Fair play and Game Theory

In game theory, there is game called Ultimatum. The game is about how to divide money between two players.

Game is like this- there are two players Player A and Player B. There is certain amount x which has to be divided among themselves.

Player A proposes how to divide the sum between among themselves, and player B can either accept or reject this proposal. If the player B rejects, neither player receives anything. If the player B accepts, the money is split according to the proposal made by player A.

Now in purely economic terms, if amount to be distributed is Rs.100, then split of Rs.99: Rs.1 should be acceptable to B, because if he rejects both he and A get nothing, but if he accepts, he gets least Rs.1.

But when this game was played in real life, the results were surprising. In most of the cases the proposer (first player) offered between 40%-50% to second player, which shows that they wanted to be seen fair in making offer, because unfairness would lead to rejection of offer. On the other hand the second player rejected offer if he was paid less than 30% of amount, as there was element of “honour” attached to it. The second player felt that first player was trying to belittle him by offering him less amount. So results of game are not same in economics and psychology.

ME_139_Unfair[1]

It also has implication for HR manager ex. there is a vacancy in organisation and there are applicants who wish to join organisation, if organisation want to fill vacancy by offering too little to candidate, candidate is likely to reject offer, because he will see it as unfair. Economically it makes sense to take offer, because some salary is better than no salary. But psychology works otherwise.

 

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