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The Tax Plan – Annie’s Weekly Newsletter, Jan 5th 2018


Dueling messages and the “Ultimatum Game”

One of the biggest year-end news stories was the passage of the GOP tax plan. From a decision-making standpoint, I listened to the initial narrative adopted by each party. Each side has a plausible message. I’m summarizing but this is how each party expects we’ll feel about the tax plan:

  • Democrats: “Ordinary folks will be outraged the wealthy are getting a far bigger tax break than the middle class.”
  • Republicans: “As soon as people see more money in their paychecks, they’ll be happy about the tax plan regardless of the comparative size of the tax breaks.”

The Democratic Party’s narrative is that people will become unhappy because they’ll think it’s unfair that someone else is getting more than them. The Republican Party’s narrative is that people will be happier because they are getting more money in the absolute.

So which narrative do you think will resonate in the end, especially with the middle class??

The Ultimatum Game, a classic game in behavioral economics, offers some insight into how this may all turn out. In the Ultimatum Game, two people are paired up and the first person is given $10. They are told to offer some portion of the $10 to the second person, keeping the rest. If the offeree accepts the offer, they get to keep the money, split according to the offer. But if the second person rejects the offer, they both get nothing.

For example, if the first person offered $2 – keeping $8 – the second person’s options are accepting the offer and keeping the $2 (which is $2 more than they walked in the room with), or rejecting the offer and walking away with $0 (which means the other person doesn’t get to keep any portion of the $10 either).

From a purely rational economic standpoint, given the game is only played once, the second person should accept any offer of one cent or higher since if they walk away with a penny they are doing better than walking away with nothing. They are economically better off taking any offer above zero. The Republican narrative predicts that people will accept the penny (or $1 or $2) and that people will be happy about it because it’s rational to be happy about getting more than you had before you walked in the room.

It turns out that in the experiments involving the Ultimatum Game, people turn down offers they consider “unfair,” even though their rejection means they, themselves, will be worse off. In one of the most cited papers on the subject, “The Neural Basis of Economic Decision-Making in the Ultimatum Game,” the authors pointed out that offering $2 and keeping $8 has “about a 50% chance of being rejected.”

It takes just a moment of thought to really feel the reaction. If I offered you a penny, you would probably not be, “whoo-hoo, I’m walking out of here with a penny more than I walked in with!” (The sole exception might be an old-timey economist, whose only complaint would be about all the irrational people turning down the free money. But almost everyone else would at least get a little peeved about the first person hogging almost all the money.)

Results from the Ultimatum Game show there are circumstances where people will reject a benefit to themselves to punish someone else they perceive to be getting an unfairly greater benefit. That might inform which party’s narrative I would bet on.

It comes out next week, which is perfect timing!


@DanielPink’s new book comes out next Tuesday and I’m excited about getting it. Titled When: The Scientific Secrets of Perfect Timing, his book’s always-relevant message is especially topical because of our tendency to use the New Year as a reset to examine aspects of our lives and consider making changes. He takes up the subject of New Year’s resolutions in a @WSJ article, “How to Be Healthier, Happier and More Productive: It’s All in the Timing.”

Aim low – and often!

It’s officially self-examination season. A common theme in the advice surrounding this year’s resolutions seems to be “aim lower.” @FastCompany says the beginning of the year is actually the worst time to set new goals, and recommends reframing those goals into something more attainable. “Why You Should Make An Anti-Resolution List (And What To Put On It).” @Inc’s take focuses on new habits, starting with “Make your habits embarrassingly small.” “Forget Resolutions: This is What You Need to Make 2018 Your Best Year Yet.”

And count on @TheOnion to remind us about the absurdity of the concept of New Year’s resolutions: “Earth’s Successful Completion of Orbit Around Sun Inspires Woman to Reflect on Eating Habits.”

All this Resolutionism reminds me of a blog I wrote about “Dieting and the ‘January Effect’: Our Predictable Irrationality.” Emotional resets can be a good thing, especially if we don’t limit make-it-or-break-it time to the beginning of January.

2018 is the centenary of his birth

I’m an unabashed admirer of the late physicist Richard Feynman. His observations about scientific thinking – actually, about all thinking – are inspiring. One of my favorite sites, Shane Parrish’s (@FarnamStreet), recently summarized reasons why Feynman’s approach endures, along with providing famous quotes and suggestions for further reading. “Who Is Richard Feynman? The Curious Character Who Mastered Thinking and Physics.” (Of course, I also recommend the Twitter account devoted to reproducing some of his messages, @ProfFeynman.)