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What's the ultimatum game?

        Money | Money & Ethics

How the Ultimatum Game Works
What's the most you'd offer in the ultimatum game? And what's the least you would be willing to accept?
What's the most you'd offer in the ultimatum game? And what's the least you would be willing to accept?
Roslan Rahman/AFP/Getty Images

The ultimatum game is the brainchild of Israeli game theorist Ariel Rubinstein, who predicted in 1982 that a person asked to decide in such a game would choose to offer the least amount possible. This notion describes a behavior called rational 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 from their test of the ultimatum game that directly contradicted Rubinstein's prediction -- the average offer from one participant to the other was around 37 percent of the money. Further studies found an average offer between 40 and 50 percent. Even more, approximately half of the receivers turned down offers under 30 percent [source: Indiana University].

The researchers' findings opened a floodgate of speculation and further research. Why would humans behave so irrationally? One answer was a fear of rejection. If a giver knows that his or her offer may be refused and the refusal may cost him or her the rest of the money, the giver might be more inclined to make an equitable offer. This theory is undermined by another study, which used a variation of the ultimatum game, the dictator game.

In this version, the giver gets to keep the money, regardless of whether the receiver rejects 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. Either way, the giver got to keep the money, regardless of the receiver's acceptance or refusal of the offer. Seventy-six percent of givers chose to split the money evenly, despite the beforehand knowledge that the receiver had to take whatever the giver gave him [source: Indiana University].

Other studies have come up with different results. One variation of the dictator game, published in 2002, created a test in which the recipient in one round would be the dictator in the next round. They found that what the former-recipient-turned-dictator doled out in the second round "strongly correlated with the amount received" in the first round [source: Ben-Ner, et al.]. In other words, if the receiver was given a low amount, as dictator he or she would stick it to the person who had shorted him or her.

What's going on here? Why wouldn't humans rationally maximize across the board in the ultimatum or dictator games? While fear of rejection certainly is a reasonable explanation for a giver's behavior, it doesn't explain why a receiver would ever reject an offer or why someone would give more than necessary. Our concept of fairness, however, would satisfy as an explanation in this case. Studies involving primates have shed some light on the influence of fairness and rational maximization in the ultimatum game. Find out more on the next page.


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