Traditional approaches to decision analysis assume that decision makers are rational, but in reality, we’re fairly irrational. That’s what makes us human. What happens in certain applications when decision makers are likely to be spiteful? That’s what one of my students addressed in his presentation for my class in multiobjective decision analysis (all students have to present a research article).
The Ultimatum Game is a test of whether decision makers play in a “traditional” manner in bargaining games. This game involves two players, the Proposer and the Responder. The game is played only once, and the players remain anonymous to one another. The Proposer is given a certain amount of money (say, $20) and the Proposer divides this amount into two to give to each participant (say, $15 for the Proposer and $5 for the Responder). The Responder can either accept the amount or reject it, resulting in neither player receiving any money. The Game Theory solution to this problem is for the Responder to accept the amount that the Proposer gives–regardless of the amount of the reward–because some money is better than none.
However, in many experiments, it has been shown that if Proposers offer less than 25% of the total amount to the Responder, the Responder nearly always rejects it. This is nuts–they are rejecting free money! This was verified in countries all over the world. When the study was done in rural Indonesia, the Responders (poor workers) would reject money that would amount to several weeks worth of wages — out of spite! I bet there are a million applications where this would be useful.
Camerer, Ho, Chong. “A cognitive hierarchy of games,” Quarterly Journal of Economics, 2004.
Cameron. “Raising the stakes in the Ultimatum Game: Experimental evidence from Indonesia,” Economic Inquiry, 1999.
Henrich. “”Does culture matter in economic behavior?” American Economic Review, 2000.
Slonim, Roth. “Learning in high stakes Ultimatum Games: An experiment in the Slovak Republic,” Econometrica, 1998.