Lesson 5 Activity: The Ultimatum Game

DownloadActivity 5 Guide .doc fileincluding procedures, handouts, visuals, teacher guide, and Appendix .

Virtual Lesson Variation (a MobLab Activity): Instructions and Slides

Activity Demonstration Video

Concepts

• self-interest
• markets

Content Standards

This activity addresses parts of the following content standards in economics. Note that the lesson, in and of itself, is not sufficient to guarantee student proficiency in the identified standards.

Standard 4: People respond predictably to positive and negative incentives.

• Responses to incentives are predictable because people usually pursue their self-interest.
• Acting as consumers, producers, workers, savers, investors, and citizens, people respond to incentives in order to allocate their scarce resources in ways that provide the highest possible returns to them.

Introduction

I see the [ultimatum] game as simply providing counter evidence to the general presumption that participation in a market economy (capitalism) makes a person more selfish.

— Prof. P.J. Hill, Wheaton College

In asserting that capitalism is good for the poor, even its most ardent supporters must confront the question of whether capitalism promotes material well-being at the cost of moral depravity. Jesus’s unsettling query, “Does it profit a man to gain the world if he loses his soul?” is universal – the question is asked in some form by all major religions of the world – and echoes in even the most secular manifestations of civil society. The discipline of economics and the model of Homo economicus, or economic man, is built on the fundamental assumption of self-interest. Answering the question of whether capitalism is good for the poor, then, requires that we consider self-interest.

This classroom activity simulates the Ultimatum Game, a simple 2-person experimental interaction used widely by researchers investigating the nature of self-interest. The simulation experience sets the stage for discussing whether capitalism can be “good” for the poor in an ethical and moral sense, as well as in terms of material well-being. The lesson incorporates recent research into what is sometimes called the “selfishness axiom” – that “. . . individuals seek to maximize their own material gains in . . . interactions and expect others to do the same” (Henrich, Economic Man 3), and prompts thought-provoking discussion. Finally, debriefing questions guide students in exploring the implications of the ultimatum game research for the widely-held belief that capitalism promotes uncaring, unethical, selfish behavior.

Background:

Game Theory and Experimental Economics

In addition to broadening students’ understanding of self-interest, the Ultimatum Game simulation introduces them to the emerging sub-discipline of experimental economics. A staple of experimental research, ultimatum games have produced a large body of data and analysis, spanning more than two decades. The following short summary from the Encyclopedia of Cognitive Science provides a context for the simulation.

The ultimatum game is a simple strategic situation between two people. One person, called the proposer, divides a fixed amount of money into two parts. This division is presented to the second person, termed the responder, as a ‘take it or leave it’ offer (hence the name ‘ultimatum’). The . . . [responder’s only options are to] . . . accept or reject the proposed division. If the responder accepts, then the two parties divide the money according to the proposal. If the responder rejects, then both parties receive nothing. In either case, the game ends with the responder’s decision. In most experiments, the proposer and responder . . . never learn each other’s identity. (Burnham 238-9.)

The Ultimatum Game derives from the insights of game theory, which, despite being largely overlooked by high school text writers, occupies an increasingly prominent place in economic inquiry. The roots of game theory are found in the work of mathematician John Nash, 1994 Nobel laureate in economics (whose life is chronicled in the movie A Beautiful Mind). His pioneering contribution to economics was in recognizing the importance of interactions in which the results of one person’s choices depend not only on his own behavior but also on the choices of another person. Game theory has become an essential tool of experimental economics for simulating and analyzing strategic interactions in the real world. In law and business, for example, it is used to model employer/employee or employer/union negotiations; in biology, it is a useful component of research into predator/prey relationships; and in diplomacy, it is applied to strategic planning in global political conflict and negotiation (Burnham 239). Building on game theory, experimental economics earned its own seal of recognition when Vernon Smith, the founder of the sub-discipline, received the Nobel Prize in 2002.

A search of the literature on experimental economics reveals myriad applications, from the auctioning of communications frequencies to preventing a repeat of the 2003 northeast blackout. Ultimatum games are also of great interest in anthropological studies, where they offer a fertile field of inquiry into human behavior across cultures. As we consider the ethical dimensions of capitalism’s impact on the poor, recent studies of ultimatum games in a variety of cultures offer food for thought.

