Ultimatum game

Definition

The ultimatum game is a strategic interaction in which one player, the proposer, offers a division of a resource (like money) to another player, the responder, who can either accept or reject the offer. If the responder accepts, the resource is divided according to the proposal, but if they reject it, neither player receives anything. This game highlights important concepts like fairness, negotiation, and decision-making under uncertainty.

5 Must Know Facts For Your Next Test

1. In the ultimatum game, proposers typically offer around 30-50% of the total resource to responders, as offers below this range are often rejected.
2. This game challenges the notion of purely rational behavior since responders frequently reject low offers even at a cost to themselves.
3. Cultural differences can significantly affect outcomes in the ultimatum game, with some cultures exhibiting stronger fairness norms than others.
4. The ultimatum game demonstrates how emotions and social norms influence economic decisions, illustrating that human behavior often deviates from traditional economic theories.
5. Variations of the ultimatum game include multiple responders or changing the resources being divided, allowing researchers to study different aspects of cooperation and competition.

Review Questions

• How does the ultimatum game illustrate concepts of strategic decision-making and rational choice?
  • The ultimatum game showcases strategic decision-making by highlighting how players make choices based on expected outcomes. The proposer must consider how much to offer, knowing that if the offer is too low, it may be rejected. Rational choice theory suggests that both players will act in their self-interest; however, the game reveals that emotional responses and fairness considerations can lead to decisions that may not align with strictly rational behavior.
• Discuss how backward induction applies to strategies employed by players in the ultimatum game.
  • In the ultimatum game, backward induction helps players anticipate responses based on possible future actions. The proposer might think about what amount is likely to be accepted by the responder based on their perceived preferences for fairness. By considering how the responder might react before making their offer, proposers can use backward induction to optimize their strategy and increase their chances of success.
• Evaluate how findings from experiments involving the ultimatum game contribute to our understanding of cooperation and social behavior in economic settings.
  • Experimental findings from the ultimatum game reveal that human cooperation often defies traditional economic predictions. Many players prioritize fairness over maximizing personal gain, leading to rejections of offers deemed unfair. This indicates that social norms and expectations play a critical role in economic interactions. By studying these behaviors in controlled settings, researchers gain insights into how cooperation can be fostered or hindered in real-world economic environments, impacting everything from negotiations to market dynamics.

Related terms

Negotiation:

A process where two or more parties communicate to reach an agreement on a particular issue or resource.

Fairness: A concept that involves perceptions of justice and equality in the distribution of resources or outcomes.

Game Theory:

The study of mathematical models of strategic interactions among rational decision-makers.