Hypothetical: $100 Game (1 Viewer)

[drz-400]

You agree with another person to play a game where one of you could win up to $100. Before you play you learn the rules. The rules are:

The game begins with a coin toss

The coin toss decides each players roles of either player A or B

Player A proposes the division of the $100.

Player B then decides whether to agree or not to the proposal

If player B agrees, the two players get the agreed upon amount. if player B disagrees, neither player recieves anything.

If you are player A what would be your proposal?

Please choose which you feel is the best response, since I cannot include 101 options

This was from Greg Mankiws textbook microeconomics, but I was interested for myself what people thought.

Edit: In this game each player is a volunteer, its not their money to begin with so they just decide how it is split up.

 

[roguenuke]

Where does the $100 come from?

I'd split $50/$50, but I still want to know where the money is from.

 

[RightinNYC]

Just off-hand, I feel like $70 is a good number for maximizing total expected return.

 

[drz-400]

Where does the $100 come from?

I'd split $50/$50, but I still want to know where the money is from.

For this poll lets say you are volunteers so its not either players money.

Yes, it would be the greatest game on the planet.

 

[CaptainCourtesy]

If we are dealing in pure economics, then $99 to me and $1 to player B is the correct answer: both people turn out ahead and I, having the control would want to maximize my take. However, if we bring human psychology into it, it would depend on the personalities of the players. Probably a $50/$50 split would work most often.

 

[rathi]

I'd chose a sure $50 over risking them screwing you of out spite for not splitting the money. You might be able to get more, but that is highly dependent on the culture and wealth of the other player.

 

[Harry Guerrilla]

The greatest probability of mutual agreement would most likely come from a 50/50 split.
Potentially working with a 60/40 or 70/30 split in my favor but for the sake of quick agreement 50/50 works out best.

 

[Kandahar]

Traditional "efficient market" economics will tell you to split it $99/$1 in your favor...but in practice that doesn't work because people are NOT rational actors, and are more than willing to waste their own money in order to screw you over. If I'm not allowed to know anything about the other person ahead of time, such as their nationality/culture/gender, then I would probably split it about $50/$50. But if I know that the experimenter is pulling other people from, say, the United States, then I'm much more likely to split it about $65/$35 in my favor.

 

[Black Dog]

50/50 is more than fair.

Of course if B refuses, I kick him in the nuts. If I am B and A offers less, I kick him in the nuts.

So in conclusion if I get nothing, someone gets kicked in the nuts.

 

[Harry Guerrilla]

If we are dealing in pure economics, then $99 to me and $1 to player B is the correct answer: both people turn out ahead and I, having the control would want to maximize my take. However, if we bring human psychology into it, it would depend on the personalities of the players. Probably a $50/$50 split would work most often.

Traditional "efficient market" economics will tell you to split it $99/$1 in your favor...but in practice that doesn't work because people are NOT rational actors, and are more than willing to waste their own money in order to screw you over. If I'm not allowed to know anything about the other person ahead of time, such as their nationality/culture/gender, then I would probably split it about $50/$50. But if I know that the experimenter is pulling other people from, say, the United States, then I'm much more likely to split it about $65/$35 in my favor.

Both of your rational greatly confuses me.

Economics has to account for psychology otherwise, you remove the key ingredient of what economics is about.

 

[Real Korimyr #9]

If we are dealing in pure economics, then $99 to me and $1 to player B is the correct answer: both people turn out ahead and I, having the control would want to maximize my take.

Only if you're playing the game once. If you're playing multiple times with multiple people, establishing a reputation for "fairness" will lead to you getting more favorable decisions more often.

If you put two spider monkeys in cages where they can see each other and feed one apples and the other cucumbers, the one getting cucumbers will refuse to eat. Do the same thing with chimpanzees, and both will refuse.

 

[Kandahar]

Both of your rational greatly confuses me.

Economics has to account for psychology otherwise, you remove the key ingredient of what economics is about.

Traditional economics often assumes that people will behave rationally to maximize their expected value...which isn't always true. Behavioral economics does indeed take psychology into account.

 

[Harry Guerrilla]

Traditional economics often assumes that people will behave rationally to maximize their expected value...which isn't always true. Behavioral economics does indeed take psychology into account.

What are you defining traditional as?

CC says "pure" which I think is incorrect because in order for it to be pure, you would have to always include psychology.

 

[Panache]

Traditional economics often assumes that people will behave rationally to maximize their expected value...which isn't always true. Behavioral economics does indeed take psychology into account.

The problem isn't assuming that people will behave rationally to maximize their expected value, as in this case, they are. The real problem with traditional economics is that they assume people are a frictionless uniform sphere that exists only for the duration of the immediate mental exercise.

If someone offered me a $99/$1 split, I would decline, and consider it perfectly rational. The seemingly irrational willingness to take a loss in order to produce a greater loss for an adversary is actually a perfectly rational response with more long term benefits. The most obvious example is that player A must consider the possibility that I will accept a loss out of spite when determining the split, and so must provide greater incentive. In order for that implied threat to carry any weight, I must make good on the threat every now and then.

