Game theory. Or should I sayyy LAME THEORY. Ayyyyyyy….
This post is about one small game, the ultimatum bargaining game, that’s useful in explaining the tools behavioral scientists can use to measure the reactions of other humans.
Did you ever watch the (now old) movie A Beautiful Mind? It’s about a mathematician named John Nash who developed the now famous Nash Equilibrium. That’s the beginning of the field of game theory. And game theory can be quite useful, as I said earlier, as a tool to measure how humans rate and react to choices.
I’m not going to actually tell you anything about game theory because it’s complicated and hard and there are 100 other posts and videos on Youtube that would do a much better job than I could. I just want you to be familiar with what it is and understand some of the simple games that are commonly used.
Okay, now that I’ve sufficiently buried the lead… The Ultimatum Bargaining Game! Güth, Schmittberger, and Schwartze in 1982 published a paper titled An experimental analysis of ultimatum bargaining. Now I’m not sure if they invented the ultimatum bargaining game, but they certainly get the credit for popularizing it. It goes like this:
There are two players and some money. One person has all the money and makes an offer to the other person.
If the other person accepts the offer, they get the amounts that were offered, but if they reject the offer, both people get nothing.
For example. We start the game and I have $30. I offer you a split where I keep $20, but you get $10. You’re not super happy about it but hey $10 is better than nothing, so you accept and we both get paid.
Next time I have $30, but I offer a split where I keep $29, and you get $1. ”Screw you!” you say. I’m such a jerk. You reject the offer out of spite and no one gets anything. Obviously, you can see the interesting behavioral economics twist.
Classical economic theory would say that the second person always accepts, because any amount of money, be it $5 or $1 or whatever, is more than nothing. The rational person (“actor”) always takes more over less.
And, of course, in the real world why this game is so brilliant is that it doesn’t happen that way.
People reject offers out of spite; especially when multiple rounds are played and there’s a history with someone. This is a classic decision of people making choices against their own self-interest! If I told you that you could make $1 just by accepting the dollar, wow! Sounds too good to be true. But if I tell you someone split $100 and gives you only $1… Not so much. It’s fascinating stuff.
I want to tell you about another paper entitled “Trust, Reciprocity, and Social History” by Berg, Dickhaut, and McCabe. They ran an experiment using a derivative of the Ultimatum game. Subjects in room A and room B are each given $10.
In room B, they pocket their money. In room A, they must decide how much to send to their (anonymous) counterpart in room B. Whatever amount A sends to B is tripled.
B then gets to choose how much money to return.
This second half of the game is a dictator game, because the room B person doesn’t have to give any money back to the other person in room A.
The optimal strategy for A is to never send any money because there is no guarantee they can get anything back. It’s an experiment in trust. If B doesn’t give back to A, next time they worry A won’t give anything to B.
In 55 out of 60 times running this experiment, A sent money to B. And I quote from the paper:
“In conclusion, experiments on ultimatum game, repeated prisoners’ dilemma games, and other extensive form games provide strong evidence that people do punish inappropriate behavior even thought this is personally costly.”
I’ll talk more about punishment later. Never underestimate the power of humans to make decisions not in their best interest, out of spite, and also give to others not out of kindness, or altruism, but out of fear of spite.
One theory of why 55 out of 60 people sent money even when they may have been better off not giving, was altruism. Altruism is the idea that humans do things that are purely good because we enjoy helping other people.
However, in a follow-up study in 2012, a different group re-investigated the game in “Does the trust game measure trust?” by Brulhart and Usunier. They found that none of their altruism measures were statistically significant, and I quote from the paper:
“In sum, our results suggest that altruism is not a statistically significant motivating force in determining “trust-like” behavior, both across all subjects and for specific groups of players.”
Trust was not formed through kindness, rather it was formed from fear of retribution. Altruism had nothing to do with trust in their Study.
How does this apply to the real world? Well, when people are anonymous weird stuff happens. People aren’t altruistic most of the time, especially when they can directly benefit by keeping money to themselves.
How then do you change behavior? How do you encourage altruistic behavior? Maybe you have a cause that you’d like to promote, or you are trying to create change somewhere.
If you want to create a culture of trust and sharing you must easily allow for public shaming and retaliation. Even if that retaliation ends up being a loss for everyone. People will hit the button that says “Well, if you won’t be nice to me, I won’t help you either even if it hurts me.”
Retaliation does not have to be in money. It could be in PR loss, or some other type. But it is critical that you create an environment that says clearly that these are the rules “we” the members of the community have agreed to. If you violate these rules the community, together, will punish you.
If the rest of the community does not band together to collectively punish the selfish; the selfish act will almost always win. And in systems and markets with especially greedy or immoral behavior you often see that the community does not take action against a bad actor to enforce community standards.
Economists can learn a lot about the process of human decision make through games. I wanted to introduce the idea of a few interesting games where the Nash equilibriums may indicate a different result than what we see in the real world.
I love games and have always found various setups like this exciting and fun. We’ll explore more fun games like the Ultimatum game in the future because it is so useful at eliciting human behavior.
Berg, J., Dickhaut, J., & McCabe, K. (1995). Trust, Reciprocity, and Social History. Games and Economic Behavior, 10(1), 122-142. doi:10.1006/game.1995.1027
Brülhart, M., & Usunier, J. (2012). Does the trust game measure trust? Economics Letters, 115(1), 20-23. doi:10.1016/j.econlet.2011.11.039
Güth, W., Schmittberger, R., & Schwarze, B. (1982). An experimental analysis of ultimatum bargaining. Journal of Economic Behavior & Organization, 3(4), 367-388. doi:10.1016/0167-2681(82)90011-7