Ultimatum game

As behavioural science specialists, we answer business challenges through a range of behavioural science technologies and expertise that enable us to understand and impact human behaviour.

As part of that, we find it vital to delve into the world of academia and behavioural science in order to derive, from a variety of articles, reports and books, the implications of theories and experiments on brands. The Ultimatum Game is one of the many behavioural science experiments that can guide our thinking and that we have explored, analysed and dissected from our deep-dive into academic journals, literature reviews and research experiments.

Let’s put this experiment in to context first. Imagine someone gives you £100 and proposes an ultimatum: “you can keep the money, but only if you share that sum with the person next to you’’. In a nutshell, you (the proposer) are told to offer another person (the receiver) a share of the £100. You are also both told that if the receiver rejects your offer, neither of you get anything. Under the traditional view of economics, which is frequently reinforced by businesses, the proposer would be expected to follow a logical thought-process centered on maximising their own share. Indeed, under the traditional economists’ view, a rational person would naturally offer the smallest sum possible to the other party in order to get the most out of this transaction. They would also expect the other party to think this through logically and accept any sum, no matter how small, because it’s better than no economic gain.

However, in all of the numerous ultimatum game experiments conducted over the years, the experiment has refuted, at every instance, the above economic self-interest theory reinforced by economics theorists. Indeed, the ultimatum game has widely contributed in proving that humans are instead economically irrational and that the decision isn’t based on maximising a selfish monetary reward but rather, people adopt an impulsive and intuitive behaviour that is filled with deeply rooted psychological elements. Indeed, in the ultimatum game, instead of maximising their economic gain, proposers offered what they instinctively believed would be accepted by the other party, even if it meant shrinking their own material gain. The behavioural concept of loss aversion comes into play here: As people tend to be reluctant to lose what they feel like they already own, they would rather offer a fair split to avoid incurring a loss. Hence, on average, most proposers typically offered as high as 40-50% of a sum in experiments, rather than maximising gains.

Similarly, an identical economically irrational phenomenon occurred with receivers as experiments show that most offers below 20% of the total sum were typically rejected. When proposed with an unjust split, receivers preferred settling for no amount instead of making the rational choice of accepting any financial gain. These rejections stemmed as a consequence of their ego being hurt from unfair offers and subsequently, a loss of self-control that prompted them to mechanically reject the amount. There was also a deeply rooted desire within participants who rejected amounts to punish the respective proposers for ridiculous splits and, this way, teach them a lesson about fairness and values. Receivers perceived punishing someone for diminishing their reputation as a greater gain (psychological benefit) and of greater pleasure than what incurring a small material benefit would have been.

Similar to many experiments that we explore and dissect on a daily basis, this behavioural science experiment provides great insights into the human psyche and adds tremendous value to brands. The actions incurred during the Ultimatum Game experiments demonstrate that consumers are not rational in their decision making and therefore, applying this to consumer-brand relationships, it demonstrates that many psychological factors surpass a ‘good price’, i.e. a ‘material benefit’. Indeed, seeing as the traditional view of economics is often reinforced by businesses, the pre-conceived opinions about consumers and their motivations should instead be replaced by a more disruptive business approach which empowers a strong understanding of human nature and social interactions; an approach that reinforces that a consumer’s view of a fair transaction goes beyond the price offered.

Lea Karam - Associate Consultant

Author:Lea Karam - Associate Consultant

Lea Karam is a strategic marketer that adopted a core focus on consumer behaviour and strategy as a result of being drawn to behavioural science and out-of-the-box thinking. A curious brand scientist that strives on purpose, innovation and exciting challenge, she had previously worked as a Strategist in Dubai after which completed a Master’s of Science in Strategic Marketing at Imperial College London, where she graduated in the top 10% of her competitive program.