Interview with Richard Thaler

Interview with Richard Thaler, University of Chicago behavioral economist, by Douglas Clement Editor, The Region: “…Region: One thing we haven’t talked about yet is your work on reciprocity and cooperation. And let’s use another British example, Golden Balls. You did some fascinating research on this British game show. Can you tell that story and what it illustrated?
Thaler: You know, it’s funny, this goes back to Gary’s line [about behavior in real markets as opposed to labs]. As you know, this game show ends in a prisoner’s dilemma. And there have been thousands of experiments run on one-shot prisoner’s dilemmas. We know that economic theory says that the rational strategy is to defect; theory says everyone will defect. It’s the dominant strategy.
In experiments, about 40 to 50 percent of the people cooperate, but it involves small stakes. In this paper we write about the actual game show, there’s one trial, a round in the actual game show—you may have seen the clip of it—where it’s not small stakes at all; it’s around 100,000 pounds. And that’s one of the things we were interested in: What happens when you raise the stakes?
This is what happens: You get a plot like this (see hand-drawn plot and actual plot). I just happened to have drawn this for another visitor, a grad student.
So, yes, the economists were right. If you raise the stakes, cooperation falls. But it falls to the same level you see in the lab. The interesting behavioral thing is, when the stakes are small, compared to what other people are playing for in the game show, then cooperation gets even higher.
This goes to bounded self-interest. Economists assume people are unboundedly unscrupulous—or I’ll say self-interested, a more polite term. But there have been lots of experiments where you leave a wallet out and depending on the place—I don’t remember the exact data—but a large percentage get returned. Now, some wallets also get picked clean first, but … so I wrote about this too. (He displays a photo of a roadside rhubarb stand.)
Region: What is this?
Thaler: This is significant. Notice the features of this. It’s a roadside stand; they’re selling rhubarb. And it’s got an honor box with a lock on it.
I think this is exactly the right model of human nature, that if you put this stuff out there, enough people will leave money that it’s worth the farmer’s time to put it out. But if you left the money in a box that was unlocked, somebody would take it.
Region: It takes just one dishonest person to “undo” the honesty of many others …
Thaler: Right. If you ask somebody directions, most people will tell you. It’s very fortunate that we don’t live in a society where everybody is out to take advantage of us. For instance, if you have work done in your house or on your car, there’s absolutely no way for you to monitor what they’re doing, unless you’re willing to spend the time watching them and you happen to know a lot about the work, materials and methods being used.
So it has to involve trust. Trust is really important in society, and anything we can do to increase trust is worthwhile. There’s probably nothing you could do to help an economy grow faster than to increase the amount of trust in society….