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.


Interestingly, when the game is played against a computer, people are more likely to accept unequal terms.


I think the big Chicago economist (the author) should carefully read
25 by sanchmo
16 by Robert Dewar
57 Donald
80 fm
73 pavel

and learn some real world things - not just sitting in an ivory tower and "think like economists" making silly conclusions based on completely impractical assumptions.


It's not an us or them mentality as you suggest. The legislators voting against the bill are not pandering to an uninformed public. Here's the real reason for rejecting a bill that ignore falling home prices and foreclosures...

If you spend $700B to "fix" the economy, but leave the country with mortgages that are soon to be defaulted on, how will the economy actually be fixed? There is absolutely zero chance of a healthy economy for ANYONE if the middle class gets driven out of their homes, loses their jobs, and cannot afford to invest for a healthy retirement.

As lenders continue to foreclose, mortgage backed securities will continue to fall. People on Main St will be less likely to invest, likely pulling their investments out of the market. From 2 sides, the economy will continue to flounder. And this is after $700B was spent on it. Where does the money come from to bailout the bailout?

I hope that when the money is spent, that it is wisely spent and does what is intended. We cannot afford to look at the economy as trickle down or flow up at this point. Sound economic policies are called for now more than ever. And to be effective, we must not be swayed by slogans meant to hype and rationalize why our individual needs are more important than theirs. I think the money managers are smart enough to realize they need to take care of the middle class. I'm not sure the politicians are.

Of course, there is one candidate with the requisite financial training but there seems to be an eagerness to rush out and blow $700B foolishly before his race to the White House culminates.



Many people here seem to be asking why should people who haven't done anything wrong help those who got themselves into this mess. The problem is that we are on the brink of a fincancial collapse that could lead to devestating conswequences for everyone. Many companies put their money into 6 month to 1 year accounts and then take out loans to pay their employee's paychecks. Then when the accounts mature, the company uses the money to pay off the loans. The interest that was earned is greater then the interest paid on the loans. Unfortunately companies are not letting out loans as easily. It may soon be that when companies try to get the loans to pay payroll some month, they won't be able to, and they won't be able to touch the money that is put away because of their contracts. If you like your monthly paycheck, you have a stake in what's going on down on Wall Street.

Jeffrey P

Securities sellers and banks want to make money, so they offer their wares to anyone they can get to buy their wares. It is inevitable that they will, from time to time, get their hands stuck in the cookie jar. Government intervention in the housing market and government intervention in the lending and securities markets helped enable this set of problems. Intervening now to soften the blow to those who made what ultimately turned out to be mistakes, whether on Main Street or Wall Street, or Pennsylvania Avenue, encourage future bad behavior. Surely everyone can agree with that much. The question we face is can we tolerate the results of not intervening to soften the blow? I think the outvoted Republicans are (at least in effect) fighting the good fight against socialism, but not they nor any other representatives can save a Democracy where Selfish Wall Street and Selfish Main Street are unwilling to pay the penalties we've all collectively accumulated through a long history of allowing Government intervention into the markets when it benefits us in the short term. The invisible hand can (and should) destroy. We will not perish - capital and expertise will find a new way to win and prosper, so long as we don't allow liberals to turn us into Socialists and systematically punish success.



I don't understand the current crises and I bet the majority of the elected officials don't really either. I have been told or read on the internet, which is not reputable, that the bail out is needed in order to inject capital into the banks, which have seen their capital/assets dwindle because they are so heavily invested in mortgage-backed securities. As a result of the uncertainty of mortgage backed securities, the concern is that they are worth less or that they are worthless, and so banks don't know how much they have to lend, they don't comply with federal requirements because they can't show they have one dollar for every ten they are lending, and as a result people can't get loans to buy cars to go to work and businesses can't get loans to meet payroll and invest in inventory or capital like dump trucks. This will all snowball and then nobody can do anything except with cash on hand and the whole economy slows down, or stops, or starts moving backwards.

That makes sense, I guess. Maybe its true, but what am I supposed to do, take the word of some lobbyists, some politicians, and some people on the internet? Not when $700 billion is being given away or loaned at below market rates. I want more proof, or at least information. Where is Ross Perot with his easy to understand graph?

