I attended a great concert in Vienna this Friday night. Afterwards, on the way back to the apartment of the friends I was staying with, we passed a cafe where we had drinks a couple of times on previous occasions. Much to my surprise, the cafe was closed. I asked my friends what had happened - surely a location like this with thousands of concert goers passing by every night must be a gold mine? The tale my friends told was not only sad, but provided insight into an often overlooked tendency in human decision making: Our unwillingness to accept proposals we perceive as unfair, even if refusal comes at a personal cost to us.
The owners of the building in which the cafe was located had one day decided to drastically increase the rent, arguing that at a top location like this - around the corner from one of Austria's top concert and show venues - the operators of the cafe would generate so much revenue that they could easily afford to pay the additional fee. The people who ran the cafe though declined to pay the increased rent, opting instead to cancel their contract and close the place down for good. From a rational point of view this was much to the detriment of everyone involved: The owners of the building now got no rent at all, the people running the cafe had to look for a new location, and thirsty concert goers like us had to keep looking for another spot.
Just a view days earlier I had heard about a similar situation in the context of a complex inheritance case: An old man who had neither children nor siblings had passed away, leaving a massive estate, including a big farm, to a sizable group of distant relatives. Apparently, 83 people turned out to be entitled to a share of the estate, some of whom admitted that they had never even met the deceased. But despite that fact, a big controversy broke out about who should take which share of the wealth, culminating in a court case that will most likely go on for years and consume most of the estate. Needless to say, in that case everyone will be worse of than if they simply decided to accept a small share of a big pie.
The ultimatum game
Both stories illustrate nicely that as human beings, we are far from the rational actors that some economists believe us to be. Instead, our behavior is often driven by irrational, unconscious biases. One of those drives us to punish what we consider selfish behavior, even if dealing out that punishment means paying a personal penalty.
This fact was demonstrated in an experiment at the University of Cologne in the 1980s called the "Ultimatum Game". As a participant in that experiment, you would take one of two positions: Proposer or responder. As the proposer, you would be handed a sum of money - let's say $ 10 - and asked to split it with the other partaker in the experiment, the responder. As the proposer you could chose to split the money however you liked (90/10, 80/20, 50/50, …) but whatever split you suggested, it's up to the responder to either accept or reject. If the responder choses to accept, the deal happens, the money is split accordingly, and both of you go home with your share. If however the responder declines to accept your offer, both of you go home with nothing.
If the responder would act purely rational, he would be forced to accept any split (except for 100/0), as he would go home with something, rather than nothing. But studies consistently show that splits worse than 70/30 usually get rejected - because the responder feels the need to punish what he perceives as selfish behavior of the proposer, even if it comes at a cost of $ 3 to him that he could otherwise take home.
Mental biases like the tendency to punish are a wonderfully interesting subject. I think that we can learn a lot by just becoming aware of them, and watching out for when we ourselves might fall prey to them. I'm not suggesting that we should strive to become more rational in all our actions, but that a bit of awareness about our underlying motivations can't hurt. It also enables us to understand and predict the reactions of others better: If the owners of the building with the cafe in the initial example would have been aware of the renters tendencies to refuse an "unfair" offer at their own expense, they might have shied away from raising the rent in the first place - and we would have had a cozy location for an after-show drink that Friday night.