Win-Win Denial: The Empirical Psychology

Contrary to what you’ve often heard, psychology is a great discipline that bristles with insight.  Case-in-point: Johnson, Zhang, and Keil’s new working paper, “Win-Win Denial: The Psychological Underpinnings of Zero-Sum Thinking.”  Quick version:

A core proposition in economics is that voluntary exchanges benefit both parties. We show that people often deny the mutually beneficial nature of exchange, instead espousing the belief that one or both parties fail to benefit from the exchange. Across 4 studies… participants read about simple exchanges of goods and services, judging whether each party to the transaction was better off or worse off afterwards. These studies revealed that win–win denial is pervasive, with buyers consistently seen as less likely to benefit from transactions than sellers.

Let’s look under the hood of JZK’s Study #1.

Our first study tested win–win denial for various goods and services. We asked participants to read about simple, everyday transactions, including monetary purchases of goods (e.g., olive oil, a car), monetary purchases of services (e.g., a haircut, a plumber), and barters of goods (e.g., a McDonald’s sandwich for a Burger King sandwich, or soy sauce for vinegar). Participants then rated the welfare of the buyer and seller (or traders, in the case of barter), relative to before the transaction. This experiment probes two sets of questions. First, how often do people deny that transactions are win–win? If people understand the underlying principles of economics, they should indicate that both buyer and seller are better off after most or all transactions, because the transactions are voluntary. On the other hand, if people deny the win–win nature of trade, then they may often believe that either the buyer or seller failed to be bettered by the transaction, or even was worse off after the transaction.

Second, what pattern of perceived gains and losses do people perceive?…

The set-up:

Participants read about a series of 12 transactions, and were instructed that “for each transaction, you will be asked whether each participant is better off, worse off, or the same, relative to how they were before the transaction.” The transactions were divided into three types—monetary purchases of goods, monetary purchases of services, and barters of goods. Four items of each type were used, and the 12 items were presented in a random order. For the monetary purchases of goods, participants read about transactions, such as “Sally goes to Tony’s clothing store. She pays Tony $30 for a shirt.” Other items included purchases of olive oil, a car, and a chocolate bar. Participants were then asked to rate the welfare-change of the buyer and seller—that is, how each party’s welfare compares after versus before the transaction (e.g., “How well off do you think Sally now is?” and “How well off do you think Tony now is?”) on a scale anchored at –5 (“Worse than before”), 0 (“Same as before”), and 5 (“Better than before”).

Results:

Figure 1 plots the proportion of times that buyers, sellers, and traders were deemed to have gained (the white area), lost (the black area), or experienced neither gain nor loss (the grey area) from each type of transaction. Clearly, people are not neoclassical economists who would color this whole chart white.

How the chart really looked:

Pay attention now:

Whereas basic economics says that both buyers and sellers benefit from transactions, people thought that buyers were much more likely to be made worse-off by their transactions than were sellers. Whereas very few sellers [M = 0.49, SD = 0.86 out of 8] were thought to be made worse-off by the trade, five times that many buyers were [M = 2.53, SD = 2.47; t(85) = 7.55, p < .001, d = 1.11]. [emphasis mine]

Some wise perspective:

Could one argue that these results actually contradict the notion of win–win denial, since a great majority of sellers, modest majority of buyers, and nearly half of traders were seen as benefitting from the transaction? We think this is a tough case to make, because chance responding is not a relevant comparison: The normative theory says that all (or nearly all) of the transactions should be seen as mutually beneficial, thus that is the most appropriate comparison. Empirically, we observe that nowhere near all of the transactions were seen as win–win. By way of analogy, it is a fallacy when people underweight base rates even as they do not fail to consider them entirely (Koehler, 1996), and it is a fallacy when people deny the mutually beneficial nature of trade even as they do not fail to recognize this entirely. These glasses can be plausibly be viewed as half-full (since people often use base rates to some degree and often acknowledge that trades are mutually beneficial) or half-empty (since people systematically underweight base rate information and systematically underappreciate the gains from trade). But these glasses are definitely not full.

Read the whole thing, especially if you teach Intro Econ!

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