I attended a conference with my team from work last week, going to talks and workshops dealing with pricing techniques and theory. One of these workshops was on behavioral economics as it relates to pricing, and the ice breaker at the beginning of the session was based on the Ultimatum Game.
The Ultimatum Game works as follows: The facilitator breaks the participants into groups of two. He then explains to each group, "I am giving one of you $100. You can have this money on the condition that the other person in your groups agrees to your proposal on how to split the money. No negotiation is allowed. You make one proposal on how to split the money such as, 'I will give you $50' and your partner responds yes or no. If he agrees, you get the money and split it. If he refuses, none of you get any money."
I proposed giving $40 while keeping $60 and got a yes. One person proposed a $65/$35 split. The rest of the group went $50/$50, except for one group which had a refusal when a man offered the woman he was paired with a $70/$30 split and she turned him down. One guy who was left without a partner announced that he had conducted an imaginary transaction at $99/$1.
The imaginary transaction is actually the solution to the problem at a logical level. It's free money, and you get nothing if you don't reach an agreement, so if you're at the person who receives the proposal you should say 'yes' to anything. If you could count on everyone being logical this way, the person who was in charge of making the offer should offer a $99/$1 split every time in the confidence it would be accepted.
But people aren't simply rational profit maximizers, and in experiments people routinely refuse offers of $30 or less. This means that as the person making the proposal, you need to take into account the sense of fairness of the person to whom you are making the proposal.
This tendency of Person A to offer a more generous split for fear of offending expectations of fairness shows that while an individual Person B may get nothing due to refusing a low-ball offer, the tendency of people to refuse such offers actually means that in general people in the Person B role will do much better than if people didn't enforce this societal expectation. Someone who refuses a low offer gets nothing, but in reinforcing the expectation that low offers will be refused, he benefits others who are in the same position. Refusing may be 'irrational' in the sense of not getting a sure immediate gain, however it results in overall long term gains for the group.
Sitting where we are, a week from the election, it struck me that some of the intra-conservative arguments about whether to support Trump boil down to the two approaches to analyzing the Ultimatum Game. One side argues that if Trump is any short term gain at all to be had in electing Trump president over Clinton (judicial appointments, etc.) then we should vote for him. Doing otherwise is 'irrational'. The other side (to which I adhere) holds that in accepting a candidate as bad as Trump, conservatives would signal to their party that such a low offer will nonetheless by accepted. By rejecting him, we form the expectation that only better candidates will get our support.
Learning Notes Week of April 24
5 hours ago