The rules of the game
Last week’s ‘Take It or Leave It” article gave Jazz readers a chance to negotiate how to divide $100 between you and a bot. I hope you had a chance play. (The link to activate the game is still open here. Either way, here’s a quick summary of the exercise.
Two utter strangers, Allocator and Recipient, with limited ability to communicate, are tasked with having to divide $100 between them. The Allocator states a split (really an ultimatum) to the Recipient). The Recipient can only Accept the offer or Refuse it. If he or she refuses, both parties get nothing.
Behavioral economists, psychologists, and social scientists have long studied different versions of the game. Their fascination lies in the fact that most people disregard its basic logic. In a narrow sense, people are “irrational,” though many of us would agree with their decision-making.
Here’s the strict economic analysis (which is incomplete in my view):
Since the parties are strangers, Allocators should seek to maximize their own payoff.
To achieve that goal, the Allocator must win the Recipient’s approval of the proposed split. (Otherwise, both parties get zero).
Supposedly, that should be easy to do, since it would be "irrational" for a Recipient to refuse any positive number (as one dollar—or even a single penny—is better than nothing.
Extensive research, however, shows that few Recipients are willing to accept a minimal amount. Typically, they demand 25 or 30 percent of the stakes.. Some Recipients are willing to live with much less; a few others demand an even 50/50 split.
The fact is that most people care about more than just money. They want to be treated fairly. If a large pie is being divided, they don’t want mere crumbs. They reject one-sided deals out of pride and self-respect.
Plus, there’s the vengeance factor. The person who insists on receiving $30 and thus rejects an offer of $20 loses that money, of course, but has pleasure of inflicting an even greater loss on the Allocator who proposed that one-sided split.
Allocators who are solely concerned with maximizing their own financial payoff still should take into account the thinking of their counterpart. Not out of generosity, but simply to increase the odds of having their offer accepted. This involves weighing tradeoffs. On the one hand, the more that the Allocator offers, the greater chance the Recipient will accept it. But on the other, the more that Allocators offer, the less there is left for themselves.
Striking the right balance is hard. Not all Recipients think the same way. A split that would be accepted by one person could be rejected by someone else. Allocators willing to gamble might make an aggressive demand in hopes of a big payoff. On the other hand, an Allocator facing a lot of overdue bills might be more cautious to reduce the risk of ending up empty-handed.1
Strategy
Countless articles have been written about the Ultimatum Game over the years. Key findings include that:
Varying the amount of the stakes have little effect on how people play. They care about fairness regardless of the amount being divided or the role that they are assigned
Multi-round versions of the game call for different strategy. If each party knows that there will be future rounds, they should consider both their immediate payoff and longer-term consequences. A Recipient might veto reasonable proposals in the early rounds in attempt to force the Allocator to be more generous later. At the same time, of course, the Allocator may try to signal their resolve by making meager offers.
Anonymity. Allocators are less generous (and Recipients less demanding) when they don’t know with whom they are dealing. Seeing someone in person may evoke more empathy on the Allocator’s part.
Those results, taken as whole, have implications for all types of negotiations:
Research confirms that fairness is a concern of many negotiators, though people vary widely with respect to what they think is fair.
Perceptions determine feelings about fairness more than reality. Your counterpart may reject a reasonable offer, erroneously believing that you could provide much more, even if that’s not the case.
Think about fairness strategically when preparing for and conducting a negotiation. The operative question isn’t how others should react to your offers; rather, it’s the variety of ways that they might.
All this relates to responding to ultimatums. Harvard Business School Professor Deepak Malhotra offers some practical advice in his book, Negotiating the Impossible. "Ignore ultimatums," he says. "The more attention you give them, the harder it will be for the other side to back down if the situation changes."
When someone states, "That’s my best offer," or "It’s against company policy," the natural impulse may be to ask why, seek an exception, or challenge the assertion itself. But it's often smarter to let the remark pass without comment. Your counterpart may have spoken in haste or may be bluffing. If you’re patient, they may soften their position—provided you haven't reinforced it.
The worst thing to do is to rise to the bait. Don't ask if they really mean what they said. If people have painted themselves into a corner, why hand them another brush and bucket?
Housekeeping
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Be well, Mike
It may seem as the Allocator has more leverage, as he or she gets to define the terms, but there’s a solid argument that Recipient is just as powerful as he or she can veto the deal. See the “Split the Pie” article posted here earlier this month.