The Price of Disgust

So the bailout proposal before Congress seems to have been rejected because legislators were worried that voters back home saw it as a bailout of Wall Street at the expense of Main Street. Is such a fear rational?

It may be that voters simply don’t understand or believe that a broader Wall Street failure could quickly trickle down and harm their Main Street interests. Or could it be that they’re willing to pay a price to exhibit their disgust even if it ultimately harms their self interest?

Consider the popular academic experiment known as the ultimatum game:

The ultimatum game is an experimental economics game in which two players interact to decide how to divide a sum of money that is given to them. The first player proposes how to divide the sum between themselves, and the second player can either accept or reject this proposal. If the second player rejects, neither player receives anything. If the second player accepts, the money is split according to the proposal. The game is played only once, and anonymously, so that reciprocation is not an issue.

Very often, the first player offers a 50-50 split. But what happens when he offers the second player only 30 percent of the total, or 20 percent?

It turns out that the second player often rejects a 20 percent offer, which means that both players walk away empty-handed.

Many economists cannot understand why they’d do such a thing. To an economist, an offer of even 1 percent would be worth accepting since it is free money, and because for the second player it is ultimately irrelevant how much money the first player takes home.

But most people do not think like economists. When offered 10 percent or 20 percent or even 30 percent of the total, they are disgusted by the inequity — and willing to pay the price for that disgust by rejecting the offer.

Is that what we’re seeing now in the vigorous antipathy toward a government bailout? Perhaps, at least in part — although there are a lot of super-rational reasons to dislike the bailout as well.

This disgust factor, and the disconnect between Wall Street and Main Street, seems to be where the bailout’s supporters have focused their attentions. (They are also adamant that it shouldn’t be called a “bailout” at all, but rather a “rescue.”) In the coming days, look for the public debate to move strongly in this direction. From this morning’s Wall Street Journal:

Adding to the pressure on Congress to act were some of the nation’s biggest corporations, including Verizon Communications Inc., Microsoft Corp., and General Electric Co. GE Chief Executive Jeffrey Immelt is actively lobbying politicians and finance officials in Washington to complete the financial-rescue bill, said a company spokesman. To back up his message, Mr. Immelt directed his staff to compile evidence of the “negative ripple effects” throughout America from the crisis on Wall Street, including information on what is happening to customers and employees in all 50 states.


Yeah #77 pretty much expresses my sentiments plus the will to type it all out.

But going further than the case where you're dieing by not accepting, there's a practical case for principle, even "spite principle." You're setting a precedent by settling for less, even if it's immediately beneficial. Tell them "50 or bust" with rejections and all the "first deciders" of the world will learn and maybe next year we'll get a better offer.


Oh, claiming that rejecting any amount is "irrational" shows the concrete-bound way many economists tend to think about things.

That won't benefit you in this situation but, why do you think most people wouldn't cut it too far in their favor in the first place? Because they're aware that the "spite rejection" is possible. If everyone did what the economists consider rational and take anything, then in these situations person number one would always go 99/1.

By rejecting a terrible divide, although we lose money here, we are promoting a culture of principle where one more person is going to be aware that some will take immediate losses in order to fight for fairness. Maybe the next time he is in a situation like that he'll cut it a little more fairly.

There's real self-interest in making a point.

Why do you think the US government (supposedly) "doesn't negotiate with terrorists"?


Could a bail out be brokered to private equity or an outside govt.? Could firms buy a stake in the bail out? It is a little anarchistic. Comment 123 has an interesting strategic slant.


PK (Post 77), if you have a fan club, newsletter, etc., please sign me up immediately.


Well this is a first in the game. The American public (player #2) are being offered 100% split -- of Player #1, Sec'y Paulson who never quit working for Goldman Sachs.

Of course, that would be 100% of toxic, worthless assets. Lucky us.

Michael Turton

Re commenter #77's brilliant point that the game is rigged:

The game theory analogy in the post points up another key issue here: as reported in both business and cognitive science literature, business and commerce majors are far more likely to cheat on assumed social contracts than other kinds of majors. It's the kind of thinking created by such travesties of the real-world as these games that has brought us to this pass in the first place.



I see the good Economists at freakonomics have joined the propaganda machine.


In other news:
Economist surprised to find that acting like a jerk is not always the best policy.


Not to put too fine a point on it, but I think that the reason so many "voters" are against the bailout is that they don't have the slightest confidence that economists understand a thing about the economy. Given the odds of the economists being right against the cost of the bailout, many people are making a reasonable judgement in favor of waiting to see what happens.

Myron W

The scenario of the ultimatum game doesn't apply here. This game isn't anonymous and is played with repetition. Unfortunately, the government has been giving the big investors a bye for the last several years worth of rounds in this tournament.

Seems a lot of people are missing the point. Investment banks don't make loans to home buyers. They buy tranches of mortgages from banks, securitze them and then sell them to multiple buyers. A lot of those securities are in the form of credit swaps which are basically large institutional investors gambling with each other as to who will be left holding the bag full of bad loans. There is no underlying value to the contract. It's all hedge and no funds.

