People Care About Fairness The ultimatum game works like this: Two volunteers (who are otherwise strangers to each other) are told that they are going to play a game and could win a total of $100.
Before they play, they learn the rules.
The game begins with a coin toss, which is used to assign the volunteers to the roles of player A and player B.
Player A’s job is to propose a division of the $100 prize between himself and the other player.
After player A makes his proposal, player B decides whether to accept or reject it.
If he accepts it, both players are paid according to the proposal.
If player B rejects the proposal, both players walk away with nothing.
In either case, the game then ends.
Before proceeding, stop and think about what you would do in this situation.
If you were player A, what division of the $100 would you propose?
If you were player B, what proposals would you accept?
Conventional economic theory assumes in this situation that people are rational wealth–maximizers.
This assumption leads to a simple prediction: Player A should propose that he gets $99 and player B gets $1, and player B should accept the proposal.
After all, once the proposal is made, player B is better off accepting it as long as he gets something out of it.
Moreover, because player A knows that accepting the proposal is in player’s B interest, player A has no reason to offer him more than $1.
In the language of game theory, the 99-1 split is the Nash equilibrium.
Yet when experimental economists ask people to play the ultimatum game, the results are very different from this prediction.
People in the role of player B usually reject proposals that give them only $1 or a similarly small account.
Knowing this, people in the role of player A usually propose giving player B much more than $1.
Some people will offer a 50-50 split, but it is more common for player A to propose giving player B an amount such as $30 or $40, keeping the larger share for himself.
In this case, player B usually accepts the proposal.
What’s going on here?
The natural interpretation is that people are driven in part by some innate sense of fairness.
A 99-1 split seems so wildly unfair to many people that they reject it, even to their own detriment.
By contrast, a 70-30 split is still unfair, but it is not so unfair that it induces people to abandon their normal self–interest.