Fairness has a biological and social hold on us that cannot be underestimated. And we’re not alone—studies have proven that dogs and monkeys are also affected by the notion of fairness. In economics, fairness is part of a group of emotions that drive our decision-making. We recently looked at how confidence affects the economy, now, let’s take a look at how we are hardwired to push for fairness and justice, and why these feelings have an effect on the financial world around us.
How a money game proves that we love fairness
Study after study shows that fairness often overrides the rational economic behavior that we learn about in economic textbooks. For instance, there was one experiment where researchers had subjects play a cooperation game with a twist to test fairness. In the original game, players could choose to put money into a “pot” that later gets shared with the rest of the group. If everyone acts cooperatively, returns for the whole group are the greatest. However, there’s an incentive for each player to act selfishly.
However, if everyone puts money in the pot, but one person puts no money in, that one person achieves the best outcome for themselves. When this game is played, participants start out cooperating, but after a few rounds, some players begin to act selfishly, which causes other players to act selfishly. After many rounds of the game, all players act selfishly. This behavior in the game has been documented for both humans and monkeys many times over.
Researchers added one slight twist to the game: They let players pay to punish other players who acted selfishly. In this version of the game, players were willing to pay to punish those who acted selfishly, and as you would expect, the threat of punitive consequences greatly reduced selfish behavior. In this version of the game, many players were still putting money in the pot after many rounds, unlike the original version of the game.
Because players were willing to pay to punish others for acting selfishly at the expense of the group’s well-being, this experiment shows that players cared about fairness. In a later, similar experiment, players had their brains PET-scanned during the game. The PET scans show that punishing others for wrongdoing makes the players happy; it lights up an area of the brain—the dorsal striatum—that anticipates many different types of rewards. This natural leaning toward fairness and justice is called “inequity aversion”, and we as humans display it daily.
How fairness affects the economy
The easiest place to see how fairness affects the economy is in the wage system. For example, if you were to ask those around you if they, in theory, believe that people who do the same job should be paid the same amount; they will likely say yes. This is inequity aversion in action.
When employees find out about pay inequity—be that by experience, workload, hours worked, or even internalized biases about gender and race—they tend to seek fairness by demanding equal pay for equal work. For many people, it’s easier to not discuss how much they are paid, in case they awkwardly find out that they earn less than their coworkers, or that their coworkers earn less than them. This desire to avoid awkwardness perpetuates the incorrect (but widely held) belief that it’s illegal to discuss your pay rate with your coworkers. It’s not.
One flow-on effect of wage secrecy is that employers can pay their employees less than market rate, or their coworkers. This is better for the business’ bottom line, but not for those employees who may struggle to make ends meet.
While steps are being taken from the very top to help America understand that it’s okay to talk about wage fairness with co-workers, we are still a long way from being open and honest with each other about how much we are paid, because we are hardwired to feel uncomfortable, upset, and even cheated when matters of injustice and unfairness are presented to us, and happy when unfairness is punished. So, in the meantime, remember—it’s okay to talk about how much you are paid.
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