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114 Chapter 7: Fairness and Ethics in Decision Making
fairness research has avoided making evaluative statements about the rationality of fairness
judgments. This silence has inhibited our understanding of how our cognitive
processes create anger, jealousy, and inefficiency. If we are to reduce or eliminate our
dysfunctional perceptions of fairness, we need to confront the rationality of fairness
perceptions.
Fairness considerations may account for some of the limitations of the explanatory
power of economic models. Kahneman, Knetsch, and Thaler (1986) argue that fairness
considerations inhibit employers from cutting wages during periods of high unemployment
despite changes in supply and demand and also explain particular inflexibility in
consumer prices. Here, we examine three systematic ways in which fairness considerations
lead our decisions to deviate from a rational model. First, we describe situations in
which individual judgment deviates from the expectations of supply and demand considerations.
Second, we examine the ultimatum bargaining problem and what it reveals
about why we make choices inconsistent with our own economic self-interest. Third,
we consider how social comparison processes lead to decisions that may clash with our
underlying preferences. We conclude this section with a discussion of why fairness
judgments matter.
When the Consequences of Supply and Demand Seem Unfair
In a provocative set of experiments, Kahneman, Knetsch, and Thaler (1986) demonstrated
that fairness considerations can dominate economically rational choices in decision
making. Consider the action of the hardware store owner in the following scenario:
A hardware store has been selling snow shovels for $15. The morning after a large snowstorm,
the store raises the price to $20.
Would you rate this action as fair or unfair? From an economic perspective, the
price should go up. When demand increases relative to supply, an increase in price is
the logical consequence. However, despite the economic rationality of raising the price
of snow shovels, 82 percent of respondents viewed raising the price of snow shovels to
be unfair. And even among the individuals who said it was fair, many would not think it
fair for a hardware store to raise the price of generators after a hurricane even though
the logic is the same. Thus, fairness considerations are often inconsistent with economic
models.
An interesting reversal of the snow shovel problem emphasizes the importance of
thinking about others’ fairness concerns. Assume that you own the hardware store and
have twenty-five remaining shovels after a blizzard. Should you raise the price by $5?
Even if you are economically rational, the answer may be no. If you ignore your customers’
concerns for fairness, you might wind up raising the price and collecting an
additional $125 on the shovels. However, the loss of future business from angry customers
may cost you more than $125. Providing your customers with a brief lesson on
the laws of supply and demand is unlikely to help your cause. If they think the price
increase is unfair, they are likely to react negatively. Thus, businesses that act in an
economically rational manner (e.g., increasing the price of the shovels) may