1

SOSC 1000A:
BEHAVIORAL GAMES

9 November, 2018
HK University of Science and Technology
Jane Zhang
 2

Project proposal comments

• In general the proposed games that involve strategic
choice are too complicated. For groups that want to
modify a strategic game, for example the PD, make sure
to write out the payoff matrix and solve for NE of the
modified game. Everyone needs to include the NE in
the project write up. In the process of doing this,
hopefully you will see why you should make the game
less complicated. You don’t need to make any
modifications to the PD for the project – there are many
treatments other than changing the game that would
make for good experimental designs.
 3

Project proposal comments

• I’m not looking for people to come up with a new game.
I’m looking for interesting experimental treatments that
would help us understand how people behave in an
already established game. If you do modify a game,
make sure to change only one thing, so that we can
conclude that any differences in behavior in the standard
game and the modified game is due to that one thing.
• Some other groups are using the lottery game, which in
an individual choice game. These are not as complicated
to run so you can potentially test more hypotheses. The
theory part of the write up is to show that more risk averse
people will pick more choices of Option A, for example.
 4

Announcement
Each project group needs to meet with me to make sure
you are on track, read over your instructions and log sheets
and go over any problems you are having.
• Groups 1 and 2 need to meet with me after class on
Wednesday Nov 14
• Groups 3, 4 and 5 need to meet with me after class on
Friday Nov 16
• Groups 6 and 7 need to meet with me after class on
Wednesday Nov 21

There is no other exam after Exam 2, which is on Nov 30.

 5

ULTIMATUM GAME
 6

Instructions
• I have $100 for two people to split.
• Those in the left side of the room are “responders,” and
those in the right side of the room are “proposers.”
• There are 11 ways that the $100 can be divided between two
people:
$0 for the proposer, $100 for the responder
$10 for the proposer, $90 for the responder
$20 for the proposer, $80 for the responder
$30 for the proposer, $70 for the responder
$40 for the proposer, $60 for the responder
$50 for the proposer, $50 for the responder
$60 for the proposer, $40 for the responder
$70 for the proposer, $30 for the responder
$80 for the proposer, $20 for the responder
$90 for the proposer, $10 for the responder
$100 for the proposer, $0 for the responder
 7

Instructions
• The proposer must suggest one of these by circling one (and
only one) of the listed options.
• The responder must choose whether he/she would accept or
reject each of the 11 proposals.
$0 for the proposer, $100 for the responder
$10 for the proposer, $90 for the responder
$20 for the proposer, $80 for the responder
$30 for the proposer, $70 for the responder
$40 for the proposer, $60 for the responder
$50 for the proposer, $50 for the responder
$60 for the proposer, $40 for the responder
$70 for the proposer, $30 for the responder
$80 for the proposer, $20 for the responder
$90 for the proposer, $10 for the responder
$100 for the proposer, $0 for the responder
 8

Earnings
• Each of you has two sheets. Fill out both sheets the same way.
• We will collect one of them and you can keep the other.
• The proposer and responder sheets that we collect will be shuffled
and arbitrarily paired with each other.
• We will put on the screen the paired matching, the proposed amount
and whether the matched respondent accepts or rejects the offer.
 9

Earnings
• You can check on the screen the decisions of the person paired with
you to record your earnings.
• Proposers and respondents will only be identified using ID numbers,
to preserve anonymity.
• All earnings are hypothetical.
• Are there any questions?
 10

DISCUSSION
Sequential games
• So far we’ve only seen games where both players move
simultaneously.
• The centipede game is an example of a sequential game.

R r R’
A B A 2, 1
D d D’

3, 3 10, 0 1, -10
Centipede games
• Example 1: a small centipede

R r R’
A B A 2, 1
D d D’

3, 3 10, 0 1, -10

• A goes first and can choose D or R, for Down or Right.

• If A chooses D, the game stops.
• If A chooses R, then B gets a chance to play, and can also choose
down or right.
• If B chooses down in the second node, the game also stops. If B
chooses r, then A gets to choose D’ or R’.
Centipede games
• Example 1: a small centipede

R r R’
A B A 2, 1
D d D’

3, 3 10, 0 1, -10

• What is the likely outcome if both players are rational and only care about
their own payoffs?
• Starting from the last decision node, if we end up here, what will A choose?
• A will choose R’ over D’, so the game will end with payoffs of (2,1)
• Knowing this, in the second to last decision node, B will choose r over d,
so the game will end with payoffs of (2,1)
• Knowing that, in the first decision node, A will choose D over R, and the
game will end with payoffs of of (3,3)
 Centipede games
• Example 2: a longer centipede

R” r’ R r R’
A B A B A 2, 1

D’’ d’ D d D

4, 4 10, 2 3, 3 10, 0 1, -10

• What is the likely outcome if both players are rational and only care about
their own payoffs?
• This game embeds the previous small centipede, so at the 3rd decision
node A will choose D.
• So at the 2nd decision node B will choose r’, which ends in payoffs of (3,3)
• At the first decision node A will choose D’’, which ends in payoffs of (4,4)
 15