See Appendix 1 for additional background on game theory and ultimatum game research. (Appendix also included in download file linked above.)

Time required:

1-2 class periods

Materials:

(All visuals, handouts, procedures, and teacher guide included in the download linked above.)

• an easily divisible reward – enough for all participants
  • The usual payout in ultimatum game experiments is cash. As this is not feasible in the classroom setting, substitute something inexpensive that students value – small pieces of candy, extra credit points, classroom bucks that can be exchanged for privileges or prizes, etc.
• 5×8 clasp envelopes, 1 per student
• sticky notes, 1 per student (If running the activity in more than one class, use a different color sticky note for each class.)
• Handout #1 – Proposal Selection Forms (enough for ½ of all participants) (p. 10)
• overhead transparencies of visuals #1-7 (pp. 10-17)

Preparation:

• Review the activity procedures. Additional background on game theory, ultimatum games, and experimental economics is provided in Appendix 1. It is not necessary to master this additional content in order to run the activity effectively. However, teachers may find it helpful preparation for debriefing the activity. See Appendix 1.
• Room set-up: Separate desks so that students cannot easily see each others’ forms. Ideally students should be back to back, in every other seat, and/or partitioned so as to create a maximum privacy effect to insure anonymity.
• Assign roles and identification codes: Randomly assign half the students to be responders and half to be proposers.
  • Prepare slips of paper (same size), each with one student’s name. Fold slips in half and place in a hat or bowl. When assigning roles, draw out half the name slips. Those students will be “proposers,” and the students whose names remain in the hat will be “responders.” (Any random method of dividing students is acceptable.)
  • Create a set of envelopes, each with an identifying code word on the inside of the flap. Put a small, blank sticky note over the code. (Clasp envelopes can be saved and reused. However, if you have several classes in a day, you may wish to use a different color sticky note for each class.)

Procedures:

1. Conduct a large group discussion, recording students’ comments as “hypotheses” to be tested by the upcoming simulation:
   • What does it mean to be self-interested?
   • How can we distinguish between behavior that is self-interested and behavior that is not?
   • Give examples of behavior in markets that is self-interested and behavior in markets that is not self-interested.

   Set hypotheses aside. Tell students they will be revisited during the activity debriefing.

