Sunday, March 25, 2007

Sunday dollars+cents: Hating winners

Do you die a little inside each time a colleague gets a promotion? Would you rather other people didn’t have bigger houses than you? Would you actually be prepared to give up some of your own money in order to stop other people getting more money than you?

Surprisingly, for most of us the answer appears to be “yes”.

Two UK economists Daniel Zizzo and Andrew Oswald set out to uncover what they called the “dark side” of human nature by creating a computer game using real money in which each of the players had the opportunity to anonymously “burn” or destroy the winnings of others.

Here’s how it worked. The four players were separated by screens and never met. But by using graphs on their screens they could each see how much each of the others was winning.

Much of the game involved gambling, a bit like playing a poker machine. But every so often, out of the blue, one of the players received an “unfair” windfall. And throughout the game, and also at the end, each player was given the opportunity to “burn” another player’s winnings. The price varied between 10 cents to burn a dollar and 25 cents.

Textbook theory says no one is going to pay good money to “burn” another player’s winnings. It costs money and can’t possibly make money...

And yet Zizzo and Oswald discovered that an astonishing two-thirds of the players gave up real money in order to burn another player’s. Surprisingly it didn’t seem to matter how much the burning cost. The decision to burn was unrelated to the price.

Two types of players were burned the most - those that were the richest and those that were seen to have made their money “unfairly”.

Zizzo and Oswald conclude that equality and fairness matter a lot to ordinary people – so much so that in the language of the street we are prepared to live in much worse houses in order to make sure that no-one lives in a house that’s much better.

For taxation, the implication is that we like it when we tax rich people the most, even if it harms our economy (in the burning game half of all the earnings were burned).

For industrial relations the implication is that we don’t much like the idea individual contracts – no matter how much the designers of WorkChoices insist we should.

Zizzo, D.J. & Oswald, A., 2000. Are People Willing to Pay to Reduce Others' Incomes?, The Warwick Economics Research Paper Series 568, University of Warwick, Department of Economics.