Tuesday, June 30, 2009

Irrational Markets: People Reject Free Money Out of Anger

The basic rules of the Ultimatum Game are simple. One person is given a stack of cash, and told to divide it between themselves and a second party. That second party is then given the chance to accept or reject the offer; if it's rejected, neither of them get any money. Clearly, any of this free money should be better than nothing, so under assumptions of strictly rational behavior, you might expect all offers to be accepted.

They're not. Things in the neighborhood of a 50/50 split are accepted, but as the proportions shift to where the person issuing the ultimatum tries to keep seventy percent of the total, rejections increase. By the time they hit an 80/20 split, nearly 70 percent of the offers are rejected, even though that 20 percent of the total cash would leave the recipient better off than where they started.

http://arstechnica.com/science/news/2009/06/irrational-markets-people-reject-free-money-out-of-anger.ars