The Ultimatum Game

How many of these could you win?

There are two basic motivators for humans. These are fear of loss and hope of gain. This dynamic animates every choice we make. There is overlap. There is some vicissitude from one decision to the next, but most people will generally align themselves into one camp or the other over their lifetimes. ”Fear of gain” and ”hope of loss” do not exist as motivators, but the way people perceive gain and loss, are relative. The concept of value comes into play. And human interaction, with its perceived value, has an impact. The two basic motivators then, nudge people toward what they value. 

Interesting studies show that in general, persons place a higher value on things they possess or think they are owed, than they value the very same things if they were trying to obtain them. Your used car, or your house is worth more to you as the owner/seller than the same car or house would be if you were trying to buy them.

A study on the psychology of economics (Neuroeconomics) called the Ultimatum game presents some interesting findings. First developed in 1982, it has been repeated many times, across many different cultures and countries, and with many variations. There is an abundance of information online if you care to indulge yourself further.

The typical format for the basic version of the Ultimatum game groups participants into pairs; a proposer, and a responder. They are endowed with a sum of money. Both the proposer and the responder know the amount of money being gifted. The proposer is told to make a single, one-time proposal on a split of the money between the participants.  If the proposal is accepted, the pair will each receive the amount of the proposed split. If the proposal is rejected, they each receive nothing.

What is being studied is whether or not the participants will make rational decisions enabling them to agree on a proposed ratio and pocket their cut of the provided money. If not, what other considerations are at work?

Example: Al and Barbara are given $10 in ones to split between themselves. Al has to make a proposed split that Barbara will accept, otherwise, neither of them takes home any of the free money. Al can make only one offer. Barbara knows there are ten dollars on the table. What does Al propose? What do you propose if you are Al? What are you willing to accept if you’re Barbara?

Pure rationality, expressed as the expected utility theory of economics, dictates that the responder should accept any proposed split, even if it is only $1. Any amount is more than zero, comes at no cost, and is more than the participant entered the study with. In actual results, any offer of less than 20% of the total amount is rejected more than 50% of the time. Offers of only $1 are rejected almost all the time. Offers of between 30% and 40% are accepted almost all the time by responders, albeit, the further from 50%, the more reluctant the responder is to accept, and the less happy they feel about their share.

Why is this? Researchers in economics are puzzled by these findings since they defy rational behavior, and therefore don’t fit neatly into economic theory. Psychologists dig deeper and discover that an emotional component exists in humans that causes perceived unfairness to be rejected. But it goes further than just rejection of an unfair proposal for one’s cut of ten bucks.

Interesting fMRI findings show that some respondents declining to receive an offer they feel to be unfair, prefer to punish the proposer, causing both themselves and the proposer to receive nothing. The part of the brain that is stimulated to release dopamine as a pleasure response can be triggered by the rejection of the offer, specifically because it punishes the proposer for his unfairness. Let me say that again: The research shows that there is pleasure derived from punishing the unfair actor. 

Turning down an unfair offer, induces physiochemical and psychological gains to the responder greater than free money in their pocket would provide. They are willing to punish themselves financially, forfeiting the purely financial gain, because it literally feels better to them to walk away with zero, rather than to walk away with a gratuitous dollar and be treated unfairly.

Researchers surmise that since the responder knows the total amount of the endowment (which in some experiments is significant, totaling $100 or more), they calculate that ”fair” would be a 50/50 split of the pot. They proceed to take mental and emotional ownership of that 50% portion. Any proposal offering less than that amount, even though it is a positive gain in terms of money, feels like a loss in contrast to the 50% portion emotionally banked in the responder’s mind. Though fictitious, having no basis in reality or rationality, this is a loss that many responders are not willing to bear.

In such cases, the feeling one receives from punishing an unfair partner is greater than the feeling one has from walking away with money on the house. The punisher is placing a much higher value on the amount of money they believe they are ”losing” by accepting an unfair offer, than the value they place on the non-zero amount they could have by accepting whatever offer is made. And…they get some dopamine as a bonus for punishing the unfair partner guaranteeing that they will get zero as the wages of their perceived greed.

These findings are skewed to a statistically predictable significance when factors such as ”pro-social” or ”individualistic” personality types are factored in for comparison. Surprisingly, researchers find that the more a participant identifies as individualistic, the more they are willing to accept the most unfair of offers. The flip side is that pro-social participants will more often reject offers even at the 30% range to ”teach a lesson” to the unfair proposer. Pro-social persons value cooperation and fair play. They exemplify a ”win/win” attitude. 

Individualists, on the other hand, do not expect fairness, are not surprised or angered when unfair offers are made, and they are not out to correct the unfair proposer’s future behavior by giving them a ”lesson”. To the individualist, there are winners and losers, and that’s that.

Remember, there is no negotiating in the basic version of the Ultimatum game. Reciprocity is not a factor. It is a one-time, take-it-or-leave it proposal. The proposer has an incentive to be fair if she wants to walk away with anything, but the selfish greed of human nature dictates that even when an 80–20 split is proposed, it’s still accepted about half the time; and the proposer gets to keep 80% of the endowed amount.

I find it fascinating and a bit counter-intuitive that individualists are more willing to be treated unfairly and not feel bad about it, at least in purely economic transactions. Especially in light of the fact that researchers have found that there is a correlation between behaviors in the Ultimatum game and other aspects of life that are not purely economic. 

Sociologists study these kinds of psychological tests and their results to determine people’s ability to recognize, and willingness to tolerate, social injustices and economic inequalities. Apparently, self-declared individualists would rather be taken advantage of than have to suffer the indignities of cooperation and teamwork. At least according to the Ultimatum Game results.

I don’t know anyone who relishes being treated unfairly, but then I suppose some people will sell themselves cheaply if they don’t have the kind of wealth or principles that are more valuable than what can be bought with a dollar. Especially if they can pocket that dollar and still cling to their illusion of self-reliance. Maybe to such a one, that feels like being a winner. After all, a dollar is a dollar, and self-respect won’t buy a cold beer.

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