Does Competition Affect Social Preferences in the Context of a Bargaining Game - Essay Example

Does Competition Affect Social Preferences In The Context Of A Bargaining Game? Discuss. Number: Introduction There have been various studies and experiments that have been carried out so as to establish the impacts of competition on social preferences specifically in the context of bargaining game. Some scholars argue that the level of competition highly determines application of social ethics in all the fields both in the market and in the non-market environment. Other controversial studies oppose this claim and argue that social preferences are not likely to be affected by the level of competition, instead, they argue that application of social preferences remain intact and what matters most is the kind of persons involved in that competitive situation. This essay is going to precisely discuss whether competition is likely to affect social preferences particularly in the context of bargaining game while at the same time giving solid evidence from past scholarly studies and experiments done relating to this contentious argument. First, it is important to define the some of the key terms t used in the essay. Social preferences refer to the partialities that are covered in psychology, behavioral economics, as well as experimental economics (Fehr, Fischbacher and Universität Zürich, 2002, p.30 ). The partialities are composed of interactive elements like equity, reciprocity, fairness and altruism just to mention a few. Under experimental and behavirial economics, it is presumed that all persons cater for their interests without minding the affairs of the other people especially if the resources that are being hunted for are scare hence raising unfavorable competition. It is also presumed that all human beings are rationale which means that they reason logically. Bargaining game on the other hand is a scenario whereby a minimum of two people are supposed to agree on how they can share given sums of money, goods or generally resources that are of mutual interest (Arzeni and Organisation for Economic Co-operation and Development, 2004, p.18). During the process of playing this game, the parties involved whose number is mostly two, bargains trying to win the most fair deal possible from the other party. This exactly what most human beings do in all spheres of life be it in the market place and other non-market situations like solving disputes between countries who are fighting over a territory, communities fighting for resources among other examples (Collins, Lawrence and Brookings Institution,1999, p.43). In the market place, the context is applied in solving labor disputes between the employers and the employees, unfair competition among the employees over scarce job opportunities among other day-to day applications (Price, 2007, p.72). In all these situations, each party pulls on its side hence calling for an intervention in order for the involved parties to reach on the most fair consensus. Such situations are likely to hinder application of social preferences like equity and fairness. Ultimate Game (UG) is an example of a bargaining game and it is likely to give a clear understanding of effects of competition on social preferences. Ultimate Game is a test applied to scrutinize possible behaviours that are likely to occurs during the process of playing bargaining games. The game involves two player who are given a certain sums of money to share in the ratio that they would settle on. The two parties involved are labeled as the proposer (the person given the money to decide the ratio they will share at) and the other party is referred to as the responder. Responder is the person who is the person who is given a choice of rejecting the offer made by the proposer or accepting it depending on his or her take on the fairness of the offer made. The game’s conditions are; one is that the players must not be knowing each other and the second one is that responders rejection on the offer made to a point that they fail to get into an agreement would translate to both parties losing everything in terms of the money they had been given. Responder determines the ratio that they will both share the money even though responder is given a chance to bargain for an increment of his or her share (Wilkinson and Klaes, 2008, p.89). In this game, players are expected to behave in a selfish manner while at the same time reasoning in a logical way. This means that it is expected that the offer made by the proposer would be the lowest offer possible that he or she thinks that the responder will accept. Responder on the other side is expected to take the offer unless a situation arises whereby the responder may feel frustrated and unfairly treated by the proposer. It is rare for the responder to reject the offer since doing so would make both of them walk away with nothing. However, a situation may arise when the rational reasoning of the responder may be superseded by his or her emotions especially if the proposer offer is extremely unfair. In such a scenario, the responder may reject the offer made in spite of knowing the consequences of his or her decision. The motive of such a decision would be primarily to frustrate the responder by making him loose his or her unfair bid (Kahneman and Tversky, 2000, p.73). Most of the bids made usually range within 40% to 50% with those that are below 20% likely to be rejected. According to the experiments carried out, it has been proven that proposers are always