In his excellent book Here Comes Everybody, Clay Shirky writes about the Ultimatum game, a well-known experiment in behavioral economics. This is how it works. Two people are given ten dollars to share between them. One person gets to decide what the split will be; the other’s only power is either to accept or reject the proposed deal. If he rejects it, neither of them receives anything.
Now, according to conventional economic theory, the second person should accept any split, because even if he only offered one cent and the first person gets $9.99, he is still better off. But that is not how it works in practice. It seems that people are unwilling to accept any proposal that is perceived as too unequal; in practice, anything less than a $7-$3 split is liable to be rejected. It seems that a desire for fairness – or a desire to punish people who don’t act fairly – trumps economic self-interest.
At first blush it seems like a good thing that people aren’t motivated solely by thoughts of personal economic gain. But think about what’s driving the impulse to reject unequal offers. Isn’t it a mélange of petty vindictiveness, jealousy, and a misplaced sense of entitlement? Not much to celebrate there.Update: further illumination from James Surowiecki’s book, The Wisdom of Crowds. He reports that in practice, the most common offer made by the first party is a 50/50 split. This isn’t rational either. Why do people do this? Because the first guy is as jealous and vindictive as the second guy. He knows what he would do if he were on the wrong end of an unfair offer. All’s well that ends well?