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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 756837  
Subject: Re: Welfare Queenie: Olga From Greece Date: 1/27/2013 11:58 PM
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This may be a clearer explantion of the game called Ultimatum, also known as Nash Equilibrium after John Nash, subject of the movie, "A Beautiful Mind."

You're standing on the sidewalk with a friend, minding your own business, when a man approaches with a proposition. He offers you $20 in $1 bills and says you can keep the money under one condition: You must share with your friend. You can offer as much or as little as you like, but if your friend rejects your offer, neither of you can keep any of the money. What do you do?

Now you've got the $20 in your hand and your friend watches you expectantly. Will you low ball your friend? Will you split the money evenly? Will you be generous?

Under a strictly utilitarian view of economics, you would give your friend the lowest possible amount. In this case, you've got twenty $1 bills, so you would give your friend a dollar. Since it's found money, your friend should accept the dollar. Your friend might call you cheap, or perhaps offer a bit of gratitude drizzled generously with sarcasm but, hey, at least he got a dollar out of it. (Personally, I would split the money evenly with my friend on the premise that it was only chance that I was given the $20 and not her.)

The thing is, this strictly utilitarian view doesn't translate to how people actually behave when faced with this decision. In experiments based on the Ultimatum game, test subjects on the receiving end routinely reject offers they perceive to be too low. In other experiments, subjects who must choose how much to give often offer more than the lowest amount.

In the real world, if the money was extended to me and the other person was a stranger, I would give the stranger the lowest amount I perceived he would accept.
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