Friday, January 20, 2006

Would you take the $1?

EconBrowser talks about the Ultimatum Game.

You are given $100 and can offer $0 to $100 to a second person. If they accept the offer, you give them what you promised and keep the rest. If they decline, neither of you get anything.

I've seen this problem several times and have always enjoyed the fact that the rational thing to do is offer your opponent a dollar.... they're better off than they were so should accept it. But, of course, if you did this in real life, they'd get more pleasure from denying you the $99 and so say no.

James Hamilton talks about this in the context of the assumption of rationality that economists use when reasoning about people.

It's an interesting article. I'm not sure the experiment proves we're irrational; I think it just shows that people do derive pleasure from "sticking it" to someone when they think they've been treated unfairly. There are no doubt good evolutionary reasons for this.

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