Here's an alternate reasoning and theory I came up with in the last three minutes, which I also think could make sense, and which would not cost $700 billion:

Mortgages in default or in danger of default that will end up costing the lender money (including a smaller rate of return than otherwise expected) are a tiny fraction of all the mortgages out there. Let's say housing prices have gone down 20% across the board. So what? The house is still there, you can walk into it. You will be able to sell it for at least half the value that it was purcahsed for, and hold the mortgagee responsible for the remaining balance, from whom you can expect to collect another 10% of the value of the home. So let's say that of the small fraction of mortgages that will fail and cause a loss to the lender, it will be a 40% loss. Fine, devalue all mortgage backed securities by half of that, or 20%, and allow banks to value their mortgagebacked securities at 80% for lending requirement purposes, then up the FDIC insurance to 250K to encourage main street and small businesses, and see what happens. Be prepared for tough times, but not so tough that you would risk paying $700 billion so that maybe things would go back to the way they were before this "crisis." If stuff really gets bad, or my numbers that were picked out of thin air are wrong, be prepared to sell off 1,000,000 acres of Federal Land every year for three years, and then cut everyone another stimulus check after each sell off.

Ultimately, I am not convinced that a) I understand what's going on, b) that anybody understands what's going on, c) that the people who do actually know what's going on are the people who say they know what's going on, and d) that my proposed idea is any more arbitrary that loaning a bunch of "financial institutions" $700 billion.



I'm willing to pay good money to see greedy, rich men suffer... but they've undermined Democracy in this country, so have no fear... a minority of the opulent will eventually get their way.


King Bush


"The game is played only once, and anonymously, so that reciprocation is not an issue." I am skeptical of the bailout because I foresee playing this game against the same players again. And again. And again. And I think they think they can stick me with the $20 and pocket the $80 every time.

Ron Tomlinson

Perspective is the origin of the distaste most taxpayers have for the bail out. Those people who get their obscene salaries and perks can't believe anyone would want to deny them. I as an investor have had terrible returns since the current president got in office. My opinion is that the CEO's who are not major owners of the companies are employees who should be compensated relative to success and failure. Some think they should be rewarded for their preparation to do the job instead of performance. There are plenty of potential CEO's from places like Japan and India who can actually select executives and managers who can then apply Management by Objectives, Lincoln Electric studies and develop other studies which can be used to improve production and improve quality. The Japanese have long been using methods developed in the US. A problem the US management has is that it is too successful in communicating from the top down, and too resistant to communication from the bottom up. When management doesn't want to know about problems at the sales, shipping, or product end they can't solve those problems.

Boards of directors and CEO compensation packages get around the shareholder. Boards are often complementary boards made up of CEO's and senior management of the company and some outside companies. The CEO's then attend each other's board meetings and help set each other's perks and total compensation packages.

There should be no surprise that in today's business ethics have almost no influence. Workers pensions and insurance vanish and CEO's golden parachutes look like the mirror image of the vanished worker's benefits, and shareholder distributions which don't take place.

Victor Hugo wrote the Tale of Two cities which reflected that there is a difference in perspective at the same time and place. The economy which is super for a few may bring revolting experiences to others.

The lesson we should learn from other countries in which there is a large homeless population is that when people are placed in that situation they become a repository for physical and other illnesses which can then spread through the remainder of the population. In other words for every benefit there is a cost, and some costs are externalized. Mass transit is an example which does not typically pay its own way when it is examined alone, but rubber tired vehicle operators
also benefit. When the roadway traffic at peak hours is reduced by the shift of riders to transit, the roadway user benefits by a higher level of service.

What has people angry is the irresponsible management of what has become the cannibalization by disinvestment of what was the American base industries which could export based on economic advantage.

Economics should be used to efficiently allocate resources. Finance should be used to maximize profits, and Engineering should be used move the resource to the finished product which can then be marketed and shipped. Accounting should be applied
to its purpose of balance sheet production. There are short terms where the maximum profit ignoring externalities is to dismantle and sell assets. We have had too much short sighted bookkeeping telling management to dismantle and sell. That has made us an importer instead of an exporter. The problem with we are seeing now is that the structural change to our economy has worked its way through the whole system and made it into the oversold housing market.