Multi-stage Bargaining
• Face-to-face negotiations typically involve a series of
offers and counter-offers.
• The ultimatum game can be transformed into a game with
many stages by letting the players take turns making
proposals about how to split an amount of money.
• Consider a game with only two stages, with a money
stake, Y, in the first stage and a lower amount, X, in the
final stage.
• For concreteness we can assume the initial stake is $15
and the final stake is $10.
 16

Multi-stage Bargaining
• If the proposed offer is accepted at any stage, then the
agreed split is implemented.
• If the proposed offer (made by Player 1) is rejected in the
first stage, then we move to the second (and final) stage,
in which Player 2 makes an offer, although the size of the
stake shrinks to $10 from $15.
• Player 1 then can reject or accept the offer that Player 2
has made. If Player 1 rejects, both players receive
nothing.
• So the final stage of this game is exactly the ultimatum
game.
 17

In-class exercise
• If both players know that they would each choose the
action with the highest payoff, even if that action
increases one’s payoff by a penny, what should the first
player do?
 18

In-class exercise (Answer)

• If both players know that they would each choose the action
with the highest payoff, even if that action increases one’s
payoff by a penny, what should the first player do?
• Player 1 knows that if they reach the final stage, Player 2 will
offer the least amount possible, 1 penny, and he will accept that
amount rather than take home nothing. And Player 2 will take
home $9.99.
• Player 1 then knows that he needs to offer something more
than $9.99 in the first stage, or Player 2 will reject and move to
the second stage.
• Therefore, Player 1 will offer $10 in the first stage, and Player 2
will take the $10 rather than play the second stage. And Player
1 will keep $5.
 19

Ultimatum game
• But how do people actually behave in the final stage?
• The ultimatum game was introduced by Guth et al (1982)
to highlight an extreme conflict between selfish, strategic
behavior and notions of fairness.
• If each person cares only about his or her own earnings,
and if more money is preferred to less, then the proposer
should be able to get away with offering a very small
amount to the responder (who should accept any positive
amount).
• Many economic situations involve a final offer from one
person to another, where rejection means no transaction
or zero earnings for both.
 20

Monopolist example
• For example, suppose that a local monopolist can
produce a unit of a commodity for $5.
• There is only one buyer, who is willing to pay any amount
up to $15.
• The surplus to be divided is therefore $10.
• Both buyer and seller knows each other’s value and cost.
• We assume the seller can make a take-it-or-leave it offer
price.
• The buyer must either accept the proposed split of the
surplus or reject the proposal, which results in zero
earnings for both parties.
 21

Monopolist example
• The monopolist, being the first mover, has a strategic
advantage.
• In theory, he/she could offer a price of $14.99, knowing
that the buyer would rather pay this price and earn $0.01
than to earn nothing.
• The $14.99 price is unfair in the sense that $9.99 of the
available $10 surplus goes to the seller.
• Even so, the buyer who only cares about final earnings
should accept any price offer below $15.00; and hence
the seller should offer $14.99.
 22

Restaurant example
• Situations come to mind in which a seller might hesitate to
exploit a strong strategic advantage.
• For example, restaurants near a university on graduation
day become very busy and dinner reservations
sometimes need to be made six months in advance.
• In principal, restaurants can allocate the scarce table
space on the basis of price.
• However, prices are generally not raised on graduation
day. (Which is why reservations need to be made so far
in advance.)
 23

Restaurant example
• A possible explanation is that an exorbitant price might be
widely discussed and reported, with a backlash that might
harm future business.
• The higher the price, the lower the cost of rejecting the
(perceived) unfair deal.
• In the monopoly example, the analogous response is that
a price of $14.99 would be rejected if the buyer is willing
to incur a one-cent cost in order to punish the seller for
charging such a price.
• In the lab, it is possible to ensure anonymity to eliminate
any considerations of reputation, so that the ultimatum
game is only about the tension between fairness
considerations and narrow self-interest.
 24

Ensminger (2004)
• Ensminger, who conducted the public goods game on the
Orma in Kenya also conducted ultimatum games with this
population.
• The Orma offer an interesting case where there is
considerable variation in the extent of integration into a
market economy, which may affect attitudes toward
fairness.
• The more nomadic Orma families raise cattle and live
largely off the milk and other cattle products, with very
little being bought or sold in any market.
• Although some nomadic families have high wealth, which
is kept in the herd, they typically have low incomes in
terms of wage payments.
 25

Ensminger (2004)
• Other Orma, in contrast, have chosen a more sedentary
lifestyle for a variety of reasons, including the
encroachment of grazing lands.
• Those who live sedentary lives in villages typically
purchase food with money income obtained through
wages or crop revenues.
• Thus exposure to a market economy is quite variable and
can be measured as direct money income.
• Such income is not highly correlated with wealth, since
some of the wealthiest are self-sufficient nomadic families
with large herds.
 26

Ensminger (2004)
• Who do you think will propose more equitable offers,
those with more exposure to a market economy or those
with less exposure?
• On the one hand, the interactions among those with less
exposure involve trust and reciprocity, whereas a market
with more anonymous arrangements may make people
more selfish.
• On the other hand, one could reason that many
bargaining situations in a market context end up with
individuals agreeing to split the difference, so that people
with more exposure to markets may make more equitable
offers.
 27

Ensminger (2004)
• Ensminger recruited at least one adult from each
household to play “fun games for real money.”
• The experiments were conducted in isolated houses.
• A grand master, who was known to all villagers, read the
instructions.
• This person would turn away to avoid seeing decisions as
they were being made.
• The amount of money to be divided between the proposer
and responder in each pair was set to be approximately
equal to a typical day’s wages (100 shillings).
• The game was only played once.
 28

Ensminger (2004)
Data for 56 bargaining pairs

• The average offer was 44%, with a clear mode at 50%.