   OR

2. (Alternative Option) Compose or cull from the news 3 brief examples:
   • a “selfish” exchange
   • a neutral exchange
   • a generous exchange
     • Share the examples with students. In large or small-group discussions, have students decide which of the examples best illustrates “self-interest” and why
     • Record students’ hypotheses about self-interested behavior and set aside to revisit during the debriefing.
3. Read aloud to students the following description of the activity:
   • “In this experiment each of you will be paired with another person in this room. One of you will be designated the proposer, and the other will be designated the responder. You will never be told whom you are paired with; and I will never know who the pairs are. This experimental format is called a “double-blind,” and it is designed to make you completely anonymous. You are the only person who will know what decisions you make. In double-blind experiments, participants need not worry about other people judging their actions, so they feel free to act as they truly desire to act.”
4. Distribute the pay-off envelopes and sticky notes, face down, one per student. Explain that the envelope is coded, and that in order to simulate the double-blind experimental procedure, students should keep their codes hidden from others. Instruct students to turn up the envelope flap, copy the code onto the sticky note, fold the sticky note and keep it in a pocket or notebook, close (but don’t seal) the envelope flap, and return the envelopes to you.
5. Explain the experimental set-up.
   • “For the first part of the experiment, which will take only about 3 minutes, the proposers will remain in the room, and the responders will wait silently in the hall (or another classroom or designated area). Then, you will silently switch places and the proposers will wait in the hall for about 3 minutes. When I call the proposers back into the room, we’ll discuss the experiment.”
6. Send half the students to wait silently in the hall. Quickly distribute the Proposal Selection Forms to the randomly selected “proposers” who have remained in the room.
7. Display the blank Proposal Selection Form on the overhead (visual #1). Explain the procedures to students.
   • “Do not talk to other people in the room and do not look at other people’s forms or show your form to anyone else. In this experiment, we are going to use candy for money. As the proposer, you will determine how $20 (or 20 pieces of candy) will be distributed between you and an anonymous responder. (Point out the various combinations to the students.) The money (candy) will be put into your coded envelope to be collected after the experiment. When I tell you to turn over your form, this is what you will do:”
     • Note: Use any prize that students value – candy, extra credit points, points on the next homework assignment, etc. Obviously, money provides a greater incentive. Consider setting up the experiment by telling students that 1 proposer and 1 responder will be chosen randomly at the end of the game and will actually receive the money payoff specified on their sheet. This may help to keep all students appropriately motivated.
   • “Enter the code from your sticky note at the top of the form, and then put your sticky note away. You will need to turn in your sticky note to claim your money (candy).”
   • “As the proposer, you will choose how to distribute the money (candy) on the Proposal Selection Form. Then, the form will be presented to the (anonymous) responder. The responder will look at the proposal and decide whether or not to accept. If the responder accepts, by circling ACCEPT on the form, you will each receive the amount circled in the proposal. If the responder rejects the proposal, by circling REJECT, both the responder AND you will receive nothing.”
   • “Are there any questions about what you are supposed to do?” (Restrict questions to the procedures and do not allow students to predict or speculate about outcomes or to discuss possible decisions.)
8. Instruct proposers to turn over and fill out their Proposal Selection forms and then to hand the forms to you face down.
9. When you have collected all the forms, send the proposers to the hallway and bring in the responders. Remind groups not to talk while passing.
10. Display the blank Proposal Selection Form on the overhead. Explain the procedures to the responders:
    • “Do not talk to other people in the room. When I hand you a form, leave it face down on the desk. Do not look at other people’s forms or show yours to anyone else. In this experiment, we are going to use candy for money. As the responder, you will accept or reject a proposal for the distribution of $20 (or 20 pieces of candy) between you and an anonymous proposer. (Point out the proposals to the students and explain that the second number in the proposal is the amount they will receive.) The money (candy) will be put into your coded envelope to be collected after the experiment. When I tell you to turn over the form, this is what you will do:”
    • “Write the code from your sticky note on the line for the responder’s code. Put your sticky note away; you will need it later to claim the envelope with your money (candy) in it.”
    • “Read the proposal at the top of the form. Transfer the proposal information to the bottom half of the form by filling in the blanks.”
    • “Decide whether you want to Accept or Reject the proposal. Circle your response. Turn the form over and hand it to me face down. Sit quietly until everyone is finished.”
11. When all the forms have been collected, call the proposers back into the room to begin the debriefing. Remind them that you will deliver the pay-offs in the envelopes, which they may claim only with their sticky notes. (Note: During this time, have an assistant – preferably an adult or a student assistant who isn’t in the class – place the payoffs in the envelopes. Alternate ways to accomplish this: Distribute an individual assignment. While students are reading, sort the forms and enter the pay-offs in the coded envelopes. Note that the size of a candy pay-off may be easily observable if the candy is sealed in the envelopes. If you wish to keep the level of anonymity high for the debriefing, envelopes may contain coupons or IOUs to be exchanged for candy later. Or Schedule the activity so that the class period ends shortly after the completed forms have been collected and students’ predictions have been recorded. Prepare the payoff envelopes before the next class meeting.)
