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The Ultimatum Game: How to Make the Smartest Deal

“Let’s say you’re handed $10 and told you can split it any way you like between you and another person…” starts the Ultimatum Game. (Warning: high testosterone men are most likely to act irrationally.)  Since we consumers don’t always choose rationally, such “real life” tests are useful indicators of what we’ll actually do. They’re used by HP experiential economist Kay-Yut Chen, for example, to help price products and compensate partners. Four key takeaways from his and other experts’ work can help you make better deals:

• In the Ultimatum Game, test subjects on the receiving end routinely reject offers they find too low – even though, in so doing, they may get nothing. That means you should guard yourself against your instinctive resentment of unfair offers, recognizing that getting something is better than getting nothing.

 • In another kind of Ultimatum Game, subjects who must choose how much to give often offer more than the lowest amount. That means that asking someone to suggest how much he would charge for his un-priced product means you have good chance of get a deal, as you see it.

• Let your sales folks decide how they’ll be paid, choosing “a personal balance of fixed and variable compensation.” Try this approach on your children – let them choose how to they earn their allowance.

• Do a test first of the incentives you offer people to buy from you or to sell your products for you.

No wonder eBay, Yahoo and google now use such “real life” tests.  Chen just got a juicy deal to write a book with respected journalist Marina Krakovsky.  For more tips on how to act wisely in your own behalf read FreakonomicsIrrational ExuberanceSwayNudge and On Being Certain.  

Categories: behavior, Book, Choice and tagged , , , , , , , .
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  1. Jim
    Posted March 1, 2009 at 6:42 am | Permalink

    The ‘ high testosterone’ comment was interesting- I clicked through and read the research. In my opinion, the $5 offer is an offer to create a low-value relationship. Men with high testosterone are looking for high-value relationships; do I want to partner with someone who keeps most for themselves- NO! I can do better on my own than partnering with another person who exhibits selfishness up-front.

  2. Posted March 2, 2009 at 5:14 pm | Permalink

    I read your comment twice Jim – and it makes perfect sense to me too. Although I am not a man I can see why women and men would be smart to seek high-value relationships. Thank you!

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