Fairness in economic decisions (Ockenfels)

For Axel Ockenfels, fairness in economic decisions means that people care not only about their own gain, but also about their position relative to others. For him, fairness and reciprocity are not a deviation from rational action, but part of what people want – in markets too.

This entry deals with this one idea and what it means for the image of the human being in economics, not with the work as a whole. For the concept itself, see Altruism; for mutuality, Reciprocity.

About the person. Axel Ockenfels (born 1969) is an economist at the University of Cologne and one of the best-known German representatives of experimental economics. His doctoral thesis Fairneß, Reziprozität und Eigennutz (Fairness, Reciprocity and Self-Interest, in German) appeared in 1999.

What does self-interest mean – and what does altruism mean?

Ockenfels draws a precise distinction. He calls only that behaviour self-interested which is driven solely by one’s own material gain. Altruism, by contrast, he takes broadly: as an interdependence of preferences – one’s own goals depend on the well-being of others. Fairness and reciprocity are expressly part of it.

In doing so he gives up an assumption that long counted as a basic law of economics: that people look only to their own advantage. The assumption that people act rationally he does not give up. He merely widens what their reason is directed towards.

What does the ERC model explain?

Together with Gary Bolton, Ockenfels developed the ERC model – Equity, Reciprocity and Competition (Bolton & Ockenfels 2000). It assumes that, besides their own gain, people pay attention to their relative position, that is, to their share of the whole. Most do not want markedly less than the others, and many do not want markedly more either.

A single assumption thus explains what otherwise seems contradictory:

• In the ultimatum game, one person proposes how a sum is to be divided; if the other rejects it, both get nothing. Very low offers are nevertheless often rejected – better nothing than a humiliating share. Those making the offers know this and offer more, because they fear the rejection.
• In the dictator game, in which no one can reject, many still give something away.
• In markets with many sellers, by contrast, the same people behave competitively – there, sharing can hardly influence one’s own relative position.

Alongside ERC stands the model of inequity aversion by Ernst Fehr and Klaus Schmidt (1999), which emphasises the comparison with each individual other person. Both models explain many findings similarly well; they stand side by side. For more on Fehr, see Altruistic punishment (Fehr/Gächter).

What does the East–West comparison show?

In the 1990s, Ockenfels and Joachim Weimann had students in Magdeburg play the same games that students in Bonn had played before (Ockenfels & Weimann 1999; Selten & Ockenfels 1998). The students in Magdeburg paid less into a common good and gave less in a solidarity game. A second finding was decisive: each group expected from the others pretty much exactly what it did itself.

The authors therefore expressly consider it misleading to call the one group “less fair”. Different norms apply – and measured against them, each group acts fairly. Where the differences come from, they leave open; as conjectures they name the experience of the planned economy and the notion that, after reunification, self-interested behaviour might be considered “typical”, that is, customary, in a market-based order (Ockenfels & Weimann 1999: 285).

For us this is the most important lesson of this finding: fairness is not the same measure everywhere. Differences between groups stand side by side, not one above the other. A political order that monitors the lives of individuals down into the private sphere and enforces conformity leaves traces in trust – that is a critique of the system, not of the people who lived in it.

Does talking help people cooperate?

Clearly. People who can talk with one another before a decision cooperate in social dilemmas on average much more often (Sally 1995). Besides the words, voice, tone and facial expression have an effect. Feelings in a face can be read somewhat more easily within one’s own culture than across cultural boundaries – and that applies in both directions (Elfenbein & Ambady 2002).

We therefore note: even in “anonymous” situations, people perceive more of one another than a game set-up assumes – expression, language, bearing. A laboratory experiment shows behaviour under its own conditions; in life, experience and impression are always added.

Does money crowd out one’s own motivation?

Under certain circumstances. Whoever does something on their own initiative can lose that drive if they are paid or controlled for it – especially when the payment is experienced as mistrust or steering (Frey & Jegen 2001). This does not always apply, nor completely; appreciative reward can also strengthen motivation.

Our reading: the market needs fairness – and freedom

Even in the market, people decide not only according to their own gain, but according to their position relative to others. Fairness and reciprocity are not disturbances, but part of preference – Ockenfels thereby opened a way for economics to take the social seriously.

From this, a distinction follows for us. The free exchange of many individuals brings forth prices in which dispersed knowledge is contained – Friedrich August von Hayek described this. Whoever, by contrast, wants to measure all areas of life in a single quantity and steer them from above claims a knowledge that no one has. It is not the market that pushes fairness back, but an order that replaces exchange with direction.

And something else belongs here: those who, in their studies, learn above all the model of the self-interested human being tend to behave accordingly in game experiments (Frank, Gilovich & Regan 1993) – how much of this is learning and how much self-selection is disputed. An image of the human being does not remain without consequences when it is taught.

What we read differently in 2017

In Selected Perspectives on Altruism (2017, in German) we explained the East–West finding by an aversion to the West – that is not what Ockenfels and Weimann say; they leave the cause open. We also attributed to Ockenfels the claim that strongly self-interested people were found almost only among economists; in fact, people who gave nothing were found in all subjects, and a difference by field of study showed up only among men. Our critique of an image of the human being that knows only self-interest remains – it now stands on the more precise finding.

Related terms

• Reciprocity – mutuality and Nowak’s five rules of cooperation
• Altruistic punishment (Fehr/Gächter) – why people punish at their own cost
• Fairness expectations (Schmidt/Sommerville) – fairness already in toddlers
• Collectivism and individualism – order from above and order from freedom
• The Gift (Mauss) – reciprocity beyond the market
• Altruism – the concept and its interpretations

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By Tobias O. R. Alke