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What Happens When The "Ultimatum Game" Stakes Are Really High
By Nick Colas of Convergex
Let’s Make a Deal, Monty!
Today we’ll reprise a favorite topic from prior years of this note: the Ultimatum Game. This most-replicated of all behavioral finance studies highlights the significant role human notions of fairness play in what classical finance says should be a straightforward set of decisions. The game itself is simple: two people have to split a pot of money with one person offering a percentage and the other accepting or declining. The former results in both walking away with their agreed take; the latter means no one gets anything. Offers should be minimal – any money is good, right? But in practice offers have to be +35% to get a deal done. Recent research highlights just how capricious real people are in their decision-making. For example, attractive people can cut more advantageous deals, prolonged eye contact is a no-no, and negotiating through social media avatars seems to ease the process of getting to more agreements.
“The secret of life is honesty and fair dealing. If you can fake that, you’ve got it made.” That witticism comes from Groucho Marx, and it’s one my favorite quotes on the slippery subject of fairness. We learn early on that “Life’s not fair”, even if we spend the rest of our existence hoping that somehow we can make it so. At best we fake our way through it, grabbing bits of ersatz equality where we can.
Classical finance solves the fairness quandary with one of its famously simple models: anything with positive utility is desirable. Someone handing us a dollar with no extra effort on our part is a happy occurrence. End of story.
Behavioral finance takes issue with that construct, and it has a powerful case study in its corner: the Ultimatum Game. The landmark paper on the topic (Guth, Schmittberger and Schwarze) dates to 1982 and it has provided researchers with fertile ground for everything from undergrad psych papers to Ph.D. theses ever since. The basic format is as follows:
- A researcher has two subjects who do not know each other flip a coin. The winner is handed a nominal sum, say $100.
- The winner of the toss, cash in hand, is told they must offer a portion to the loser. It is up to them how much to share.
- The catch to the game, explained to both participants, is that if the recipient of the offer turns it down then no one gets any money. If, on the other hand, the recipient accepts the offer then both get the cash. Either way, the game is over and the subjects are free to leave.
- Classical finance has a clear strategy for the person making the offer: $1. After all, the person evaluating that amount is still getting more than they would otherwise have.
- In what are now hundreds of research papers on the topic, 1 percent never yields a positive outcome. The recipient of the offer turns it down. In practice, 20% is the lowest generally acceptable offer, and in some cultures the offer has to go over 50%. The median accepted offer is generally 35-45%.
- The reason that offers have to be close to half, says the behavioral finance researchers, is because humans value fairness much more than classical finance understands. Hand someone a dollar out of the blue, and they are happy. Hand them a dollar when someone else is getting $99 because of the chance of a coin flip, and they aren’t.
That’s the basic insight of the Ultimatum Game, but the research continues and for the remainder of this note we’ll summarize several recent updates to the work.
One question I get when I discuss the game is “What happens when the stakes are really high? If the amount was $1 million, would someone really turn down $100,000?” That’s a tough experiment to do, mostly because of the inherent cost of running a typical 25-100 person sample size. Still, in 2011 some researchers (Andersen et al, link at the end of this note) went to rural India and tried the game on +450 villagers. The stakes went as high as 160 hours of work –something like $5,000 to an American. The results are pretty much what you’d expect. Those offering the split do offer lower percentages then when the amounts are more trivial, but rarely very low amounts. Those evaluating the offers take the lower amounts, with the cutoff for +90% certainty of acceptance around 10 days wages.
With Americans living more of their lives online, one interesting question is what this does to social cohesion. One 2014 paper (Greiner et al) looked at what happens when you play the Ultimatum Game on Second Life, the online virtual world. The surprising answer, from the abstract: “In Second Life we detect a shift to more cooperation when there is no communication.” In other words, more deals get done (offers are deemed “Fair” and accepted) when the players do not chat or otherwise communicate. “The higher cooperativeness in the virtual world lowers the need for additional communication between avatars in order to achieve efficient outcomes.”
Since the Ultimatum Game essentially measures an emotional arbitrage – how far people will go to harm themselves for the sake of fairness – one logical avenue of research relates to the person making the offers. In a 2015 paper (Ma, et al), researchers in China paired male evaluators with female “proposers” (the term used in the literature to denote the person making the proposed split). In findings that you probably won’t find all that surprising, male evaluators accepted lower offers from women they deemed “Attractive”. We await the reverse study to see if this works the other way.