12. Spread the envelopes on the desk in rows, so that the coded flap is facing up. Allow students to come up, one at a time or by rows, to claim their envelopes. They must turn in their sticky notes to claim their envelopes. (Determine the best time for making the pay-offs. Some student groups pay more attention to the discussion if they have not already received the pay-offs. In other cases, distributing the pay-offs sparks more enthusiasm and thoughtfulness in the debriefing.) (Materials conservation note: Remind students to return the envelopes after they have opened them, so that you won’t have to buy more next time you run the activity.)
13. Display visual # 2. Explain to students that they have just participated in an experiment called “The Ultimatum Game,” in which the proposer gave an ultimatum, and the responder’s only alternatives were to “accept” or “reject” the ultimatum. This game is based on game theory and is an important component of a new field of economic research called Experimental Economics. Additional background:
    • Experiments were first run on college campuses, but have since been used in both developed and developing countries throughout the world.
    • Any student on campus could sign up for the experiment, just as if he or she were signing up for a temporary job. Students were not in the research professor’s economics class, nor did their participation in the experiment have anything to do with their studies.
    • The payoffs in the game were in actual dollars; students knew that they would be given cash payments at the end of the experiment.
    • Most experiments were conducted in a computer lab, with computers matching the responders and proposers and collecting the information on proposal offers and acceptances. The use of computers tended to strengthen the anonymity of the double-blind format.
14. Discussion questions:
    • Predict the outcome of ultimatum games: What do you think is the most common proposal? What types of proposals are most commonly accepted? Rejected? Give reasons for your predictions. (Record and project students’ predictions on the overhead transparency, visual #3. Solicit answers both from students who made the common prediction and from those whose predictions differed from most.)
    • Proposers: How do you think people decide which proposal to circle? (Remind students that they need not reveal their actual offer, nor should they reveal their codes.(Allow several proposers to explain their thinking during the experiment. Point out any common themes that emerge from the descriptions. Anticipate that there will be comments about what seemed “fair” or “right” to do.)
    • Responders: How do you think people decide whether to accept or reject a proposal? (Again remind students that they need not compromise their anonymity. Allow several responders to explain their thinking. Point out any common threads. For example, it is common to hear that whatever was offered was better than nothing, and to hear that $1 was such a small amount to lose that it was worth losing it to punish the proposer who planned to keep the other $19.)
      • What does the model predict about the behavior of proposers? In other words, what offers will proposers make and why? .)
      • What does the economic model predict about the actions of responders in the experiment? Why?
      • Based on the economic model, will any offers be rejected? Explain why or why not. (No. The model predicts that the responder will always accept offers because any amount offered is better than $0, which is what he gets if he circles REJECT.)
      • Does your class prediction differ from the prediction of the economic model? Did the class results differ? How do you explain the differences? (It is likely that students’ predictions, based on their own experiences, will be very different from the economic model. Students tend to predict more equitable splits, 10/10 and 12/8; they also tend to predict rejection of more inequitable splits. Expect to hear many comments about “fairness.”
15. Display visual #4 with the results of large numbers of ultimatum games.
16. Discussion questions:
    • Do you find the results of ultimatum game experiments surprising? Why or why not? (Certainly the results are not what the theory of Homo Economicus predicts, and in that light, they may be surprising. However, having participated in the activity themselves, students may perceive the results as predictable.)
    • Do the results of ultimatum games undermine the assumption of economics that people act in their self-interest?
    • How is it possible to argue that proposers who offer 10/10 and 19/1 splits are both acting in their self-interest?
    • How is it possible to argue that a responder who rejects a split (and therefore ends up with nothing) is acting in his or her self-interest?
    • (Display the “hypotheses” from procedures 1 or 2.) Having participated in the ultimatum game, are you still satisfied with your pre-game hypotheses?
    • Are the results of ultimatum games consistent with a prediction that participants will behave selfishly?
17.  Display visual #5. Read aloud. Are the results of ultimatum games consistent with Paul Heyne’s conception of self-interest? According to Heyne, why is it meaningless to criticize proposers for being selfish if they offer highly unequal splits? (Heyne’s comment reminds us that money is a means to an end – and it is the character of the individual that determines the ends. Since we often do not know what people do with their money, we should be cautious about attributing selfish motives to others. Students often condemn proposers who offer highly unequal splits as being selfishly “motivated by money.” Heyne’s quote cautions them about making assumptions about other people’s character. None of them really knows what proposers will do with the money.)
    • How are sellers and buyers in markets analogous to proposers and responders in the experiment? li>
18. Display visual #6 and explain to students the results of more current cross-cultural ultimatum game experiments.
19. Display visual #7. Assign for homework or in-class, written reflection.) Suppose that someone argued to you that capitalism is not good for the poor because it makes people greedy and selfish and encourages them to ignore others and think only of themselves. How could you use the results of ultimatum game experiments to counter than argument? (The results suggest that people do not always act selfishly, that people’s definition of self-interest is not narrowly material and includes consideration of their ties to other people. While they don’t assert that capitalism changes people’s character for better or for worse, ultimatum games do demonstrate that people’s behavior routinely takes others into account.)

 Appendix 1:  Teacher Background to Ultimatum Game Experiments