The Ultimatum Game

We are not by far as rational as we like to think.

Game theory, the study of mathematical models of strategic interaction between rational decision-makers, saw the light of day in a 1928 proof written by Hungarian-American polymath John von Neumann (1903–1957) — considered by many to be the most intelligent person ever to have lived. In 1944, Von Neumann co-authored Theory of Games and Economic Behavior with German-American economist Oskar Morgenstern (1902–1977), which further lay the basis for the groundbreaking new field of game theory, used in a wide variety of sciences, from social science to computer science. Game theory starts with the assumption of rational or logical decision-makers. The trouble is, that we are not as rational or logical as we think we are. The so-called ultimatum game is a prime example of that.

Consider the following narrative. Someone offers you ten dollars on one condition — the ultimatum. You have to share the ten dollars with a total stranger and the stranger has to agree with how you split the ten dollars between the two of you. Now, if we humans were purely rational actors, you should offer the stranger one dollar and keep nine dollars yourself. A purely rational stranger would consider that one dollar is more than zero dollars, so a good catch! But we all know that we — as the stranger — would feel this division to be…