bringing in the new stuff think they’re doing something very different, but the people who were there before say this is just a minor variation on a theme.” Edwards “didn’t see the point of the fuss being made.”

In Kahneman’s modest account, “Everything we wrote was
obvious
. In some sense, nothing surprised Ward. Nothing of what we were saying surprised him.”