Inherent within the human character is the belief that we should all be treated fairly. For some, injustice might be high levels of poverty in the developing world, while for others it might be the umpire calling a foul and costing their team the game.
The Ultimate game is a famous experiment used to test people’s values of fairness and cooperation. The most famous description of the game was published in 1982 by the German economists Güth, Schmittberger and Schwarze.
How it works
There are two strangers playing the game — the person proposing the offer and the person receiving the offer. Let’s call them Paul and Rachel.
- To start the game, Paul is given a sum of money. In our example we’ll give him $100.
- Paul is now given the option to nominate a proportion of that $100 to offer to Rachel.
- Rachel now has two choices:
- If Rachel accepts the offer, they both get to keep the money.
- If Rachel rejects the offer, neither of them take home any cash.
- If you were Paul, how much of your $100 would you offer Rachel?
- If you were Rachel, what is the lowest offer that you would accept?
Traditional economic theory says that Rachel should accept any offer greater than $0. Even if Paul offered her just 5c, she would still be better off than she was before.
But Rachel is not a robot and she knows that a 5c offer from Paul is only 0.05% of the money provided to him. Rather than give him the pleasure of keeping 99.95%, she would rather they both walk away empty-handed.
This game teaches us about humans’ ideals of fairness and pride.
Variations to the Ultimatum Game
There are many other variations of the game, which all test different aspects of human negotiation.
- Two-option ultimatum — where Paul is given only two deal options to offer Rachel — 50/50 (a fair split) or $80 for himself and $20 for Rachel (an unfair split).
- Competitive ultimatum — where there are many proposers and Rachel can decide which one of the offers to choose
- Ultimatum game with tipping — where Rachel can offer a tip back to Paul to thank him
- Reverse ultimatum — which allows Paul to keep providing more offers until Rachel either accepts or abandons the game.
- Dictator game — where Rachel has no right of reply to Paul’s offer. This tests Paul’s level of altruism knowing that Rachel must accept whatever he offers
- Pirate game — a puzzle where 5 pirates need to decide how to distribute a kitty of 100 gold coins. The pirate captain makes an offer and the other pirates vote to either accept the offer or throw him overboard. If he’s thrown overboard then the second-in-command becomes the new captain and its up to him to make an offer.
The value of the Ultimate Game
The Ultimatum Game teaches us how humans operate in a negotiation environment. Where prices are not set based on cost, there is room for disagreement on price and therefore negotiation. The price we are willing to accept is often influenced by our perception of the value being derived by the other party. If we feel that they are going to be extremely well off with the deal — proportionately higher than us, we will try and increase our value at the expense of theirs to reach an agreement where both parties profit equally.