Academic journal article Review of Social Economy

Cooperation and Fairness: The Flood-Dresher Experiment Revisited

Academic journal article Review of Social Economy

Cooperation and Fairness: The Flood-Dresher Experiment Revisited

Article excerpt

Abstract In this paper we set out to deepen our understanding of the importance of fairness in decision-making within the context of Prisoners' Dilemma games. A review of the "historic" Flood-Dresher experiment provides a useful empirical basis, as it allows us to look in considerable detail at how the experimental players made up their minds. We try out several game-theoretical readings of the experimental results, and find some value in Adam Smith's age-old concept of rules of conduct. We find that fairness considerations are much more than mere excuses for taking a free ride or pointers to focal points. They seem to play a considerable role both at a conscious and at a less-than-conscious level.

Keywords: cooperation, fairness, prisoners' dilemma, roles of conduct

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In a seminal article entitled Fairness as a Constraint on Profit Seeking, Kahneman, Knetsch and Thaler convincingly explain several market anomalies by introducing the assumption that economic behavior is influenced by standards of fairness--even in the absence of a long-run interest to apply such standards (Kahneman et al. 1986). The argument implies that individual behavior is merely indirectly related to outcomes. Social norms seem to mediate between behavior and outcomes. In what follows, we try to explain the anomalous outcome of a "historic" prisoners' dilemma experiment by applying the same assumption.

Experiments are appropriate methodological tools for considering in detail the articulation between behavior, local norm formation and outcomes. Once we question the assumption of economic rationality, studying real-life actors in an artificially controlled environment can be an interesting option for exploring alternative assumptions. We begin by reviewing a little (quasi-)experiment, conducted in January 1950 and known as the "Flood-Dresher experiment" (Flood 1958; Luce and Raiffa 1967: 101; Axelrod 1984: 216; Poundstone 1992). As an experiment, it would not stand up to today's methodological requirements. However, it does provide an interesting basis for exploring the way in which behavior, incentives and rule-following are articulated. The argument is not that players do not act intentionally; it is rather that they become so obsessed with attaining a consensus over fair distribution that we can rightly question the "rationality" of their behavior.

After a discussion of the results of the experiment, we put forward some alternative theoretical ideas on the relationship between behavior, incentives and rules. According to some scholars, social norms are enforced by "informal rewards and punishment" (e.g. Lundberg and Pollack 1993). Others gave substance to this assertion by referring to the role of emotions in sustaining norms (Frank 1987; 1988; Elster 1989; 1999; Becker 1996; Platteau 1994). Most of these authors refer directly or indirectly to Adam Smith. Indeed, Smith's work, and particularly his Theory of Moral Sentiments (TMS), is relevant in this context in that it provides a framework which allows us to go considerably beyond material interests. At the end of the first section, we first interpret the Flood-Dresher experiment by reviewing some contemporary game- theoretic interpretations. Subsequently, we develop our own interpretation by making extensive use of Adam Smith's concept of rules of conduct. The third section summarizes the main ideas of the paper.

THE FLOOD-DRESHER EXPERIMENT

In an attempt to verify the usefulness of Nash's identification of a (non-cooperative) Nash equilibrium, mathematicians Merril M. Flood and Melvin Dresher invited two friends, economist Armen Alchian (UCLA) and mathematician John Williams (RAND), to play the following game:

Armen Alchian's payoffs (representing dollar cents) are in the southwestern corner, while John Wiliams's payoffs are in the northeastern corner. Each player is summoned to maximize his payoff. But payoffs depend as much on own decisions as on the other's choices. …

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