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The Ultimatum Game and Human Irrationality


It's easy to imagine humans as rational and selfish creatures at times. After all, the whole premise of the economic system that drives the US, capitalism, is based on the idea that manufacturers will satisfy the needs of Americans because of their desire for wealth. In addition, the hypercompetitive spaces at work or school can make it feel as if we are all participating in a zero-sum game where our bosses and peers only seek to take advantage of us. However, this is not always the case.


An experiment conducted in 1982 by Guth and Werner sought to test the extent of human rationality and perception of injustices. Called the Ultimatum Game, there are 2 participants, a proposer and a responder. The proposer’s role is to decide how to split $100 between himself and the responder. Whether it's 50:50 or 100:1. The proposer will offer his “proposed” split to the responder for decision. The responder will then either accept or decline the offer. If he accepts, the money is split exactly how the proposer offers it. If he declines, no one receives any money. The meetings are anonymous, and the participants interact only once, meaning there’s no additional game for retribution.

If we were to assume that both participants are 100% rational, there would be some expected results. The responder should accept every “proposal” the proposer offers. Whether it's $50 or $0.01. After all, something is better than nothing. On the other hand, the proposer should propose a 99:1 split because he knows that the responder has no choice but to accept. In this way, both parties are acting 100% rationally to acquire the most reward.

However, the results were different. Proposers often offered 50:50 splits, with nothing more than 20% less. On the other hand, responders tended to decline offers less than 30% despite the fact that both parties will get nothing. In this scenario, both parties behaved completely irrationally, but why?

The issue lies in our “Homo Economicus” perspective, or the perspective that humans are utility-maximizing individuals who will seek the most reward in a game. In most cases, there are different “rewards” that we all seek other than money. There are social rewards, psychological rewards, and other influences. The foremost influence is the concept of “fairness”. The proposer may seek to maintain his image of being a fair person, and sacrificing his self-character for $100 may not be desirable. On the other end, the responder would seek to punish the proposer if the proposal is unfair. In this case, the responder would rather seek the gratification of punishing his opponent than the meager money they would win.

Factors like culture and upbringing all come to bind people to act in altruism or vengeance despite rationality. But this is for a good reason. There are more long-term games we must prioritize over short-term gratification. Sure, we could exploit our peers, our coworkers, or our teammates to gain a competitive edge. And sometimes, the victim might not be in a position to act in his or her best interest. But often, people act irrationally, and if we play selfish short-term games often enough, we will find many enemies waiting and willing to bring us down.

On the other hand, selfless short-term acts of kindness or generosity can pay us back. Even when the other person doesn’t have to pay us back, they often will in order to be fair. Fostering good-will and support from others by losing the short-term game can help us in the long run. There is a reason why most cultures possess the same or similar notions of fairness. That’s because we evolved to be fair to one another in order to survive. A tribe of selfish humans can never collectively survive in the wilderness. A company that works its employees like dogs will find its short-term income rising but its talented workers leaving and productivity decaying. Humans aren’t 100% rational, but it's only because all the rationality in the world cannot outweigh friends, family, coworkers, and allies.

To conclude, we ought to change our perspective on mankind and revise the idea that every consumer or entrepreneur plays rationally in the free-market. There are often higher goals than short-term monetary gain that some companies play, and figuring out that higher game can be important. And most importantly, we should seek to play that higher game and learn to recognize the deeper motivations of people. Through this, we can better understand how to cooperate with others, work effectively, and accomplish more than we could on our own.





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