willing to increase responders’ pie especially if they insist on demand more. Moreover, similar experiments have shown that people rarely reason rationally in the process of playing the game. The fact that most of the offers made range between 40% and 50% gives the first answer about the question of whether competition affects social preferences. It appears that majority of the people in the society care about interests of the other people, and tend to treat them at least relatively fair as much as possible. This means that competition rarely affect social preferences irrespective of the situation the parties involved are put into. Sharing in such a ratio absolutely contravenes the model of self-interest that suggests that human beings are self-interested especially when it comes to sharing the prevailing opportunities (Chaudhuri, 2009, p.20). The outcomes of the Ultimate Game experiments also prove material possessions or rewards are not the ultimate concerns of most of the people. It proves that most of the people are also interested with the psychological satisfaction, which can only be achieved by making a relatively fair offer if not absolutely offer bid. On the other hand, some scholars argue that what makes the proposer make a relatively fair deal to the proposer is his or her rational thinking and not the concern for psychological satisfaction. They argue that proposer are likely to make a fair deal since they are aware that failing to do so may annoy the responder who on the other hand would express his or her resentments by rejecting the offer whose consequences are not likely to be impressive. During the game, both parties undergo a moment of psychological conflict especially if the proposer has acted in an extremely selfish manner. The responder wonders whether to reject the offer, and then they both loose or to accept it hence benefiting the responder more than himself or herself. Nevertheless, statistics show that such situations rarely occur. Rejection of the offer can only be associated with the responder’s desires to punish the responder for selfish actions. The game’s fairness is exemplified using the Nash Equilibrium Analysis, which applies the theory of Self-Interest Hypothesis (Baker and English, 2011, p.96). Credibility of the approach used by the responder is the main determinant of the Nash equilibrium (Camerer, 2003, p.38). This is because the proposer who the theory of self-interest term as both selfish and rational makes the lowest bid possible that the responder can accept. Responder also risk the deal by assuming that chances of the responder accepting the offer are high irrespective of the fairness of the deal since he or she fears losing everything. This gives the other claim of the question of whether competition affects social preferences. In this case, the proposers bid is highly unfair and made in a selfish manner without observing equity hence matching the theory of self-interest. Application of this theory in explaining the evenness of the bargaining game explains the anomalies that are experienced in many organizations, countries among other places as people behave in a selfish manner (Camerer, 2003, p.18). This is at times common in job places whereby workers are fighting for limited opportunities or between parties who have mutual interest over a resource. In such situations, competition for the scarce opportunities is likely to make people forget about social preferences like equity, fairness, reciprocity, and altruism among others and instead mind about their interests alone. Scholarly studies and experiments such as the Smith (1962 and 1964) and the Fehr and Schmidt researches show that when the level of competition is very high in the market place, the involved participants’ behaviors are directed towards their interests alone even though this is not always the case. Other studies have shown that majority of the people maintain social preferences irrespective of the level of competition though this may be influenced by other factors like the familiarity of the participants as well as the motive of the proposer(Camerer, 2003, p.18). According to the studies, fairness and equity among other preference are highly valued in the society and most people are willing to make sacrifices in order to observe them. This studies conflicts other analysis that claim that people loose social preference if the level of competition is very high. Therefore, the question of whether competition affects social preferences or not remains controversial and debatable. This means that competition can affect or not affect social preferences depending on the personality of the persons used in the testing (Smith, 2007, p. 32). Some people’s personality allows them to value elements such as equity and fairness while others never care about it. In conclusion, it has been revealed that competition may or may not have significant effects on social preferences depending on the personality of the persons involved in that competitive situation. Some people are self-interested and behave in selfish manners while others value the aspect of observing social preferences like fairness in all situations. However, the theory of self-interest portrays people as selfish and as if they are just oriented to material rewards irrespective of whether they are fair or not. Results from ultimate game however show that some people value social preferences and that why they make bids that are relatively or completely fair. 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