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Ultimatum game – How to trade effectively

In life we are constantly making deals in ways we might not even think of. It doesn’t have to be as big as buying a house, paying off debt or some other major life event. We make deals as simple as splitting a piece of gum with someone. Traditionally, I’ve used the 50/50 split rule. It seems intuitive and fair. Growing up when I used to split a piece of gum my mom used to tell me, “you split, I pick.” This method ensured that we both had a common interest in making sure the split was as fair as possible. However, you may be able to get a little more if you don’t get to greedy.

Enter the science of what economists call the ultimatum game. In this scenario, there are two participants. One participant is given a sum of money. He or she is told that they must make an offer to the second participant. If the 2nd participant accepts the offer they can both keep the money. Remember, the 2nd participant will always be better off by accepting some offer. For example, a single penny is better than nothing. As you can imagine, the 2nd participant declines the offer at some level. What numerous studies have shown is that regardless of income level or size of offer that the 2nd participant usually declines when their share drops below 30%.

This has numerous implications for deal making and sharing of resources. As long as you can position yourself to let the other person think they are getting more than 30% of the benefit in a deal there is a good chance they will accept.

If they have the gum in the future you may want to opt for a more even split 🙂

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