What is the Ultimatum game? (2023)

You're standing on the sidewalk with a friend minding your own business when aMannapproaches with a suggestion. He offers you $20 in one dollar bills and says you can keep the money with one condition: you must share some of it with your friend. You can offer your friend as much or as little as you like, but if your friend declines your offer, neither of you may keep any of itMoney. How are you?

This isn't the premise for a spin-off of the TV show Cash Cab; rather it is aBusinessExperiment that offers some interesting insights into the human psyche. It's called theUltimatives Spiel.

Now you have the $20 in your hand and your friend is looking at you expectantly. Will you ball down your friend? Will you split the money evenly? will you be generous

From a purely utilitarian perspective on economics, you would give your friend the least amount possible. In this case, you have $20 bills, so you would give your friend a dollar. Since this is found money, your friend should accept the dollar. Your friend might call you cheap, or might offer you a bit of gratitude to be liberally showered onsarcasm-- but, hey, at least he or she made a dollar out of it.

The thing is, this strictly utilitarian view doesn't carry over to how people actually behave when faced with that choice. In experiments based on the ultimatum game, test subjects on the receiving side regularly reject offers that they find too low. And in others, subjects who must decide how much to give often bid more than the lowest amount.

This unlikely behavior offers a unique insight into the human mind and how we function as social animals. Find out on the next page how we behave during the game – and what happens when the tables are turned.

Contents

1. How the ultimatum game works
2. Evolution and the Ultimatum game

The ultimatum game is the brainchild of Israeli game theorist Ariel Rubinstein, who predicted in 1982 that a person asked for a decision in such a game would choose to bid the lowest possible amount. This term describes a behavior calledrational maximization-- the tendency to choose more for oneself.

The following year, Rubinstein's prediction was tested by three economists - Werner Güth, Rolf Schmittberger and Bernd Schwarze. The three researchers found results in their test of the ultimatum game that directly contradicted Rubinstein's predictions — the average offer from one participant to the other was about 37 percent of the money. Other studies found an average offer between 40 and 50 percent. Even more so, about half of recipients declined offers below 30 percent [source:Indiana University].

The researchers' findings opened a floodgate for speculation and further research. Why do people behave so unreasonably? One answer was fear of rejection. If a giver knows that his or her offer can be rejected, and that refusal could cost him or her the rest of the money, the giver might be more inclined to make a fair offer. This theory is undermined by another study using a variation of the ultimatum game, thedictator game.

In this version, the giver keeps the money regardless of whether the receiver declines the offer. A 1986 experiment gave subjects two choices: the giver could either split the $20 evenly, or offer the receiver $2 and keep $18. In either case, the giver must keep the money regardless of whether the recipient accepts or rejects the offer. Seventy-six percent of givers chose to split the money evenly, despite knowing beforehand that the recipient would have to take whatever the giver gave [source:Indiana University].

Other studies come to different conclusions. A variant of the dictator game released in 2002 created a test where the receiver in one round would be the dictator in the next round. They found that what the former recipient-turned-dictator received in the second round "correlated strongly with the amount received in the first round" [source:Ben-Ner, et al.]. In other words, if a small amount was given to the recipient, he or she would leave it as the dictator of the person who short-circuited him or her.

What's going on here? Why wouldn't people rationally maximize across the board in ultimatum or dictator games? While fear of rejection is certainly a reasonable explanation for a giver's behavior, it does not explain why a recipient would ever turn down an offer or why someone would give more than is necessary. In this case, however, our concept of fairness would suffice as an explanation. Studies with primates have shed light on the influence of fairness and rational maximization in the ultimatum game. Learn more on the next page.

It is possible that we humans have a sense ofaltruism, the desire to put the interests of others ahead of our own. Those who subscribeevolutionaryTheory states that such a mechanism should not exist; Some psychologists believe it is evidence of a higher mind that humans possess. This second theory is supported by the results of a 2007 study by the Max Planck Institute.

In the study, the chimpanzees were offered a variety of bowls of raisins in sets. Just like in the human version of the Ultimatum game, the voter could keep one but had to give up the second. The sets of raisins were divided differently. Some were fairer than others, and in some cases one chimpanzee of the pair received no raisins at all. The researchers found that the chimpanzees didn't care about the concept of fairness and accepted any offer that included raisins, no matter how evenly divided. The only time a chimpanzee declined an offer was in a case where no raisins were offered to the recipient [source:Max-Planck-Institut].

But this study doesn't rule out the possibility that we have a sense of fairness, especially when we're being treated unfairly. Additionally, a sense of fairness may not be unique to humans.

This is proven by a study from 2003. Researchers at Emory University in Atlanta conducted a study with capuchin monkeys. The subjects in the study, all women, were taught to trade pebbles for a slice of cucumber. Upon learning that diatomaceous cucumbers were synonymous, the monkeys were mated. At first the trades were fair. But as the research progressed, the monkeys saw their partners receive a grape from the researchers in exchange for pebbles, while others continued to receive cucumbers. To make matters worse, some monkeys were given grapes or cucumbers for doing nothing while their partners had to fetch a pebble and bring it to the researcher. As the unfair trade continued, the losing partners became angry [source: Emory University].

None of these studies touch on another aspect found in studies of the ultimatum game - not the lack of fairness, as in the capuchin study, but the presence of fairness. Why would anyone give more than they had to as discovered in The Dictator Game? A 2001 study concluded that people who engaged in negotiation games such as the ultimatum game actively seek out and display nonverbal cues during the negotiation phase. We humans, the researchers theorize, are simply good at judging others and how they will react to a low offer in the case of the ultimatum game [Eckel and Wilson].

The ability to infer how another person will react when they have fallen short, along with having a sense of fairness, would certainly explain the results found in studies of the ultimatum game. Of course, you could say it's a pretty onedepressingexplanation, but.

For more information on evolution and the human brain and other related topics, see the next page.

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