Those who claim that the securities the government would buy have some value are saying that a bet between two gamblers has intrisic value. It doesn't.

Now if the plan would exclude the use of funds to buy any type of derivative securities, we are getting closer to something that would be useful. Keep real value targeted at real assets.

But the derivatives market is a house of cards. If the governement were to outlaw future credit swaps and declare all unreported credit swaps to be null and void (a good first step), the balance sheets of the big investors would take a huge hit. And rightly so because they were taking the risks.

The economy is going to tank, there is nothing to stop that now. Why should the taxpayer throw investment bankers, who thought it would be a good idea to jump out of a perfectly good airplane, a golden parachute.

People talk about the blockage in the credit markets without talking about the source of the excess credit in the first place. Why? Because it's anathema to free market capitalism to criticize unrestricted trade. But there is no denying that the increase in the money/credit supply is a reflection of the imbalance in the financial accounts of the balance of payments due to foreign firms not repatriating profits on sales in the US. Period.

The dotcom and real estate bubbles were SYMPTOMS of the underlying credit bubble caused by the imbalance in the financial accounts resulting from the trade defecit. As US assets become viewed as risky to foreign firms, they will repatriate a higher percentage of their earnings on US sales and you will start to hear a giant sucking sound on the value of the dollar.

Turmoil in the financial markets won't be resolved until greater equilibrium in the real economy is reached.


Tom Minton

Through my own bad financial decisions I owe several banks several thousands of dollars in credit card debt. Because of the high amount, I am considered a bad risk (even though I have never missed a payment). Because I am considered a bad risk, the banks frequently attempt to raise the interest rates on my balances to 25 percent.

Now that the banks are considered bad risks, I say loan each bank the money they need, but charge them the same interest rate they charge their credit card customers who they consider bad risks.

amadea hadley

#77: Very well said.

Dave Buell

I will bet you alot of people against understand $700B as the end cost to tax payers and stop thinking right there.

People who are for the bailout are probablly estimating some cash flows due to purchasing the bad securities with the understanding there are some good and some bad morgages tied to the securities, and even the bad morgages are tied to a sellable assets.

Albert Donnenberg

The longer the bailout is delayed without an economic collapse the more it looks like none was needed. In fact, the only way that the American people will get to find out whether this is another Bush administration ruse is to deny the bailout and see what happens. That the bailout appears to have bipartisan support is of little comfort. The decision to empower the president to go to war with Iraq was also supported by Congress, but was based largely on misinformation which Congress accepted at face value.


Dear Bail Out the Little Guy,

$700 billion (estimated cost)divided by 305 million (current US population) equals $2,295 per person, not $7,000.

Which is better? We all run with our checks to Wal-Mart to buy more Chinese imports made be inmates in labor camps, or we buy undervalued assets at a fraction of their cost, sit on them, and (hopefully) sell them at a profit.

Bear Stearns was a bail-out. This is not. Unfortunately, the world 'bail-out' is so popular, it's being used incorrectly, and nobody stops to question it. The Bear Stearns bail-out should have been shot down. We need this 'rescue' to work, because this time it really does affect everyone, and not just Wall Street.



How does the data for respondents in the Ultimatum Game breakdown by culture? Are Americans more apt to apt to display disgust at inequity than non-Americans? If so, how does that explain our tolerance of the widening income gap between the rich and everyone else in the US?


Here's another game theory experiment for you:

What if the banks are squeezing the government by refusing to lend to each other in hopes of a $700 billion pay day?


Typically flawed and unrealistic economic logic by the author. The analogy does not apply at all for a basic reason. Most Americans correctly see the crisis as a result of actions taken by precisely the same people who are now telling us the bailout is absoulutely necessary. Why should I trust these people? They obviously know nothing about running an economy. What if, at the end of the $700 bn bailout we're still stuck or in a worse situation? Artificial examples from behavioral psych experiments are toys - put them away and learn to think like a grown-up.


I agree with the folks who said that citizens' rejection of the bailout is largely an issue of trust. Perhaps under a different administration, and under a less stressful political climate (two wars, a huge deficit, inflation, an upcoming election, gas prices, and so on) this may have been more palatable to Jane and Joe. Given the catastrophic last eight years, however, this financial crisis comes off as beyond outrageous. I don't think people in the media and Washington appreciate how distressed and angry average folks are at this particular moment.


Have you considered that people have been conditioned to prevent moral hazard in others? In the real world, if you let someone 'take advantage' of you in that way once or twice, they will continue to do so. Unless they are punished or at least have some sort of negative feedback, it is human nature to continue to take advantage of a situation that benefits yourself. (even when you know it is morally wrong)

What the persons that reject the offer of 20% are doing is perfectly rational. Their instincts are trying to prevent moral hazard and possibly the same situation in the future.