What is... | May 21, 2014

What is the ultimatum game?

If your friend was randomly given €20, then handed you €2, would that be fair? The scenario is commonly used in the ultimatum game, a test of fairness used to examine boundaries and demonstrate how people react.

So widespread is the ultimatum game that it has been shown relevant to pay negotiations, pricing and strike action.
And, amazingly, the ultimatum game test even appears to work on primates, as this video narrated by renowned wildlife broadcaster David Attenborough shows.

Is something better than nothing?
A basic ultimatum game works like this.
Person “A” is given an amount of money (say, €20) and is told to split it with person “B”.
“A” can make a one-time offer (say €10 each, or €15 for “A” and €5 for “B”).
If the offer is accepted, the deal is done. If “B” refuses, neither get anything.
It probably isn’t surprising that very low offers (such as €1 for “B” and €19 for “A”) are typically rejected.
Does that make sense? After all, a euro is still better than nothing for “B”.
The trap of the experiment is that if “B” refuses a low offer they both get nothing. This is what makes the ultimatum game so useful as a tool for measuring fairness.

Striking workers are a real life example
In his The price of fairness blogpost for eZonomics, economist Chris Dillow tells how the ultimatum game shows how far people are willing to forego monetary gains in order to take a stand against what they regard as unfair. Giving examples of trade unionists going out on strike, Dillow writes: “The truth is, we see it so often every day that we barely notice.”
Back in 1986, Nobel Prize recipient Daniel Kahneman used a tweaked test of fairness called the dictator game and found most people thought it would be unfair if a profitable firm cut wages – even if unemployment had risen.
This view can have further impacts as workers who feel they are treated unfairly might be less inclined to put in effort, potentially damaging the firm.

Are there “rational” reasons for rejecting money?
In the ultimatum game, the arguably rational response is “B” taking the money regardless of the offer, as something is better than nothing.
But research by Harvard University’s Terence Burnham looked to biology to come up with a reason why many ultimatum game players would rather accept less themselves than see a rival get ahead. He measured testosterone levels in his all-male panel and found players who rejected a low final offer had a significantly higher levels of the hormone than those who accepted.
The Economist also covered the research and wrote in Money isn’t everything one explanation for “B” rejecting a low offer is that people adapted for repeated interactions rather than one-off trades – and rejecting a stingy offer might be seen as a single move in a larger strategy.

Are you taking the euro?
The ultimatum game may even shed light on the management of personal finances.
It shows how we can react differently if we think we are emotional about being treated unfairly.
Making financial decisions in this “hot state“ can be costly.
Perhaps trying to step back from a situation and view it rationally. Take some time to regain perspective and decide in a cool mind whether you’d be happy if your friend offered you a euro or two.


eZonomics team
.(JavaScript must be enabled to view this email address)