The Ultimatum Game

An interview with Judy Bethwaite, an economist at Victoria University, Wellington

Economists’ assumptions about people’s self interest “Economists typically assume that people will do whatever promotes their self interest. Moreover such behaviour is said to be rational,” Judy began.

Judy Bethwaite and Paul Tompkinson of the Economics Group in the Faculty of Commerce and Administration at Victoria University of Wellington have been conducting new experiments using the Ultimatum Game to test just how self-interested people really are.

What is ‘The Ultimatum Game’? The game works as follows: There are two people involved in the experiment. One is assigned the role of the allocator and the other is the recipient. The allocator is given a sum of money by the controller of the experiment – something like $10 is usual – and the allocator is asked to divide the money between her/himself and the recipient.

An economist would suppose that it would be in the interests of the allocator to divide up the sum of money so that the lion’s share would go to the allocator and the recipient would be offered the smallest possible amount. This would suggest that the allocators would offer the recipient one dollar and keep nine for themselves.

However, the recipients are not just purely passive in this game. They have two options. They can either accept the offer, in which case they get the amount proposed by the allocator and the allocator gets the balance, OR they can reject the offer, in which case neither the recipient nor the allocator receives any money.

What happens in multiple experiments using this game? What typically happens is that allocators offer half the money and the recipients accept it.

Possible motivations for equal division There are two types of theories that could be used to explain this behaviour. One of these is that allocators have some concern for the fairness of the allocation. Even though they don’t know the recipient they feel that they ought to offer five dollars . The other theory is that the allocators believe that the recipients will reject any offers that are not seen to be fair opting to receive nothing rather than be insulted with an offer that is lower than half.

Extensions of the game Judy Bethwaite and Paul Tompkinson have undertaken new experiments to try to figure out which explanation is more likely.

Part of their research has focused on altering the amount of money at stake. If very large sums are being offered does it make a difference? When people were asked what they would do if they were asked to allocate $10.000, for example, it was found that although offers tended to be a little lower than half they still tended to approach half.

One conclusion that can be drawn is that allocators simply take into account extra learned information about what they believe the probable reaction of recipients will be. Allocators may well be behaving in a self interested manner because they know what recipients are likely to accept. The research has indicated that the average pay off for allocators is significantly higher if they offer larger amounts of money. Someone who acts in the economist’s model by offering only one dollar does not do very well in the game.

Focus on the behaviour of the recipients What the researchers are trying to do now is to focus on the recipient. They have several explanations of allocator behaviour, but now Judy is interested in knowing why recipients typically do not accept low offers.

Oliver Wendell Holmes once commented that even a dog knows the difference between being stumbled over and being kicked.

That line of thought led the researchers to design an experiment in which there are two people, but the recipient is told that the suggested division of the $10 will be randomly made by a computer. Again the recipients would have the same choice to make, they could either accept or reject the offer, but would they be prepared to accept one or two dollars while the other person got nine or eight dollars if it was just a random occurrence? Would recipients be so concerned with their relative standing compared to the other person that this would lead them to reject a small sum of money?

Changing the allowable offers Another variant of the game would involve telling recipients that allocators can only offer either one or two dollars or eight or nine dollars. Judy supposes that recipients would be much more likely to accept two dollars, not expecting that the allocators would offer eight, when recipients know that allocators would therefore only get to keep two dollars themselves. If there is no possibility of allocators being able to offer five dollars she believes that recipients would be prepared to accept a lower amount. In other words the allocator then has done the best s/he could be expected to do for the recipient within the constraints, and could not be expected to be totally altruistic about it.

Envy and righteous indignation The researchers are also interested in the effect of envy and righteous indignation. In this experiment the allocator is asked to divide the money between him/herself and the recipient, and has to make the recipient an offer believing that the recipient will either accept the offer or reject it as before. However, in this game the recipients are told that they can reject the offer, in which case both will receive nothing. or they can accept the offer and specify that the allocator is to receive the same amount that has been offered to them. Under this option if the allocator offers two dollars out of ten, the recipient can accept and specify that the allocator gets two dollars also.

Consider the two choices the recipient has. If the money is accepted and the allocator gets the same, then the component of envy that the recipient is feeling is removed. If the recipient was feeling truly, righteously indignant about the measly offer made by the allocator, however, then the only way to punish the allocator sufficiently is to reject the offer.

Judy is keen to sort out how many people are concerned only with the relativity in the sums that the recipient and allocator are getting and would therefore accept, and how many are so indignant that they would refuse the money in order to punish the allocator for a measly offer.

Does knowledge about the allocator affect the recipient’s decision? Other researchers have focussed on whether it matters if the recipient has some information about the allocator and how that person was chosen? Do people react differently and accept lower offers if they believe that allocators have better social standing or are more intelligent? Do students as recipients react differently if they believe that the allocators are those who got A grades and perhaps had some right to become allocators and be treated in some preferential manner?

It could be that we have a greater deference towards brighter or more able people. Would acceptance be greater if the allocators were chosen on the basis of having correctly answered the questions in some sort of quiz?

Avoiding a social context “Conducting experiments with the Ultimatum Game seems a funny thing for an economist to be doing” says Judy, “but we use games like this in an attempt to get to the heart of what we believe to be rational self-interested behaviour. I am particularly interested in finding out how people behave when any social context is stripped away. If there is any social context at all I believe that people are much more likely to be more fair or altruistic in their behaviour, especially if they believe that they might have some interaction with recipients. We try to abstract from any social context by playing the game on computer terminals, or by giving recipients instructions from allocators that are on pieces of paper in sealed envelopes. Allocators and recipients never meet and no information is given about the people involved. However what we have discovered is that it is impossible to strip all social context out of the Ultimatum Game because of the very nature of the language that has to be used to describe it.”

Connotations of language a problem in avoiding a social context Language is full of social connotations. For example it is very difficult to describe what the allocator has to do without using the word ‘divide’ or ‘share’. ‘Allocate’ seems a little too technical, and when this term is used allocators are often not sure what they are being asked to do. However, ‘Share’ and ‘divide’ seem to indicate some element of fairness in the process. It is very difficult to think about how to strip the Ultimatum Game down to its barest to take out any social connotations or context and get to the heart of what economists believe is purely self-interested rational behaviour. Experiments that have been done suggest that the less social context there is the more selfishly allocators will behave.

Economists and rational self-interest What Judy finds fascinating is that economists and economics students typically make lower offers as allocators and accept less as recipients than do other students. “Is this because people who are rationally self-interested self-select into economics courses, or are they being influenced by their training? In other words are economists born or made?’ asks Judy.