The housing market moves downward like a parachute or hang glider when people sell a limited number of homes at prices near or at historic levels because they don't have to sell. The market moves down like a falling rock in those areas where foreclosures are a large part of the market. The market does not move equally everywhere at the same time. In parts of the midwest where buyers seller and lenders are more conservative, the market has not had high volatility, yet.

Our economic situation is like sliding down the slope on the way to a drop off. We have not reached the drop off. The issue on which many differ is how high the drop is from the bottom. I believe the bottom is a longer drop for overpaid executives and not so far for a whole lot of financially struggling folks who don't have any or don't want to throw away more of their money on the altar of "Trust Us, we are your large bankers." Maybe it's time to allow the large bank operators to serously read the back of our one dollar bill where it says "In God We Trust". Let them have the fear of God, like all the folks who have invested in good faith and seen their investments fail to keep up with inflation.



David Zetland

Legislators were not worried about the voters back home. They were worried about campaign contributions...

Average contributions from financial firms to those who voted yes? $141k

Average to those who voted no? $90k

bada bing!

J. Daniel Smith

Why isn't there a plan to DIRECTLY help those on "Main St."? While I would rather not see any government involvement at all, indirectly help Wall Street rather than indirectly helping Main St.

If bad mortgages are really at the root of the problem, then let's make the mortgages good and allow people to stay in their houses. I envision a program along the lines of the following:
Troubled homeowners declare bankruptcy (perhaps some kind of special "mortgage bankruptcy").
As part of the (special?) bankruptcy proceedings, all liens against the primary owner-occupied house are dissolved except for the first mortgages and property taxes.
The Federal Government provides direct refinancing of the first mortgage up to $417,000 (the old "conforming" ceiling) at a modest (say 4%) interest rate that isn't tax deductable; 30 year amortization interest-only payments with a five (or seven) year balloon.

Banks get some of their money back and can sort out amongst themselves how to split up the funds. The homeowner gets to stay in their house. The mortgage is no longer commoditized. And we have five years (when the balloon payments become due) to sort things out.

Everybody losses: banks write off second mortgages and home equity loans; people have to declare bankruptcy and as a result pay higher costs for future credit. But the "benefits" go directly to people.



Dear Stephen, Maybe we just don't think another bailout would work.

We've already had massive takeovers (Freddie and Fannie, IndyMac Bank), enormous loans (AIG), bankruptcy filings (Lehman), bank consolidations (Wachovia), and other consolidations (Merrill Lynch). Not to mention the early takeover of Countrywide by B of A.

None of those efforts seem to have stemmed the tide.

It's time to stop bailing, take down the sail, and put on our individual lifejackets.

Jeff Thompson

This makes no sense to me at all. The government will ask the treasury to print up 750 billion and give it the companies that fleesed the american people already. This will devalue the dollar so the peoples dollar will buy less (Second fleesing) and when the businesses can't pay this bill back the taxpayer will get the bill (third fleesing). How can the executives get a bonus when they drove the business into the dumper ?

Willy Nilly

Go figger.

When the man in the street accepted the no-doc mortgage dangled before his eyes, he was a spineless creep, greedily living beyond his means.

But when our esteemed Chancellor of the Exchecquer asks for a no-doc, no-questions-asked $700,000,000,000 line of credit, he is a courageous and noble patriot, vouchsafing us the Kiss of Life.

Say, whut?

Frustrated Linguist

Thanks for the good laugh! The suggestion that one synonym should be used in favor of the other really gave me a good chuckle.


The reason people hate economists is because they assume that people should take the 1% as if the only value that mattered in the world was monetary value. People don't take the money because,unlike economists, they don't see money as a the penultimate means to all goals.


Surely it must occur to the first player in the ultimatum game that the second player may well reject an unfair offer. That means that the first player walks away empty-handed. Does the economist understand why the first player would ever propose the unfair split?


I'm in complete agreement with #15, Rick. I've been responsible with my finances, and now I'm expected to bail out those who haven't been. It's infuriating.

Henry V

Hear hear #16.

I really cannot understand how so many get caught up in the money = utility trap.

Now, I like a lot of behavioral economics, but I've not found a single example in that literature of people acting "irrationally." It's just that we don't always know the objective function.