Take your epsilon and shove it!

22 January, 2017 at 17:54 | Posted in Economics | Comments Off on Take your epsilon and shove it!

Given that a normative theory is defined as a theory prescribing how a rational agent should act, neoclassical economic theory certainly has to be considered a normative theory. The problem is — besides that it standardly assumes not only rationality and selfishness, but also e. g. common knowledge of people’s utility functions — that loads of research show that people almost never act in accordance with the theory:

winner's curseThere is a tendency among economists to think of themselves, and the agents in their models, as having hard hearts … Homo economicus is usually assumed to care about wealth more than such issues as fairness and justice. In contrast, many economists think of other social scientists (and the agents in their models) as “softies.” The research on ultimatum games belies such easy characterisations. There is a “soft” tendency among the Allocators to choose 50-50 allocations, even when the risk of rejection is eliminated. Yet the behavior of Recipients, while inconsistent with economic models, is remarkably hard-nosed. They say, in effect, “Take your offer of epsilon and shove it!”

This shouldn’t come as a surprise. Why should people accept what monkeys don’t?
Watch what happens when you pay two monkeys unequally:

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