If you would like to, please feel free to skip to the punchline at the end for some interesting thoughts on dishonesty...
There were 16 participants: 8 "buyers" and 8 "sellers". We were told that we were trading a notional good which started in the seller's possession. There were 8 periods for trades. In each period I, a buyer, would be paired with a different seller. We would meet in a room and were allowed 3 minutes of conversation, during which we could talk about anything. We would both then go back to our original rooms and write down our buying/selling price. These would then be collected by the experimenters.
If the stated buying price was lower than than the stated selling price no trade was done. If the buying price equalled the selling price, it was the final trading price. If the buying price was higher than the selling price then the final trading price was halfway between them.
So far, so straightforward.
The interesting bit was that before each period each buyers was told what "value" the notional good was worth to them that period. Buyers either valued the good at £3 or £9. Also before each period the sellers were told what it "cost" them to provide the good; either £1 or £7. The buyers' value and sellers' cost were both decided by drawing a ball out of a hat. Each value (£3 or £9) had an equal chance of being picked (50%), and each cost (£1 or £7) had an equal chance of being picked (50%).
So I, as buyer, always knew my valuation of the good (which was decided by the hat before each period). BUT I was not informed of the sellers' cost, and neither were the sellers ever informed of my valuation.
I kept the difference between the final trading price and my value as "profit". The sellers kept the difference between the final price and their cost a profit too. Thus everyone could benefit from a trade most of the time. But that does not guarantee that the profit would be shared equally (I could get very little profit and the seller could get lots, and vice versa).
By now you should be starting to grasp the the essence of the experiment. The following scenarios are possible:
Value: £9 Cost: £7 - Potential deal, somewhere in the region of £7-£9
Value: £3 Cost: £7 - NO DEAL
Value: £3 Cost: £1 - Potential deal, somewhere in the region of £1-£3
Value: £9 Cost: £1 - Potential deal, somewhere in the region of £1-£9
However, there is an incentive to be dishonest in your 3 minute conversation with the other party. If I had the value of £9, I could gain more by persuading the seller that I actually had the value of £3, because then the price would be lower.
If the seller has the cost £1 they have an incentive to persuade me that their cost is £7, because then the price would be higher.
But remember, if the buying price is below the selling price then no trade is done and no-one benefits.
--------------------------------------------------------PUNCHLINE-------------------------------------------------------------
In this experiment, dishonesty pays.
Would you be dishonest? (remember this is real money...)
I completed the experiment without telling a lie (I did, however, use negotiating tactics to get a better deal). Over the 8 periods I earned £17.20 (about average, I suspect). Some sellers were honest to me about their cost, but most were not (a seller's final trading price can be revealing about their true cost). I ended the experiment with less faith in humanity!
However, in real life people tend to interact more than once. If someone is dishonest I will not trade with them again. Thus the experiment does not necessarily translate to real life.
I'll finish with an interesting question...
Why do humans value honesty? Why, deep down, do we know that we are doing "wrong" when we are dishonest? Survival of the fittest would surely favour dishonest behaviour...
Recommended listening:
Love The Way You Lie by Eminem, Rihanna
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