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Grade 9-12
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Lesson

Behavioral Economics Lesson Five: Other Things Matter

Updated: November 11 2016,

COMPELLING QUESTION

Under what circumstances do people not behave like rational Econs?

Students will participate in a version of the classic behavioral economics experiment entitled the Ultimatum Game. The class will be divided in halves, with one half being the proposers and the other half being the responders. Each proposer will be given the choice of how to split a reward of 10 items with the responder. This reward can be 10 extra credit points, 10 pieces of candy, 10 stickers, or some other small reward that can easily be divided and has at least some value to the students. The proposer remains anonymous to the responder so that no influences, such as friendship or a fear of retaliation, influence decision-making. The proposer will put forth an offer. It is up to the responder to choose to accept or reject the offer. If the offer is accepted, both the proposer and the responder get the agreed upon amount. If the responder rejects the offer, neither the responder nor the proposer receive any reward (no one gets anything). Students will play two rounds of this game.

The discussion of the results includes comparisons between the thought and decision making process of “Econs” and “Humans.” The rational decision-making of an Econ is contrasted with that of the fairness-minded human. Students will also learn and discuss the results of an experiment in which other emotions matter, such as the meaningfulness of the work that one does and how it can affect our productivity and the amount a worker would demand in payment for their work. 

Time Required

The Ultimatum Game is a behavioral economics experiment that has many different variations and has been tested on subjects from different cultures, with different levels of socioeconomic status, and of varying ages. Each variant of this experiment focuses on the issue of fairness. What allocations of goods, rewards, or wages are perceived as fair or unfair? How do individuals respond when they are treated unfairly? The emotions associated with being treated fairly or unfairly can influence our choices.

Other emotions can also impact our decisions, such as sadness, anger, whether we perceive ourselves as being valued, and whether we feel that what we are doing is meaningful. Just as we want to be treated fairly and feel valued, we also search for meaning in what we do. For example, in the workplace, will you be willing to accept lower pay for a job that you find personally meaningful in comparison to a job that pays more but that you find less interesting or less worthwhile? A case study examines this question.

Behavioral Economics Concepts in this Lesson: Econs versus Humans, Fairness

Will Be Able To

  • Explain the interaction of self-interest and fairness.
  • Explain how self-interest prompts economic behavior.
  • Describe the differences between the thought process of an “Econ” and a “Human.”
  • Analyze and explain how some financial decisions would be approached differently by “Econs” and “Humans.”
  • Compare and contrast market interactions deemed acceptable by some and unfair by others. 

Materials

  • Slides 5.1-5.5 (ppt) or (pdf)
  • Activity 5.1 cut apart for the proposer half of the class.
  • Activity 5.2 cut apart for the proposer half of the class.
  • Activity 5.3 for the responder half the class.
  • Activity 5.4, one copy per student.
  • Small reward such as candy or stickers. Enough to give each student 10 pieces. An alternative to these items are extra credit points or some other divisible reward. 
  • Foreward and Acknowledgements

Process

  1. Write the following statement on the board: “Every person who makes more than $500,000 in annual income should be required to donate at least 5% of their income to charity.”
     
  2. Ask the students if they believe that this statement is fair. (Answers will vary. As the students state “fair” or “unfair,” encourage them to explain why they believe it to be fair or unfair.)
     
  3. Ask the students who did not believe that this was fair what they believe would be a fair percentage or if any percentage at all is fair. (Answers will vary, and students may point out that it is up to the individual who earned the money to decide what they should do with it.)
     
  4. Ask the students what they think fairness means. (Many answers are possible, but students might mention keeping in mind the needs and interests of other parties or stakeholders and maintaining a balance between them. Others may argue that making sure everyone has an equal chance to share in things is important in fairness.)
     
  5. Are people who always act in their own self-interest generally greedy? (Many answers are possible, but students will probably suggest that when people keep what is considered excess without intentions to share, society will consider it greedy.)
     
  6. Tell the students that they will be participating in a game and that the outcome will be discussed once the game has concluded.
     
  7. Have a simple reward prepared that can be given to the students. The reward can be extra credit points, candy, stickers, or it can even be something hypothetical such as $10. Another way to reward with meaningful items while keeping the cost down is to tell the students one team will be rewarded at random at the end of the experiment.
     
  8. Separate the class into two equal-sized groups (if you have an uneven number of students you can have the extra student help collect and distribute the forms).
     
  9. Explain to the students that in this game half of the class will be playing the role of the proposers and the other half will be the responders.
     
  10. Hand out Activity 5.1 and Activity 5.2 (one number per proposer) to the proposers. When giving the proposers their assigned number, be sure to tell them to keep this number out of view of any responders.
     
  11. Hand out Activity 5.3 to each of the responders.
     
  12. While showing the students slides 5.1, 5.2, 5.3, and 5.4, explain to the students the role of the proposer and of the responder. Briefly, the proposers will propose an allocation of 10 items to the responders. The responders can either accept the proposal or reject. If they accept, each get the amount proposed. If they reject, both parties get nothing. The slides explain the details of how the students should fill out activities 5.1 and 5.4.
     
