What is Ultimatum game?
The ultimatum game is an experimental paradigm in which one player proposes how to split a sum of money and the other player accepts or rejects the proposal. If rejected, both players receive nothing.
How it works
The rational prediction is that Player 1 should offer the minimum possible amount and Player 2 should accept any non-zero offer (since something is better than nothing). But experiments worldwide show that offers below 20-30% are typically rejected, even though rejection is economically irrational. Player 1 typically offers 40-50%, and Player 2 rejects ‘unfair’ offers to punish greed, even at personal cost. Cross-cultural studies show variation in the ‘fairness threshold’ but universally find that pure self-interest fails to predict behavior.
Applied example
When given $100 to split, a proposer who offers $10 and keeps $90 will typically be rejected. The responder sacrifices $10 to punish the unfair split. This ‘irrational’ rejection reveals that humans value fairness enough to pay for it.
Why it matters
The ultimatum game demonstrates that humans are not pure utility maximizers: fairness, reciprocity, and the willingness to punish unfairness at personal cost are fundamental to human economic behavior.