It isn’t just a “Beauty Premium” (not my term - that’s what it’s actually called in the literature) that draws the attention of evaluators in the Ultimatum Game. Make too much eye contact as you offer a split, and you’ll be perceived as overly aggressive (Tang, Schmeichel 2015). That will make the evaluator to a “More dominant choice” – essentially upping the required split to make a deal happen.
On the flip side, some research focuses on how to manipulate the proposer into offering more (Reed, et al 2014). By showing them clips of angry faces and written demand to make an outsized offer (70%), researchers were able to shift proposed splits higher. Their interpretation is that humans respond to visible anger in others, even if the threat is not actually present.
In summary, the Ultimatum Game is a unique window into how humans actually make economic decisions and it is a distinctly opaque aperture. The best we can probably do is to accept that context plays a far larger role in economics than classical models would suggest. And don’t stare at someone or make angry faces if you want them to work with you.
Sources:
Original study: http://teaching.ust.hk/~bee/papers/guth.pdf
Literature review: http://www.u.arizona.edu/~martind1/Papers-Documents/Seventeen_JEBO_2014.pdf
High Stakes Game: http://rady.ucsd.edu/faculty/directory/gneezy/pub/docs/ultimatum_aer_published.pdf
Online play: http://www.sciencedirect.com/science/article/pii/S0167268114000171
Facial attractiveness: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC4354284/
Eye Contact: http://link.springer.com/article/10.1007/s10919-015-0206-8#/page-2
Angry Faces: http://pss.sagepub.com/content/25/8/1511.short
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'In summary, the Ultimatum Game is a unique window into how humans actually make economic decisions and it is a distinctly opaque aperture. The best we can probably do is to accept that context plays a far larger role in economics than classical models would suggest. And don’t stare at someone or make angry faces if you want them to work with you. '
Yawn, so what? More mental masturbation signifying nothing, since all markets today are rigged. How does one make rational decisions when all so called facts are lies or distortions?
Ah, the old Marylin Chambers dilemma. Do you choose the box or the bar of soap?
If is drop in penitentiary shower, Boris is NOT recommend bar of soap.
Soap is in control of the .001 % Powers That Be.
You want shower that cleans ?
So, bend over, or no soap.
All peoples are getting bent over for the same bar of soap, and no reach around, either.
Overlords are a classy bunch of peoples, hey ?
"Mr Bond! Mr Bond! We can do a deal!"
For Your Eyes Only 1981
Dude - Marylin Chambers...? Oh wow... That's back when there wasn't much concern about trim...
https://thinkpatriot.wordpress.com/2015/11/13/why-not-presidential-debat...
Politics will be transformed soon. It is currently far too top-down, without any extended exchanges of views so we can have any idea of who candidates 'really are', or at least have many more chances to cross-check for misleading statements. With the exchanges available on the web.
Kids don't live in the same society as their parents, it seems to me. This generation of politicians at the Presidential level don't get that at all.
there is no coin
I feel cheated not knowing what type of coin it was, but you are most likely correct because most plebes don't even carry change anymore.
there is no coin, only con.
Anytime now that genius will show up peddling "US 1 kilo Gold coins" or whatever spammy coin he's pushing today...
You will have your coin. Hope you like the taste of tungsten...
Game Over, America, time to pay for ripping everyone off for over a century of unfair business practices.
What the fuck is this guy talking about??!
a little reading comprehension impaired, there, champ?
This is a good test to evaluate the propensity of a person to harm others.
For example, someone who would reject getting 1% while the other person gets 99% is a psychopath. Imagine, turning down $1billion just because someone else gets $99 billion. Such people should never be put in a position of power over others (politicians, cops, military).
So you're saying the person that got the $100B for doing nothing is not harming the other by rubbing it in the others face with a shitty offer?
so you're saying that if someone offered you $1B for doing nothing, they would be harming you?
I'll be the guinea pig. Give me the 1bill$ and we'll see how badly you harm me.