  13. Once the students are clear about the instructions for their roles, remind the proposers to write down the number that was assigned to them on the top right hand corner of Activity 5.1. Tell the proposers to write their offer on their offer sheet.
     
  14. Collect the proposers’ offer sheets, shuffle them, and hand one to each of the responders. Remind the responders to read the offer, check off either “accept” or “reject” and then record the information from the proposers form onto their Summary of Offer sheet. As the responders finish, collect the forms. Shuffle the forms again so students do not know who responded to the offers.
     
  15. Hand the forms back to the proposers by having each proposer show you their number and giving back the corresponding form. Alternatively, clear a place in the classroom where the proposers’ forms can be laid out without the responders being able to see the numbers and have the proposers pick up their form and then return to their seats without discussing the results with anyone.
     
  16. Instruct the proposers to look over their responses. Proposers will also need to fill out the fourth column (Total Number of Rewards) on their sheet. In this column they will record how much they and the responder receive (the amount allocated in the second column) based on the responders’ response in the third column.
     
  17. Once they have done so, inform the students that there will now be a second round. Tell the class that the proposers will work with different responders this round.
     
  18. Instruct the proposers to write their new offer for round 2. Follow steps 14-16 again. When handing the responders an offer sheet from the proposers, be sure that the responders do not get a sheet from the proposer that they received an offer from in round 1. This can be done by telling responders to tell you if they receive the same proposer number as in the first round. If this happens, merely switch offer sheets. Alternatively, give each responder the offer sheet they received in the first round and then have everyone switch so that they have an offer sheet from a different proposer than they had in the first round.
     
  19. At the conclusion of round 2, ask the students to add up the total rewards they should receive and write the total number on their sheets.
     
  20. Ask the proposers who had a first offer rejected if they increased their offer to the responder in the second round. (In many cases the proposers will point out that they offered less than half in the first round and then offered more, usually at least half, in the second round.)
     
  21. Ask the responders who rejected an offer in round 1 the reasons for rejecting. (Most students will state that they felt that an offer below 5 was unfair and they would rather both themselves and the proposer get zero than be treated unfairly.)
     
  22. Ask the responders who accepted less than half of the total in round 1 the reasons they accepted. (Most student’s will state that they are aware that as responders they started off with nothing, so any offer above 0 makes them better off than before.)
     
  23. Ask the students what they think proposers should offer if the proposers want to maximize their own benefit? (Guide the students to the possibility of a split of 9 for the proposer and 1 for the responder. Because rejecting such an offer results in zero rewards, economic theory would state that responders should accept such an offer because they gain something which is better than what they started with, namely nothing.)
     
  24. Ask the responders what they would be giving up if they were to reject an offer of only 1 out of the 10 rewards? (They give up one reward.) What would they gain? (Nothing would be gained, but because the offer is thought to be unfair they feel a sense of satisfaction knowing that if they reject what they see as a low offer, the proposer will end up with nothing. It’s a punishment for the low offer.)
     
  25. Ask the proposers who offered more in the second round than in the first why they felt compelled to offer more. (The responders demanded fairness in the first round and if the proposer didn’t want to end up with zero they would have to offer more.)
     
  26. Show slide 5.5. Explain to the students that this experiment is called the Ultimatum Game and has been conducted by many researchers and some commonly produced results are:

    1. The mean split is 60% of the total reward for the proposer and 40% for the responder.
       
    2. A 50/50 split is the most common offer.
       
    3. About 20% of low offers (any offer below 50%) are rejected.1
       
  27. Tell the students that behavioral economists study and analyze how economic decision making is driven by psychological, emotional, social, and cognitive factors. They bring psychology and decision making together. Behavioral economists like to use the terms “Econ” and “Human” to refer to the different ways people make decisions. Econs weigh the costs and benefits of alternatives before making their choices. Humans also use costs and benefits but can be influenced by other factors when making choices.
     
  28. Ask the students to explain how an Econ would behave as a responder in the ultimatum game versus how a Human behaves in choosing whether to accept or reject the offer. (Econs would note that everyone started off with nothing so responders should accept any offer above zero because that gives them more than they started with. Humans, on the other hand, may also weigh whether or not the offer is fair in deciding whether or not to accept it. They may reject an offer that doesn’t give them a “fair” share even if doing so means that they end up with less than if they had accepted the unfair offer. Humans may sometimes take action to spite others, even if doing so imposes a personal cost.) Show slide 5.6 to note the comparison between Econs and Humans in this lesson.
     
  29. If time is available and the students want to know more about how other incentives can affect human behavior, continue with procedures 30-38, which outline a case study, “Other Things Matter.”
     
  30. Explain to students that other experiments have been conducted by economists and psychologists that seek to explore the behavior and thought processes of “Econs” and “Humans” to see if our emotions guide us in rational or irrational decision making in other situations.
     
