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 unfair, knowing that the proposer would keep nine times as much money than they offer us. A more acceptable split would be five-five or perhaps four-six, but other than that would already feel weird.

You might think this irrational feeling of unfairness is solely human, but you’d be mistaken. Dutch primatologist and ethologist Frans de Waal (1948) has done a lot of research over the years on the behavior of apes and monkeys. One of his experiments involved giving one capuchin monkey a grape a few times in a row — which capuchins absolutely love — while handing another monkey a piece of cucumber instead — which capuchins don’t hate, but find not as delicious as grapes. The monkeys could see each other, and they could see what the other was receiving — a grape or a piece of cucumber. It turns out that after a few rounds of getting the not-so-delicious cucumber, that capuchin became really pissed off at the giver of the food, so much that the monkey throws the cucumber back at the experimenter. If the monkey had been purely rational, it would have been happy to receive any nutritious food, but to know that the neighbor is getting the sweeter grape is an unbearable unfairness. You can find the quite hilarious video of this experiment over here.

Researchers have even figured out that it actually pays off to be irrational in real life. If you, for instance, don’t even agree with a five-five split but demand six dollars — as the stranger — you will get a reputation for being difficult and hard to please, of being irrational. The next time someone wants to make a deal with you, they know they won’t even have to try a four-six deal or worse, because they know you’ll explode if you hear that. So, being a little irrational actually pays off in the long run, others will try and please you before you even know it.

In a business environment — for instance, when dealing with stakeholders — the lessons of the Ultimatum Game are worth remembering.

If you are interested in stories like these and more, you can buy Essential Psychology for Modern Organizations from Amazon and other bookstores: https://www.amazon.com/Essential-Psychology-Modern-Organizations-scientifically/dp/B08NP12D77/

Book cover.