Un(Fairness) – Part 2

In last week’s blog, we introduced the concept of fairness in economic decision-making, how we perceive it, and how it distorts rational, self-interested mentality. Traditionally, our well-being should not be dependent on the fairness of others, but rather on how well we perceive ourselves to be. As it turns out, during the evaluation of our status and well-being, we tend to compare ourselves to others – using them as reference-points.

A number of emotions can occur when we perceive unfairness, but most importantly – envy. Envy, according to Rawls (1971), occurs when we look at other people’s well-being with malevolence, despite the fact that their superior endowments do not restrict us from enjoying our benefits. Also, we wish to deprive them of their advantages, even if it costs us to do so. Some of the literature calls this “egalitarian” view as malicious envy. Regardless of its name, it is easy to realize that this kind of noxious behavior cannot exactly be called rational, in the sense that acting so, one does not listen to reason, but rather to their emotions.

I can feel it in my guts

The role of emotions in economics was already clear and acknowledged before the creation of behavioural economics. One example for such acknowledgment is Keynes’ “animal spirits”, which was mentioned in his work The General Theory of Employment, Interest and Money (1936). In short: according to Keynes, Animal Spirits are meant to explain all the animal-like “instincts” or intuitions, which affect behaviour, and as such, the whole economy (however, there was never an elaboration on the idea from Keynes.)

A relatively new decision-making model was made by Loewenstein, Weber, Hsee and Welch (2001) called “Risk-as-Feelings Hypothesis”. Standard models, such as Expected Utility Theory and Prospect Theory, expect decision-makers to act rationally at any given point. This theory, however, stresses the importance of emotions in given situations. When decisions under risks are being made under emotional influence, these decisions might be significantly different than those under “rational behavior”. As such, we can differentiate between “hot” and “cold” statuses, the first being the emotional, while the latter being the “rational” state. For which condition will be dominant during the decision is dependent on (among a lot of other, external and environmental factors) how significant visceral factors (“gut feelings”) are at that specific time of the judgment and decision.

Loewenstein (2000) argued that these gut feelings may distort decisions from that made under quasi-rationality.

• First it may lead decision-makers in situations where economic or social inequalities and injustice is perceived, to act in a way which contradicts their own interests.
• Second, it has implications on changes in preferences in inter-temporal choice. In a given situation, one might be in a “cold” state, while three months later in a “hot” state – even if their supposed “core preferences” did not change – the outcome might significantly differ. Thus, emotional effects could be looked at as “standard deviations”, which can explain inconsistencies in decisions.
• Finally, Loewenstein points out that feelings can have serious implications for decisions under risk. Under visceral effects such as frustration, a seemingly risk-free prospect might be evaluated as risky. Similarly, while in an optimistic, euphoric state, risky prospects might be evaluated as more secure ones.

It is also important to note that these visceral factors can be a) controlled by individuals, if able, or b) individuals can turn this to their advantages if they “learn” how to use this in heuristic decisions. But in this blog, I would like to concentrate on one particular topic – revenge.

Trust game – with a twist

In economic terms, we can be vengeful in many ways, starting from boycotting a particular brand or store to being malicious towards them (or in more academic terms: us being an actor in decreasing their utility, their profits).

Standard trust game is pretty common amongst experiments in psychology and behavioral economics. The rules are pretty simple: there are two players in separate rooms, with no connections whatsoever. The first one receives $10, and is told that s/he can give “x” amount to the second player. For every dollar, the second player receives four times the money that was originally sent. Then, the second player can decide how much to send back to the first player. Simple enough, right?

There exists, however, a version of the game where upon the second player acting unfairly, the first player has the option to have their revenge, paying from their own wallets. For every dollar they pay to the experimenter, the second player loses twice as much. The results were shocking: a lot of people were very keen on paying even absurd amount of money in order to divest the other player from their prize (de Quervain et. al., 2004). What was even more interesting, that during the games, players were wearing MRI sets monitoring their brains: upon taking revenge (for some, perhaps not surprisingly), the part of the brain which is responsible for the perception of rewards was very active. As such, neurologically, we treat malicious acts coming from envy and feelings of injustice as “making things right”.

“Revenge, the sweetest morsel to the mouth that ever was cooked in hell.” (Walter Scott)

Revenge, or the urge to be vengeful, in economic terms usually occurs when we feel that we have been hurt in a transaction, or we perceived the outcome to be unfair – that is, effort and gains were not in balance. While I do not want to go into how people perceive fairness, and what serious implications it has on economic decisions – this was already discussed in last week’s post – I do want to mention that the trade-off between fairness, redistribution and efficiency has been under heavy research in the field of welfare economics (Atkinson, 2015). But welfare economics primarily takes into account the macroeconomic consequences, and perhaps not so much the emotional and economic-behavioral implications to the individual (which is, by the way, completely fine – that is not the main goal of the topic).

Is taking revenge good? Well, it certainly feels that way. But if we take a look at these examples, it is easy to see that most of the time it costs us, leaving us worse off than before (objectively speaking). Maybe that is why moralists, philosophers, and the Bible speaks at lengths against acting revengefully. But maybe revenge will help us to avoid such situations later (by using the tit-for-tat strategy, which will be discussed in a future blog). Whether we deem it good or bad, when emotions – our “hot” state – come to play, we might not be able to have that firm of a grasp on our decisions.