  31. Ask the students if they have ever been in a situation where they have put forth their best effort on a school project, assignment, or any other task that took time to complete only to find that others did not seem to value their effort very much. (Accept any examples.)
     
  32. Explain to the students that in traditional economic models, individuals work because they get paid for their labor and with their pay then can buy things that they value. Psychologists and behavioral economists study other factors that also influence why or how much people choose to work. One of these additional factors is whether individuals find their job meaningful in that their work is recognized and they feel that they contribute to a greater purpose.
     
  33. Divide the students into groups of three-to-five students. Hand out Activity 5.4 to each student. Prior to having the students read the case study, ask the students if they know the Myth of Sisyphus (Some students may know the myth if they have studied Greek mythology. If students are not familiar with the story explain that Sisyphus was condemned by the gods to roll a rock to the top of a mountain for endless amounts of time only to have the rock fall back down the mountain on its own weight. It is perceived as an example of the dreadful punishment of hopeless and futile labor.) By explaining this, students will have a better understanding of the Sisyphus Condition mentioned in the case study. Ask the students to read the case study in their groups and discuss the two questions at the end of the case study.
     
  34. Ask the groups to report how they answered the two questions.

    1. What would you predict about how many each group would produce on average if you viewed the situation as an Econ? (Since the rate of pay was the same, on average, the groups should produce the same number of Bionicles.)
       
    2. What do you predict happened in the experiment? (Students might guess that the Meaningful group produced more.)
       
  35. Ask the students how Recognition and Purpose are represented in each condition. (In the Meaningful situation, the placing of the finished Bionicles on a desk in the room was a form of recognition and seeing the completed Bionicles accumulate gave a sense of purpose to the experiment above and beyond the compensation received for completing each Bionicle. In the Sisyphus situation there was no recognition other than compensation, as the completed Bionicles were immediately taken apart, and no purpose other than getting paid, as participants could not see their completed Bionicles accumulate.)
     
  36. Show slide 5.7. Discuss the results with the students, noting the significant differences between the groups.
     
  37. Ask the students what it is about doing a meaningful task that motivates us to accept less financial compensation than for a task that is not meaningful (more people in the Meaningful group were willing to continue producing even when the wage fell to less than a dollar). (Meaningful work provides satisfaction in addition to any compensation; we see many people do volunteer work on behalf of causes that matter to them for no pay at all.) Are there other forms of compensation that influence how much effort individuals are willing to put into their jobs? (Monetary compensation is not always the only driver of satisfaction in everything we do. Employees work harder when their employers express gratitude for their efforts. Job titles or the scope of responsibility and authority associated with a job can also motivate individuals in their jobs.)
     
  38. Tell the students that humans are not the only species who work for different incentives and who have a sense of fairness. Show the students the video clip [http://blog.supplysideliberal.com/post/140840617248/capuchin-monkeys-reject-unequal-pay-via-james ].
     
  39. After the video clip, ask the students the following questions:

    • Did the monkeys in the clip work for different types of incentives? (Yes, the monkeys did a task for cucumbers and grapes.)
       
    • Did the monkeys exhibit a sense of fairness in their behavior? (Yes, the monkey who performed the same task as another monkey but received the lesser reward – the cucumber instead of the grape – became upset.)
       
    • How did this video clip demonstrate the same ideas as the Ultimatum Game or the Bionicle experiment? (The Ultimatum Game emphasized fairness and how humans want others to be fair. The Bionicle experiment shows how people work for different reasons and that a sense of meaning and recognition might be two reasons, although the monkey demonstrated that even in work, people might want to be fairly rewarded as well.)

[1]Corning, Peter, Ph.D. "What's Your Fairness Quotient?" Psychology Today. N.p., 05 Aug. 2011. Web. 21 Dec. 2015.

Conclusion

  1. Conclude the lesson by noting to the students that people make decisions based on incentives. Ask the students if they believe that weighing costs and benefits are the only basis by which people make decisions. (The students will probably answer “no,” and note that fairness as well as sense of purpose are two examples of other things people consider when making decisions.)
     
  2. Ask the students if monetary considerations can then be ignored when predicting behavior. (While people do not always respond solely to monetary considerations, it would be foolish to suggest that people do not make choices based in part on the monetary considerations.)
     
  3. Note to the students that behavioral economists spend a lot of time studying people’s reactions to various incentives. Ask the students what they have learned about what types of things motivate people’s decisions. (Fairness, purpose, recognition, in addition to monetary or other rewards influence our behaviors.) Show slide 5.8 to summarize.

Extension Activity

Extension activity not available.

Assessment

Short Essay Question

  1. Describe an interpersonal situation in which you believe that you or someone else you were interacting with was treated unfairly and instead of reaching a compromise both parties were worse off because of the disagreement.
     
  2. Describe and explain how an “Econ” is predicted to respond to an unfair offer versus how a “Human” would respond.

    1. What are the different characteristics in each that influences them to respond the way they do?
Subjects:
Economics