The Metagame #011: Playing The Ultimatum Game

Here’s what’s in store for today:

• The Ultimatum Game

• Auctions

Read time: 5 minutes

Imagine this:

I give you $1000 and tell you to split it with a stranger. You can give them $999. You can give them $500. You can give them $250. You can even give them a measly $1.

The catch?

If they reject your offer, neither of you get any money.

So—how much do you give them?

This classic game theory scenario is known as the Ultimatum Game, and studying it has led to some pretty surprising truths about human behavior, fairness, and strategic thinking.

Most people would say a $500/$500 split is the most fair outcome.

But what if I offer you $499, and I get to keep $501?

Surely you’d still accept this offer.

What if I offered you $490? Would you still accept?

How about $475? $400?

How does $250 sound?

What if I only offered you $10?

At what point does the unfairness of the split make you reject the offer?

There have been lots of studies on the Ultimatum Game since it was introduced in 1982.

It turns out, most offers that get accepted are between 40-50% of the total amount.

Anything below 20% had a high chance of being rejected.

So why would people reject free money?

In game theory, we like to talk about “utility.”

Generally, something with “positive utility” is a “good move”, and something with “negative utility” is a “bad move”.

(An oversimplification, but for the purposes of what I’m talking about, it’s enough.)

For example: in chess, if you can successfully capture the opponent’s queen, this is probably a move with “positive utility” (unless they’re setting you up for a trap…)

Utility is basically a way to quantify the results of different outcomes.

A normal person would expect the utility of the Ultimatum Game to be equal to the dollar amount you get after the split.

If this is the case—when I offer you $10 (keeping $990 for myself), you’re guaranteed money if you accept (positive utility), and get nothing if you reject (negative utility).

So why do we act irrationally and decline an offer of guaranteed money?

The reality of the Ultimatum Game is that it’s more than just a dollar amount.

There’s an emotion-driven response that changes our behavior.

Humans are social creatures, and the concept of “fairness” is deeply ingrained in our psyche.

When faced with an offer that feels unjust—even if it means getting free money—we might choose to reject it purely on principle. This reaction isn't about the dollars and cents; it's about sending a message.

Short story long: game theory is great and all—but understand that humans act on their emotions (even when their actions are irrational), which can lead to unexpected outcomes.

This applies to poker, game theory scenarios, and even things like job interviews and salary negotiations.

Food for thought: if you were in the Ultimatum Game, how much would you offer? At what point would you reject another offer?

Auctions

The Ultimatum Game is just one example of how auction and game theory principles shape our world.

There’s actually a lot more to auctions than a fast speaker selling a $45 million Stegosaurus skeleton named Apex.

(Yes, that really happened back in July of this year.)

Auctions are types of negotiations, and learning negotiation strategies will completely change the way you live.

There are several different types of auctions—here are three of the most popular:

1. English Auction

   This is your typical ascending bid auction. Prices start low and go up as people bid.

2. Dutch Auction

   This is the opposite of the English Auction. Prices start high, and come down as people make lower offers.

3. Sealed-bid Auction

   This is where everyone submits their bids without seeing the other bids.

While these types of auctions have their uses in, well, your typical auction houses, we find them in so many other scenarios:

• Home buying is a form of English Auction—when a popular home in a nice neighborhood goes on the market, buyers will keep trying to one-up each other in a bidding war to buy the property. In most cases, the top bidder will close the deal.

• Seasonal clothing sales are a form of Dutch Auction—stores need to clear out inventory at the end of the season, which is why prices keep coming down the longer a certain item goes unsold. As a buyer, you could wait until the prices drop even further, but you run the risk of the item selling out.

• Job applications are a form of Sealed-bid Auction—you apply without seeing anyone else’s application. Your goal is to show off your skills and submit a better “bid” than other applicants without seeing what everyone else did.

Successful auctions rely on three things:

1. Knowing your worth—how you value yourself and your needs will change how you bid.

2. Having strategic timing—Knowing when to bid is just as important as how much you bid.

3. Gathering as much information as you can—if you know something another bidder doesn’t, you have a huge advantage.

When you understand the different types of auctions, you start to see them come up more and more in your everyday life.

The next time you find yourself in an auction-like situation, try to remember these tactics.

They might just give you that edge you need to succeed.

Quote of the week

Thanks for reading!

If you have any questions, hit me up on LinkedIn or on 𝕏 at @sam_starkman, or feel free to reply to this email!

— Sam