When would you turn down free money?

People will turn down free money if they think the deal is unfair.

The ultimatum game is a simple game which shows this.

The first player is given £100. They then choose to give a proportion of that money to the second player. The second player can then accept or reject the money. If they accept then both players get the split of the money that was offered, if they reject the offer then both players get nothing.

For example: Dave is given £100, he offers Bob £20. If Bob accepts he will get the £20 and Dave will keep £80. If Bob rejects the offer then both of them get nothing.

If you believe that everyone is perfectly rational, which is the traditional assumption in economics, then Bob will accept any offer at all, even £1, because this will make him better off than rejecting it. He won’t be bothered that Dave is keeping £99 and only making him a tiny offer.

This doesn’t happen in reality. People have an inherent sense of fairness and if they think that an offer is not fair then they will reject it, even though they are turning down free money.

Interestingly, different results are observed in different countries.

In countries where there is a high level of respect for authority the offers made will tend to be lower. Players assume that the other player will respect their authority as that is the norm in their country. An experiment in Peru, where there is a high level of respect for authority, showed average offers of just 26% of the money. The average is US experiments is about 40%.

Acceptance of an offer also varies by country. In the Peruvian experiment it took an offer as low as 5% for it to be rejected. In France offers less than 30% of the money tended to be rejected.

Think about this in terms of how to manage an organization. People expect that the rewards of a venture will be split on a reasonably equitable basis and if they feel that they aren’t then they will be dissatisfied.

Today’s takeaway: Fairness matters

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