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PPFF #158: look after No. 1 (or not)

Good morning,

One of the coolest things I’ve come across in the past few years as a layperson, is Game theory, the study of human conflict and cooperation within competitive situations or science of self-interest strategy. Just last night I was reading about one of the topics in Game theory, the ultimatum game.

The rules of ultimatum game are quite simple:

  1. There are two players
  2. Player 1 is given a sum representing something of value, e.g. money.
  3. Player 1 makes a proposal for how to divide the sum with Player 2
  4. Player 2 can either accept or reject the proposal
  5. If Player 2 accepts, the sum gets divided according to the proposal. If Player 2 rejects, both Players 1 & 2 get nothing.
  6.  Game ends with no further play

The results are very fascinating mainly because they reveal nuanced subtleties of self-interest, and to an extent the selfishness axiom of ‘look after number one’ in social interactions is not purely economically driven, can be political and is much more indirect and complicated than originally thought. Let me explain this. An obvious prediction is that Player 1 will act in their self-interest and propose a very imbalanced split, say 90:10. Then Player 2, logically speaking, would have to accept this proposal because they know that they would be better off than 0/0 split if Player 2 rejects the proposal.

However, oftentimes players defy the classic model of self-interest; Player 1 generally makes a ‘fairer’ proposal and Player 2 frequently reject grossly ‘unfair’ proposals even at the risk of receiving nothing at all. Here are some useful facts one can use to one’s advantage in negotiation.

  • 50/50 split is the most common proposal
  • one in five ‘unfair’ low offers are rejected
  • the longer Player 1 takes to make the offer, the higher the chances Player 2 would accept a low offer.

For those of you, who say “But this is a controlled lab experiment, far removed from reality. Where is a real life example of these low-ball offers being rejected?”, well, I have one word for you.

Brexit

Have a fair Friday.

 

 

 

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