PRESENTED BY

PAREEKSHIT GROVER(59)
HIMANSHU (61)
DEEP KUMAR MISHRA (70)
ANKUR TOMAR (12)
SURAJ (71)
SAJAL JAIN (47)
Economic man,
is the concept in many economic theories of humans
as rational and narrowly self-interested decision makers who
have the ability to make judgments toward their subjectively
defined ends.
They attempt to maximize utility as a consumer and economic
profit as a producer.

Fairness, reciprocity & trust are critical for business
transactions.
Trust is prerequisite,
Reciprocity is defined as mutual action or interchange of
obligations.
Who are the players?
Dictator & reciever
Who can do what when?
First: Dictator Proposes a Division of reciever
Second: reciever Accepts the Proposal
Who knows what when?
Dictator Knows the reciever Must Accept Proposed
Division
reciever gets to See the Dictators Proposed Division
Before Accepting


Offers that give player 2 positive amounts are evidence of
altruism. Pure self-interest model would predict that
player 1 would keep entire amount
Evidence: mean offer in the 20% range .

In dictator game ,36% of the player offer nothing whereas
in ultimatum game ,all players make positive offers.
Note that:
If 36% of the dictators gave nothing,64% gave something
to a person they did not know and would not knowlingly
interact with in the future.

Extended dictator game: player 1 (investor) decides how
much to keep
how much to (invest) give to player 2 (trustee).
Investment earns a return.
Player 2 decides how much to give back to player 1.


On average, about 50% is invested, around 95% of
investment is returned
There is wide dispersion, with half returning nothing or
only a token amount.
Results from other countries: Bulgarians very trusting
70% invested, 150% returned; Orma herders in Kenya:
40% invested, 55% repayment.
More indirect repayment or larger group tend to reduce
investment - falloff in trust.
Social pressure Image can increase investment and
repayment rate

In this theory, the trustees in room B should return nothing
at all if they are purely self-interested($y=0).The investors
in room A will anticipate the motivations of those in room
B and send nothing to begin with($x=0).
BUT notice that if investors trust the trustees, there is a lot
to be gained. With no trust, the total gain in the game is
$20 ($10+$10) because each participant keeps the $10 he
is given. With complete trust, the total gain is $40($10
times 3 + $10) because the trustor sends his $10
endowment, which is then multiplied. If there is trust all
players can potentially be better off.
Amount sent by investors was multiplied by 3 in some cases(M-3x)
and 6 in others (M-6x).
The majority in room A sent at least one half of their endowment to
room B.
The mean amount sent is more than $6
Reciprocity is defined as the amount returned to investors divided by
the amount available to students in room B (i.e the multiplier times
the amount received).
The reciprocity ratio is less than 50% most of the time, implying that
participants in room B kept more than they returned.
In fact, many investors received less than they zent so that trust did
not necessarily pay in this game.
Trust and reciprocity have important implications for business
transactions. As in this game, without trust a great deal of the
potential benefit of the transaction may be lost.
Some people can be classified as selfish while others behave
reciprocally and seem to care about fairness.

Current research indicates that changing the number of competitors by
only one can have a significant effect on market outcomes.
To see this, consider the following modification of the ultimatum game.
Start with the ultimatum game, but increase the number of responders
from one to two or five who are in competition with one another. The
proposer makes his offer and then the responders simultaneously
decide whether to accept or reject the offer.
If more than one respondent accepts, one is randomly chosen to get the
amount offered by the proposer.
If only one responder accepts, he gets the offered amount, and if all
responders reject, all receive nothing.
This modified ultimatum game is analogous to a goods market with one
seller( proposer) and multiple competing buyers ( responders).
Everyone in the market knows the value of the good to everyone else, so the
seller should set the price at the buyers maximum willingness to pay ( same
for all buyers).


Competition among the buyers is not expected to change the price because
with self interested buyers and sellers, sellers is already setting the highest
price possible. competition among buyers does not give the seller more
power.


Fischbacher, Fong, and Fehr find that competition has a large effect on the
market. They report that with one buyer, the buyer received about 41 % of
the gains from the transaction, but with two buyers, the trading buyer
received only 19% of the gain.
With more competitors, it is more likely that at least one of
the responders is selfish and will accept any positive offer.
Even responders who would normally behave reciprocally
may accept low offers because they recognize that other
responders may be selfish.