Of course they would because they have just given themselves 99 billion on a coin flip. With this 99 billion they can outbid you to buy food, housing, cars etc... Give the Fed reserve a heads I win tails you lose coin then flip the coin 1000 times and more. End result? You have a billion but they have trillions and in Japan Quadrillions. You lose. The sad part is it shows exactly how short term thinking leads to our enslavement wow I have 1% on a coin flip when before I had nothing. Flip often enough and they do you end up like this
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. - Thomas Jefferson
Good luck with your flipped billion ask a Zimbabwaen what it's like being a billionaire. LOL
You need to check your math there chotchke...
BTW. The article addressess the concept of larger sums. Maybe you should read it. Just a thought...
It does via the Indian farmers where 160 hours of wages that get traded off at minimum of 10% or 16hours has to be given to get a 90% clearance on the offer.
Here is another thought experiment go to an impoverished people with no money flip the coin and give them just enough to survive to the next pay check e.g. buy food for their family pay stupid bills clothing, shelter transport etc.. Would people accept that? They do it's called the economy.
The irony is when you accept that freebie whether it is just enough in the case of someone desperate for cash or a huge windfall when the amount is theoritically large in the context of the current value of a dollar both end up harming you in the long run if that's how you conduct business on an ongoing basis. Both will make you poor it shows how the bankers run the world by desperation and greed and win all the time.
So let's see collectively the US population got 1 billion and bailed out wall ST 99 billion. I say let the fuckers burn no billion for us and watch their 99 billion evaporate. You sir are a direct supporter of your own enslavement little wonder the bankers run rings around us for a dollar.
...and this is why people would rather accept welfare than work for the same amount to see someone taking 99% home, which is why wages are going need to go up or the American experiment is done for.
in thug america, the proposer is met with gun and 100% of the money is taken from him.
In thug Russia the gun is empty because the thug can't afford bullets and the person being robbed knows this. The person being robbed also has nothing and the thug knows this. Catchski 22.
Poor Russians... Time for Putin to go. With Putin "The $200 BILLION Chess Playing FSA Disinformation Officer" gone -- then thugs could then buy bullets and "robees" could aford to be robbed...
We play the offer game every day when you pay taxes.
Notice one thing about life, liberty, and the pursuit of happiness, the Constitution never put a substantive limit on the ability of Government to tax you.
There are substantive limits to everything in an ordered society and yet our own document that governs us and claims we are free and live in a democracy (or republic) never puts a limit on how much our own forms of government can take from us in taxes.
What is fair for max taxation? 50% of what you earn? Can you really have life, liberty, and the pursuit of happiness if your government takes 50% of everything you do of your own volition?
Are they entitled to that much or only that much when there is a declared war?
Would it be fair to limit total taxes to 35% max? Can you have any form of freedom when the government takes more than that amount (except in time of a real war)?
what does "fair" mean?
to threaten another person and to require them to give you money is a crimnal act, so, 0% is the max.
You get it, sir.
Re the paper by Ma simply distills to "sex sells". In my youth, the lab would be routinely visited by young attractive sales reps
sporting heels, high skirts and low cut blouses. Why? What better way to make a sale whilst the 'target', then usually male,
was distracted by T & A and legs? I used to take up as much of their time as possibe armed well in advance w/ the knowledge
that we did not have a need for their products/services. It escapes me why anyone would agree to get old if they were not compelled to do so.
Ah, but experience and treachery trumps youth and strength every time. While I would dearly love to have the wisdom of my years AND the beauty of my youth, I would NEVER surrender the wisdom to have the beauty back again. My knees, ah, that's a hard choice, but still. Wisdom is sooooooo satisfying and useful, it's even better than being able to sword-dance.
'When a man can do whatever he wishes, it is difficult to wish only what is right" Louis XIV
"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage. Intellectual myopia, often called stupidity, is no doubt a reason. John Kenneth Gailbrath
“Misdeeds, once exposed, have no refuge but in audacity. And they have accomplices in those who are fearful in their complicity.”
Tacitus, Annals
I think they need to alter the experiment a bit: the offeror chooses a percentage knowing that the evaluator is allowed to send back a number of excruciatingly painful electric shocks during the negotiation, up to ( 100 - lowestpercentageoffered)/10 seconds' worth. After all, pain is temporary but the outcome of the trials is forever...
Life might not be fair, but karma is.
Personally, I think you are playing the wrong game. Money is worthless in the big scheme of things.