Cultural Differences in Behavioral Economics

It seems that when it comes to economic decision making theorists, there are objectivists who say that we are governed primarily by innate tendencies that define all human (and possibly chimpanzee behavior and there are relativists who say that every culture is different and there is no way to predict the behavior of one culture using data from another.

I would take the middle position. Culture explains a moderate amount of the variability in economic decisions. Universal attributes explain another moderate amount. There is also a huge interaction between them, probably explaining more than both of the main effects combined. And that is where it gets interesting.

Let me explain:

Joe Heinrich used the ultimatum game to study cultural differences in how much money is offered and how much money is refused (QUOTE). His hypothesis was that it would be the same across cultures, but he found just the opposite. He wound up dedicating his career to understanding why he (and everyone else at that time) was wrong.

Rather than practice traditional ethnography, he decided to run a behavioral experiment that had been developed by economists. Henrich used a “game”—along the lines of the famous prisoner’s dilemma—to see whether isolated cultures shared with the West the same basic instinct for fairness. I

But I don’t think he was wrong. I think he just missed some nuances. Let me explain.

In the standard ultimatum game, two people who don’t know each other are matched up. One of them starts with a pot of money. He or she is instructed to offer any amount of that pot to the other person. If that person accepts the offer, they both get the money. If not, they both get zero. So if the pot is $10, the first person offers $2 of it to the second, and she accepts, then the first person gets $8 and the second gets $2. But if she refuses they both get zero. Why would she refuse? Insulted by an unfair offer. Sometimes, this insult is more salient to that second person than the money they give up.

Since the game was invented in the US, we have a lot of US data. As you probably know, most US research is done with US college students as subjects. If you are in the camp that believes something is universal this doesn’t matter. But if you think that culture matters, than you should rerun the study with all different cultures. Not just national and ethnic cultures, but organizational, regional, religious, and other categories as well.

Heinrich ran the test on the Machiguenga, an indigenous people in the Amazon basin. Many of them had worked for logging or oil companies, so this was not the proverbial untouched tabula resa. But they were traditional enough to show some differences.

What he found was that the Machiguenga offered very little money to the partner and even with this small amount, the partner usually accepted. This compares to the US data where anything less than 50/50 was insulting and anything significantly less than 50% was refused on principle, even at the expense of getting zero. He concluded that this was some kind of fundamental cultural difference.

But I think he screwed up his study. Because of the difference in purchasing power, the amount of money in the pot was equal to several day’s wages. Think of your weekly earnings. That is what was at stake in this study. Even 20% of that is not anything to sneeze at. Would you turn it down on principle for getting an insulting offer from someone you never met, interacted with for 3 minutes, and will never see again?

I also think the frame was different (and you know how much I like the framing effect. The article describes the Machiguenga reaction to the whole study as “the young, square-jawed visitor from America giving away money.” I am not sure about the square-jawed part, but when you look at something as free money, the frame shifts. How many people reach down to grab a quarter that they find on the sidewalk? Are they insulted that it wasn’t a dollar? It’s just free money. There is a visceral power of free. They showed up, did no work, and got some percentage of a week’s wages. In the abstract, a 20% offer might seem unfair. But that’s still a full day’s wages.

A day’s wages is still pretty darned good for just showing up to this crazy American’s office. Why worry what the other person got? I think most Americans in this frame would do the same. So it is not just the culture, it is the interaction of the culture and the frame.

Your Turn

What do you think? Do the Machiguenga have a fundamentally different way of making economic decisions? Or is it a question of framing and experimental design?

Image Credit: PublicDomainPictures

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