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The Psychology Behind Rejected Monetary Handouts

Published on Fri Nov 24 2023Bribe. Close-up of hands giving money over gray background | Marco Verch on Flickr Bribe. Close-up of hands giving money over gray background | Marco Verch on Flickr

Why do people reject money offered to them, even when it's clearly against their financial interest? This seemingly illogical behavior has puzzled economists for years, especially when observed in the widely-studied ultimatum game. Traditional economic theory would suggest that any non-zero sum of money is better than nothing, thus any rational player should accept it. However, a new preprint paper delves deep into human psychology and suggests a thought-provoking alternative, stating that it may all boil down to a complex dance between regret and rational punishment. This fresh perspective could reshape our understanding of human behavior in economic games and beyond, challenging longstanding notions about our so-called rational nature.

In the game's traditional setup, two players have to agree on how to split a sum of money. The first player proposes a division, and the second can either accept it, splitting the money as suggested, or reject it, meaning both walk away empty-handed. Researchers have long observed that second players would often reject offers they deemed too low, a move that Classical Rationality couldn't easily explain. However, the study proposes that such decisions could actually stem from a rational strategy: if the second player (the responder) feels less regret over losing the money than the first player (the proposer) would regret not offering a fairer share, the offer gets rejected. This approach suggests rejection can be a form of long-term rational behavior that pressures the proposer to give better future offers.

Digging further into this, the study applies the transitive regret theory, usually used for comparing probabilistic lotteries, suggesting that individuals use a rational form of regret to evaluate potential outcomes. Besides challenging the fairness-centric view, the authors argue that their regret-centered explanation can account for various behaviors witnessed in ultimatum games, such as reactions to varying stakes and responses to different types of offers. They also offer a new way to experimentally differentiate whether actions are driven by fairness or regret-induced rational punishment.

This new study is not just an academic venture. It explores the key motivations behind decision-making, an aspect that affects everything from financial markets to everyday choices. By showing that regret and punishment play vital roles in economic exchanges, the findings open a window to understanding the often complex and seemingly irrational human behavior. If validated, this regret-based explanation could offer a tool for creating more accurate models of economic decision-making, ultimately leading to better-informed economic policies and business strategies.


Tags: Economics | Psychology

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