You're standing on the sidewalk with a friend, minding your own business, when a man approaches with a proposition. He offers you $20 in one-dollar bills and says you can keep the money, under one condition: You have to share some of it with your friend. You can offer your friend as much or as little as you like, but if your friend rejects your offer, neither of you get to keep any of the money. What do you do?
This isn't the premise for a spin-off of the TV show "Cash Cab"; rather, it's an economics experiment that provides some interesting insight into the human psyche. It's called the ultimatum game.
Now you've got the $20 in your hand and your friend watches you expectantly. Will you low ball your friend? Will you split the money evenly? Will you be generous?
Under a strictly utilitarian view of economics, you would give your friend the lowest possible amount. In this case you've got 20 dollar bills, so you would give your friend a dollar. Since it's found money, your friend should accept the dollar. Your friend might call you cheap, or perhaps offer a bit of gratitude drizzled generously with sarcasm -- but, hey, at least he or she made a dollar out of it.
The thing is, this strictly utilitarian view doesn't translate to how people actually behave when faced with this decision. In experiments based on the ultimatum game, test subjects on the receiving end routinely reject offers they find too low. And in others, subjects who must choose how much to give often offer more than the lowest amount.
This unlikely behavior provides some unique insight into the human mind and how we function as social animals. Find out about how we act during the game -- and what happens when the tables are turned -- on the next page.
How the Ultimatum Game Works
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.
Evolution and the Ultimatum Game
It's possible that we humans possess a sense of altruism, a desire to put others' best interests before our own. Those who subscribe to evolutionary theory say such a mechanism shouldn't exist; some psychologists believe it's evidence of a higher mind that humans possess. This second theory is supported by findings from a 2007 study by the Max Planck Institute.
In the study, chimpanzees were offered a choice of trays containing raisins in sets. Just as in the human version of the ultimatum game, the chooser could keep one, but had to give the second one away. The sets of raisins were divided differently. Some were more fair than others, and in a few cases, one chimpanzee in the pair would receive no raisins at all. Researchers found that the chimpanzees weren't concerned with the concept of fairness, and they accepted any offer that included raisins, no matter how equally they were divided. The only time a chimpanzee rejected an offer was in a case when the receiver was offered no raisins [source: Max Planck Institute].
But this study doesn't discount the possibility that we do possess a sense of fairness, especially when we're being treated unfairly. What's more, a sense of fairness may not be exclusive to humans.
This is evidenced by a study that took place in 2003. Researchers from Emory University in Atlanta conducted a study featuring capuchin monkeys. The subjects in the study, all females, were taught to trade pebbles in return for a slice of cucumber. Once they learned that pebbles equaled cucumber, the monkeys were paired together. At first, the trades were equitable. But as the research progressed, the monkeys witnessed their partners receiving a grape from researchers in return for pebbles, while others continued to get cucumbers. To make matters worse, some monkeys received grapes or cucumbers for doing nothing, while their partners still had to retrieve a pebble and bring it to the researcher. As the inequitable trades continued, the shortchanged partners became upset [source: Emory University].
Neither of these studies touches upon another aspect found in studies of the ultimatum game -- not the absence of fairness, as in the capuchin monkey study, but the presence of fairness. Why would anyone give more than they had to, as was discovered in the dictator game? One study, conducted in 2001, concluded that people who engaged in bargaining games like the ultimatum game actively search for and exhibit nonverbal cues during the bargaining stage. We humans, the researchers theorize, are simply good at sizing others up and making a judgment about how they will respond to a low offer in the case of the ultimatum game [Eckel and Wilson].
An ability to infer how another person will react to being shortchanged, coupled with the existence of a sense of fairness, would certainly explain the results found in studies of the ultimatum game. Of course, one could make the case that it's a pretty depressing explanation, though.
For more information on evolution and the human brain, as well as other related topics, visit the next page.
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More Great Links
- Ben-Ner, et al. "Reciprocity in a two-part dictator game." University of Minnesota. March 2002. http://www.legacy-irc.csom.umn.edu/RePEC/hrr/papers/0902.pdf
- Eckel, Catherine and Wilson, Rick K. "Why fairness?: Facial expressions, evolutionary psychology, and the emergence of fairness in simple bargaining games." Virginia Polytechnic Institute and State University and Rice University. May 1, 2001. http://www.ruf.rice.edu/~rkw/RKW_FOLDER/Harvard_RKW.pdf
- McCabe, Kevin. "What is the ultimatum game?" Neuroeconomics. September 24, 2003. http://neuroeconomics.typepad.com/neuroeconomics/2003/09/ what_is_the_ult.html
- McMillan, Susan. "Monkeys have sense of fairness." November 19, 2007. Emory Wheel. http://www.emorywheel.com/detail.php?n=24747
- Rotemberg, Julio J. "Minimally acceptable altruism and the ultimatum game." Federal Reserve Bank of Boston. May 23, 2006. http://www.bos.frb.org/economic/wp/wp2006/wp0612.pdf
- Uchitelle, Louis. "Economist is honored for use of psychology." New York Times. April 28, 2001. http://query.nytimes.com/gst/fullpage.html?res=9D0DE4D71039F 93BA15757C0A9679C8B63
- "Chimpanzees, unlike humans, apply economic principles to ultimatum game." Max Planck Institute. October 5, 2007. http://www.sciencedaily.com/releases/2007/10/071005104104.htm
- "Money isn't everything." The Economist. July 5, 2007. http://www.economist.com/science/displaystory.cfm?story_id=9433782
- "Ultimatum game." University of Indiana. http://188.8.131.52/search?q=cache:bo8NBNEPC2QJ:cognitrn.psy ch.indiana.edu/rgoldsto/complex/ultimatum.ppt+ultimatum+game&hl=en &ct=clnk&cd=6&gl=us