Ultimatum Game

Publication Date :

29 Jun, 2025

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Table of Contents

What Is The Ultimatum Game?

The ultimatum game is a prevalent examined economic experiment that revealed an in-depth understanding of human decision-making and behavior. It served to re-evaluate the theories concerning economic models reliant only on self-interest, along with a greater comprehension of psychological and social elements in human decision-making.

Here proposer receives money to distribute to the responder. It helps in the assessment of how individuals respond in situations where equality and self-interest oppose each other. Multiple experiments have challenged traditional economic supposition concerning sole self-interest by indicating that individuals often reject biased offers.

Key Takeaways

The ultimate game represents well well-examined economic experiment that offers an extensive insight into decision-making and human behavior.
It aids in the re-evaluation of theories concerning economic models based only on self-interest, as well as a deeper comprehension of the social and psychological aspects of human decision-making.
It has applications like - impacting market gains, social norms and emotions influencing financial decisions, aiding in policy & product design, creating negotiating models, and understanding human behavior in financial decision-making.
It involves two players- proposer and responder while dictator games have only one player dictator.

Ultimatum Game Explained

The ultimatum game can be described as an experiment in classic game theory that tests human behavior in circumstances where there is a conflict of fairness and self-interest. It consists of two participants: a proposer who offers a part of the total amount received to a responder who can reject or accept the offer.

The ultimatum game theory has the provision that if the responder refuses to accept the proposer's offer, then the money will be taken away from both participants. The ultimatum game economics starts with the provision of a fixed sum of money to the proposer. Then, the proposer has to offer a certain portion of the money to the responder, knowing about the total sum. The responders may or may not accept the offer of the proposer. If the responder accepts the distributed money, both get to retain the money; otherwise, the players get nothing.

The ultimatum game in psychology has major implications related to understanding about economic interactions dependent on human behavior. It reveals that people prefer to be fair over self-interest, even if they have to receive less money. It highlights the role of emotions and social norms in decision-making concerning economic transactions between individuals.

It has been used to test various economic theories regarding human behavior. It happens to be the only powerful tool for understanding human behavior in conflicting situations. In the financial realm, ultimatum game results recommend that people offer to let go of financial benefits if they think that the offer made was unfair, which has vital implications for economic outcomes and financial markets.

Examples

Let us use a few examples to understand the topic.

Example #1

An online article published on 26 June 2015 discussed this article's topic as happened between an economics correspondent and an expert behavioral economist. They created a game of ultimate nature in which a person gets an amount of money that he must offer a portion of to another person, having the autonomy to reject or accept the offer. Moreover, if the second person rejects, then both get no money.

Behavioral economist elaborates that the second person generally rejects the offer if offered a portion of below 20%. In contrast, the same person happily accepts if a portion of around 50% is offered to the person. It means in scenarios of profit maximizing offer becomes 40%; the offer becomes acceptable. Nevertheless, people habitually offer generous offerings in high-stakes situations because of rejection risk.

Example #2

Let us assume that in Old York City, Bob and Alice take part in an experiment called a game of ultimatum. Alice was given $100 to propose the manner in which she would divide the money between herself and Bob. If Bob accepts her proposal of money, then both will get the same amount and if rejected, then no one will get any amount.

Hence, she offers Bob $50 as per the guidelines of rational economic behavior in the expectation that he will accept the offer. But Bob has already decided to reject any offer below $60, driven by a sense of equality and fairness. As such, the situation correctly represents the conflict between social fairness and rational self-interest in economic decision-making.

Applications In Finance

It has multiple applications, as shown below:

It exposés the manner in which fairness worries can impact financial gain in markets.
It underscores the vitality of social norms and emotions in financial decisions.
It also helps in making better-designed policies and products for consumers.
It can help in creating models related to negotiations in employee-employer bargains.
It may also help in knowing more about predator-prey volatility in the financial domain.
It also gives the best overall knowledge of human behavior related to financial decision-making.

Ultimatum Game vs Dictator Game

Both are game theories, but they have certain differences, as discussed in the table below:

Ultimatum Game	Dictator Game
Involves two players- proposer and responder.	Has only one player dictator
The resources made available to the proposer have to be split by the proposer to give to the responder.	The dictator decides whether to give to others or not and how much.
Judges the cooperation and fairness at one go.	Raises questions on the assumption of self-interest actions by individuals.
Responders must accept the non-zero offer made by the proposer, even if it is the minimum amount.	Dictators own all the money and resources.
Proposer has to offer more than the minimum to the responders as low offers get rejected.	Dictators give very small amounts to the receivers that often get rejected.
Offers become fair if the players belong to the same social group.	Dictators often give up when they encounter poor people.
Respondents value fairness more than self-interest, resulting in the denial of unfair offers.	Dictators do include altruism and fairness in their decisions.