Classroom Experiment: The Ultimatum Game

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This might be a fun classroom experiment to demonstrate behavioral aspects to finance that prove how irrational we can be.  From PBS NewsHour:

Let’s play the ultimatum game. Here’s how it works: I give your friend $20. He has to share a portion of his $20 with you and can give you as much as he wants. If you accept the offer, you get that amount, and he keeps the rest. If you turn down his offer, both of you get nothing.

Let’s say he offers you $2. Would you take it?

Economics correspondent Paul Solman sat down with Richard Thaler, who’s been called the inventor of behavioral economics, to learn about the ultimatum game. And in the process, he learned quite a bit about behavioral economics. Economic theory assumes that people make rational, selfish, and mathematical economic decisions. Behavioral economics, however, acknowledges that humans aren’t always rational. Enter the ultimatum game.

Here’s an 8 minute video that you may want to show AFTER playing the game in your classroom (you might reduce the stakes to $5 and bring two students to the front of the class so everyone can see the game in action). It is an interview with Richard Thaler, generally considered the father of behavioral finance:

  • Have students note the different situations where people are less than rational when it comes to economic decision-making:

http://video.pbs.org/viralplayer/2365517540