Monday, 17 January 2011

The bonus ultimatum game

There's a nice little piece in an article in Financial News this week. The deputy editor does a run through of the arguments banks are deploying in favour of paying out sizeable bonuses again, and why they don't have much impact. The best bit though is his explanation of the nature of the public's attitude towards big bonuses in the current climate. It is, he says, like a big version of the ultimatum game.

In a sense, the banks are arguing that, yes, they are going to get a very large slice of the pie, but that everyone benefits from the banking 'talent' being located in London, so to push too hard on bonuses would mean we all lose out. This is because the talent will move overseas taking with it tax revenues and jobs. Why, the bankers effectively ask us, wouldn't you logically just accept your own small piece, which you won't get if we aren't here?

Well, in common with the ultimatum game, it seems some people would rather stick two fingers up to what they see as an unfair deal - even if it costs them personally - in order to try and punish the perpetrator. We're willing to risk losing the bankers rather than accepting a few crumbs from their table. Now I don't know how prevalent this attitude is, but it's certainly there. And I suspect this is why the Coalition (or any government) is not going to be able to retreat without paying a price for it. People aren't thinking purely about the net benefits of bonuses, they are also thinking about fairness. Giving in to the banking lobby is like the politicians acting as an intermediary and telling you that you really should accept an unfair offer.

PS. Some people might question whether bankers really do lose out if they relocate overseas. But surely we have to assume that being located in London is currently the best option, taking into account a number of factors including bonus levels. Lower bonuses simply makes the next best option relatively more attractive (assuming there is no public animosity in the other location...!).

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