• The lowest offer was 30%, and even these were rarely rejected.
 29

Ensminger (2004)
• If people had foreseen that the 40% would all be
accepted, then they might have lowered their offers.
• It is clear that the modal offer (of 50%) was not optimal for
the proposers in the sense of expected-payoff
maximization, given the actual rejection pattern.
• People who made the 50% offers almost always
mentioned fairness as the reason.
• However, the talk of the village was that proposers were
obsessed with the possibility that low offers would be
rejected, even though rejections were thought to be
unlikely. What alternative explanation does this suggest?
 30

Ensminger (2004)
• Since the amount bargained over is equivalent to a day’s
wage, risk aversion could be an important factor in
determining the offer amount.
• When stakes are large, proposers may be willing to offer a
higher amount in an effort to raise the probability that the
offer will be accepted.
• In the extreme version of this explanation, the proposers
only consider their own expected utility (taking into
account their perceived likelihood that their offer will be
accepted) and care nothing about fairness.
 31

Ensminger (2004)
• To measure the extent to which offers are made out of fairness
considerations, Ensminger conducted a separate game called
a dictator game, in which there was no possibility of rejection.
• In a dictator game, the proposer’s offer is automatically
implemented.
• The average offer fell from 44% in the ultimatum game to 31%
in the dictator game.
• The modal offer in the dictator game is still the equal split,
suggesting that fairness was indeed a strong motivator in the
ultimatum game.
• On the other hand, the decline of 13 percentage points implies
that ultimatum offers are made with strategic considerations.
 32

Ensminger (2004)
• Ensminger used a regression to analyze the offers made
in both the ultimatum and dictator games.
• She finds that those with more market interactions (as
measured by wage income) tend to make higher offers.
• Therefore, going back to the original research question, it
seems that the evidence supports the interpretation that
people exposed to face-to-face market transactions may
be more used to the notion of splitting the difference.
• Other individual characteristics such as age, gender
education, and wealth (in cattle equivalents) do not affect
the offer amount.
 33

Henrich et al. 2001

• A cross-cultural study involving 15 small-scale societies on five
continents found that the average offer in ultimatum games had
a wide range, from 26% to 58% of the stake.
• The societies were ranked in two dimensions: the extent of
economic cooperation and the extent of market integration.
• Both variables were found to be important in explaining the
offer amount.
• The lowest offers were observed in hunter-gatherer societies
where very little production occurred outside of family units.
• The highest offers were observed in societies where production
involved joining effort, such as whale and large game hunting
societies, where production requires assembling large groups
of men and the kills were divided afterward.
 34

Roth et al. (1991)

• Ultimatum games have been conducted in student subject
pools in many developed countries, with stakes that are usually
about $10.
• The mean offer is typically about 40% of the stake, and there
seems to be less variation than was observed in the small-
scale societies.
• Roth et al. (1991) report ultimatum game experiments that
were run in four universities, each in a different country.
• The modal offer was 0.5 in the United States and Slovenia, and
0.4 in Israel and Japan.
• The differences in behavior were lower than the differences
observed in the 15 small-scale societies, which are less
homogenous in the nature of their economic production
activities.
 35

Roth et al. (1991)

• Interestingly, rejection rates were no higher in Israel and
Japan than in the United States and Slovenia.
• The authors conjecture that people in Japan and Israel
have different cultural norms about what is an acceptable
division.
 36

Other determinants of ultimatum offer

• The offer in ultimatum games also depends on how the
game is framed and on how it is determined who gets to
be the proposer.
• When the game is framed in terms of the proposer playing
the role of a seller who chooses a take-it-or-leave-it price,
offers decline to 40% from 50%, possibly because the
context evoked posted prices in retail stores in which
people do not think about bargaining or fairness.
• When who gets to be the proposer is decided by who
scores higher on a trivia quiz, the offer fell to 30%,
presumably because people feel the proposer earned the
right to make a low offer.
 37

Group decisions
• Many business bargaining decisions are made by groups
of people (e.g. teams of managers or union officials).
• In one experiment conducted by a second year
undergraduate student, subjects were put into pairs of
individuals, pairs of three-person groups, and pairs of
seven-person groups.
• It was found that the average offer was 44% for
individuals while for groups it was 35% and 36%.
• People in the individual treatment were much more likely
to mention fairness considerations than those in group
treatments in a post experiment survey.
• There is no clear consensus, however, what is driving the
different behavior between individuals and groups.
 38

THANK YOU