An interesting discussion this morning on Radio 4’s Today Programme about when humans act rationally (in an economic sense) and when they don’t.

It was particularly entertaining when presenter John Humphreys started to panic as a researcher described an experiment involving sexual arousal in rather too much detail. ‘This is Britain,’ he said to the American researcher. ‘This isn’t just Britain this is Radio Four!’

Sadly I had to turn off part way through, so I don’t know if they described my favourite example of human irrationality. It’s a situation where you can offer someone money for nothing, and they will turn it down.

It’s a great game (in the game theory sense). Two people are given a sum of money – say £100. The first person has the option of splitting the money however he or she likes between the two of them (with a minimum of £1 each). The second person can then say ‘yes’ or ‘no’ to the deal. If (s)he says ‘yes’, each gets the split of money determined by the first person. If the answer is ‘no’, neither of them gets anything.

Logically, the second person should always say ‘yes’. It doesn’t matter what the split is, they are getting money for nothing. In practice, they don’t say ‘yes’ unless they are offered around 30% of the money (the percentage varies between different cultures). If the first person offers a derisory amount (say £99 for me, £1 for you), the second person tends to turn the offer down to spite them for being mean.

There is an effect here the researchers rarely seem to mention. I think if the amount was boosted way beyond the budget of economists/psychologists and Bill Gates was running this experiment, so the amounts were £100 million to be split, a minimum of £1 million each, people would take the offer, however mean. I suspect you would only reject an amount that was less than (say) one day’s wages.

Even so, it’s a great demonstration of how an apparantly simple decision with a positive outcome (I will be given money for nothing) can be distorted by emotion.