New Result on Decision Making

Read "Neuroeconomics: Money isn't everything" in The Economist, July 5th 2007.

Terence Burnham of Harvard University asked a group of students of microeconomics to play the ultimatum game. In this game, played only once by each player for a $40 total, the first player proposes how to divide the sum of money with the second player. If the second player rejects this division, neither gets anything. If the second accepts, the funds are distributed according to the proposal. In Burnham's version, proposers could choose only between offering the other player $25 (ie, more than half the total) or $5.

Dr Burnham took saliva samples from all the students and compared the testosterone levels assessed from those samples with decisions made in the one-round game.

As he describes in the Proceedings of the Royal Society, the responders who rejected a low final offer had an average testosterone level more than 50% higher than the average of those who accepted. Five of the seven men with the highest testosterone levels in the study rejected a $5 ultimate offer but only one of the 19 others made the same decision.

What Dr Burnham's result supports is a much deeper rejection of the tenets of classical economics than one based on a slight mis-evolution of negotiating skills. It backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead. That is likely to be particularly true in individuals with high testosterone levels, since that hormone is correlated with social dominance in many species.

Economists often refer to this sort of behaviour as irrational. In fact, it is not. It is simply, as it were, differently rational. The things that money can buy are merely means to an end—social status—that brings desirable reproductive opportunities. If another route brings that status more directly, money is irrelevant.

Comment: Game theory, as I understand it, deals with this situation suggesting that people seek to maximize utility, not money. The utility of not letting a rival get ahead would be considered greater than that of having five dollars.

More fundamentally, however, I think the experiment illustrates the practical difficulty of figuring out what people are really likely to want most.

Years ago I was teaching a course on decision making. The students were asked as a homework assignment to analyze a personal decision. One of my students came to me perplexed. A law enforcement officer, he had a job offer from another police agency. The new offer would require him to perform more dangerous duties, at a lower salary and grade, and to move to another city, and he wanted to take that job, but could not figure out why. After discussion, he decided that the decision was based on the fact that the excitement of the more dangerous job was a real plus, and more than made up for all the other negatives.

I was truly surprised! For a decision making analysis, never assume! JAD