An excerpt from Scientific Mind:
Every second buyers collectively swap more than $1,839 for products through eBay, sending money to complete strangers with no guarantee that the goods they buy will in fact arrive, let alone in the condition they expect.
As a rule, they are not disappointed. To some economists, this is a borderline miracle, because it contradicts the concept of Homo economicus (economic man) as a rational, selfish person who single-mindedly strives for maximum profit. According to this notion, sellers should pocket buyers’ payments and send nothing in return. For their part, buyers should not trust sellers—and the market should collapse.
Economist Axel Ockenfels of the University of Cologne in Germany and his colleagues have spent the past several years figuring out why this does not happen. It turns out that humans do not always behave as if their sole concern is their personal financial advantage—and even when they do, they consider social motives in the profit-making equation. As Ockenfels has discovered, a sense of fairness often plays a big role in people’s decisions about what to do with their money and possessions, and it is also an essential part of what drives trust in markets full of strangers such as eBay.
Ockenfels’s Equity, Reciprocity and Competition (ERC) theory, which he developed with economist Gary Bolton of Pennsylvania State University, states that people not only try to maximize their gains but also watch to see that they get roughly the same share as others: they are happy to get one piece of cake as long as the next person does not get two pieces. This fairness gauge apparently even has a defined place in the brain. On eBay, however, fairness takes the system only halfway, researchers have now learned; eBay’s reputation system is critical for augmenting the level of trust enough for the market to work.
Circumstance also sculpts behavior, studies have revealed, regardless of natural character traits or values. That is, whether a person is competing in a market of strangers or negotiating with a partner can make a big difference in whether fairness, reciprocity or selfishness will predominate. In fact, the ERC theory hints at ways to alter economic institutions to nudge people to compete—or cooperate—more or less than they currently do.
Economists have long been studying volunteers in the laboratory to determine how and why they make financial decisions. In competitive markets, from the U.S. Stock Exchange to auctions at Sotheby’s, people generally act like Homo economicus, behaving in ways that maximize their own profits.
But inherent selfishness cannot explain behavior in other settings. Take a child who has been given a bag of jelly beans, which her left-out sibling is eyeing jealously. Many children would voluntarily share the candy just to be fair, even though that would mean fewer jelly beans for them. Mathematicians who practice game theory see something similar when they ask people to bargain in a test of social motives called the Ultimatum Game. In this two-player game, player A is endowed with a certain sum, say, $20, if he agrees to share some of it with player B. If B accepts A’s offer, the money is divided accordingly. But if B rejects the offer, both players end up with nothing.
In Ultimatum Game studies, researchers have found that the average offer is about 40 percent of the sum and that the most frequent split is 50–50, analogous to a child giving her sibling half or nearly half of the jelly beans she received. The recipient, B, usually accepts such roughly equal offers. When A offers less than one third of the total, however, B usually reacts with scorn and scraps the deal. This response seems nonsensical to someone who is only out to maximize profit. But it is more logical if people have a competing social concern: fairness. If individuals want a fair split, then accepting significantly less than that would mean forfeiting that objective.