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.