These results indicate that competition important effects on
market outcomes when some people care about fairness.
Other research by Fehr and Fischbacher shows that fairness
concerns define competitive market outcomes under certain
conditions.
INCENTIVES & CONTRACT DESIGN


An incentive is something that motivates an individual to perform an
action. The study of incentive structures is central to the study of all
economic activities (both in terms of individual decision-making and in
terms of co-operation and competition within a larger institutional
structure).

Owners of a firm want to provide incentives for workers to expend high
efforts.
Contract design helps in better aligning of the incentives principles.
Helps to act in the owners best interest and avoid shirking.
In todays world, the competition between the companies are highly
competitive, not only the company should prepare the best market
strategy to improve the company performance, but each company too
has to come up with the way to keep their employee motivation on the
highest level so that the company as a whole can perform well within
the competition.

Incentive programs improve performance
Incentive programs engage participants.
Incentive programs attract quality employees

Fehr and simon gachter designed an experiment to understand
the concept of incentives


MEANING :
Action or behavior in correspondence with socially accepted
standards, conventions, rules, or laws.
Similarity in form or character.
Line Test from the Asch Conformity Experiment
In psychological terms, conformity refers to an individual's tendency
to follow the unspoken rules or behaviors of the social group to which
he or she belongs.
In 1950s, psychologist Solomon Asch conducted a series of
experiments designed to demonstrate the power of conformity in
groups.
In Asch's experiments, students were told that they were
participating in a 'vision test.' At first, the students answered the
questions correctly, but eventually began providing incorrect answer.
Nearly 75 percent of the participants in the conformity
experiments went along with the rest of the group at least one
time. After combining the trials, the results indicated that
participants conformed to the incorrect group answer
approximately one-third of the time. In order to ensure that
participants were able to accurately gauge the length of the
lines, participants were asked to individually write down the
correct match. According to these results, participants were
very accurate in their line judgments, choosing the correct
answer 98 percent of the time.

The experiments also looked at the effect that the number of people
present in the group had on conformity. When just one other student
was present, there was virtually no impact on participants' answers. The
presence of two students had only a tiny effect. The level of conformity
seen with three or more students was far more significant.


Results of the Asch Conformity Experiments Indicate

At the conclusion of the experiments, participants were asked
why they had gone along with the rest of the group. In most cases,
the students stated that while they knew the rest of the group was
wrong, they did not want to risk facing ridicule. A few of the
participants suggested that they actually believed the other members
of the group were correct in their answers.
These results suggest that conformity can be influenced both by a
need to fit in and a belief that other people are smarter or better
informed.
This research has provided important insight into how, why and
when people conform and the effects of social pressure on behavior.
Social Behavior is behavior directed towards society.
Emotion is a strong feeling deriving from one's circumstances, mood, or relationships with
others.
fMRI( Functional Magnetic Resonance Imaging) technology allows us to see which parts of
the brain are operating at different times. Through research using fMRI , there is increasing
evidence that emotions and social interaction are inextricably linked. Much of this research
is slotted under social neuroscience, which investigates the social brain that operates when
we deal with other people.
For example: fMRI technology was used to investigate cognitive and emotional processes
during ultimatum game . Results of the ultimatum game sometimes seems to be
inconsistent with pure self interest, in the sense that positive offers are rejected to the
detriment of both parties, when we feel that we are being treated unfairly and anger is
triggered.



When ultimatum game participants were scanned using fMRI,
Brain acts in two different way in case of unfair offers
triggered i.e. Forebrain is critical for rational thought while
limbic system is the primary seat of emotion.
Forebrain ( rational thought: should I accept this offer since it
is in my self interest) and limbic system ( emotion: I m getting
even with this guy , even though it will cost me.)
In case of unfair offer were rejected, heightened activity was
observed in the limbic system , making it clear which part of
the brain won the argument.
EVOLUTION is the gradual development of something.
It is possible that evolution favored people who were cooperative and
equitable in exchanges. Perhaps we are actually hardwired to behave
socially.
Evolution favor reciprocal behavior because group that are pro-social will
outperform groups that are not.
Imagine our society if everyone always acted in terms of their own, narrow
self interest.
Conformity may encourage cooperative behavior.
Evidence supports the argument that other-regarding references inference
Human behavior.
Researchers are today making the case that social influences are so important
that their impact must be considered.