The basic problem is that we care so much about fairness that we are often willing to sacrifice economic well-being to enforce it. Behavioral economists have shown that a sizable percentage of people are willing to pay real money to punish people who are taking from a common pot but not contributing to it. Just to insure that shirkers get what they deserve, we are prepared to make ourselves poorer. Similarly, a famous experiment known as the ultimatum game—one person offers another a cut of a sum of money and the second person decides whether or not to accept—shows that people will walk away from free money if they feel that an offer is unfair. Thus, even when there’s a solution that would leave everyone better off, a fixation on fairness can make agreement impossible.Read more at The New Yorker
THE FAIRNESS TRAP
By James Surowiecki
(h/t Mark Thoma at Economist’s View)
This is why everyone betting on a peaceful/reasonable resolution may be proven incorrect. Similarly, economists that fail to incorporate lessons from other social sciences will continue to make poor predictions.