 

[Kandahar]

What are you defining traditional as?

The Paul Samuelson / Eugene Fama model of economics commonly taught in universities since the 1970s. The idea that people are value-maximizing agents, behave rationally (at least in the aggregate) when money is on the line, and that markets are efficient.

CC says "pure" which I think is incorrect because in order for it to be pure, you would have to always include psychology.

I would agree...it isn't really pure, it's just the traditional approach to economics. Behavioral economics has been gaining a lot of momentum in recent years, and it looks like it stands a very good chance of being the first major shift in economic thinking of the 21st century.

 

[Kandahar]

The problem isn't assuming that people will behave rationally to maximize their expected value, as in this case, they are. The real problem with traditional economics is that they assume people are a frictionless uniform sphere that exists only for the duration of the immediate mental exercise.

If someone offered me a $99/$1 split, I would decline, and consider it perfectly rational. The seemingly irrational willingness to take a loss in order to produce a greater loss for an adversary is actually a perfectly rational response with more long term benefits. The most obvious example is that player A must consider the possibility that I will accept a loss out of spite when determining the split, and so must provide greater incentive. In order for that implied threat to carry any weight, I must make good on the threat every now and then.

I think you're assuming things about the scenario that aren't there. Since the scenario doesn't say otherwise, I made the fewest assumptions possible: Specifically, I didn't assume that I'd had any contact with Player B before, and I didn't assume that I'd be playing this game again with Player B in the future. Obviously if it's a repeating game instead of a one-shot game, then the rules change a little bit.

 

[Wiseone]

I think the answer lies somewhere in personality. Some people will see the perfectly logical answer, assuming they are not competitors, and take 1$ if they B and propose 100$ if they are A. Others I think will view anything less than 50/50 as an insult and perhaps a violation of social norms, and thus refuse anything but 50/50. Some people may even see 100/0 as a perfectly fine solution, as while B gets nothing they certainly aren't damaged in any fashion. So even if they see A as greedy they have nothing to gain from A getting nothing either.

Are the two players allowed to debate and haggle over the division? Or does A simply state one proposal and B accepts or declines and then the game is over? I would think the majority of A players in a "one-proposal" game would go with 50/50 to ensure 100% that they get something, some who perhaps are cleverer or riskier may decide to make a more favorable offer to themselves and see if B is smart enough or admit to explain how he gains nothing by declining. If the players were allowed to debate I'd imagine you'd see more attempts on the part of A to get more than 50/50.

 

[Harry Guerrilla]

The Paul Samuelson / Eugene Fama model of economics commonly taught in universities since the 1970s. The idea that people are value-maximizing agents, behave rationally (at least in the aggregate) when money is on the line, and that markets are efficient.

The Chicago school?

If they would adopt it as a general axiom instead of a strict rule, they would be heading in the right direction.

I would agree...it isn't really pure, it's just the traditional approach to economics. Behavioral economics has been gaining a lot of momentum in recent years, and it looks like it stands a very good chance of being the first major shift in economic thinking of the 21st century.

I don't understand how people could even theorize about economics without considering behavior, especially trained professors.

 

[Kandahar]

The Chicago school?

No. Milton Friedman and the monetarists were a part of standard economics, but I wasn't referring specifically to them. Most of the Keynesians fall under the standard economics banner as well, as do the supply-siders.

If they would adopt it as a general axiom instead of a strict rule, they would be heading in the right direction.

I think there are far too many examples of people behaving irrationally, even in the aggregate, for this to be a general axiom. At most, I might accept the idea that aggregations of people are better than individual experts in certain key areas of economics, like stock pricing...but even that is questionable IMO.

I don't understand how people could even theorize about economics without considering behavior, especially trained professors.

It's amazing how people will contort reality to match their mathematical theories, rather than designing theories to match reality.

 

[Panache]

I think you're assuming things about the scenario that aren't there. Since the scenario doesn't say otherwise, I made the fewest assumptions possible: Specifically, I didn't assume that I'd had any contact with Player B before, and I didn't assume that I'd be playing this game again with Player B in the future. Obviously if it's a repeating game instead of a one-shot game, then the rules change a little bit.

All I am assuming is the the players are human. Since there is a strong potential for player B to turn down $1 out of spite, even if you only play once, and you have had no prior contact with player B, you have to offer him more than you would if you knew that he would act so called "rationally."

If everyone acted "rationally" you could just offer him $1 and keep $99 for yourself.

It seems to me then that being an "irrational" creature is more likely to maximize your expected value than being a "rational" creature, since the "rational" creature would only get $1 and the "irrational" creature gets substantially more. Accordingly it seems more rational to me to be the "irrational" creature.

 

[Kandahar]

All I am assuming is the the players are human. Since there is a strong potential for player B to turn down $1 out of spite, even if you only play once, and you have had no prior contact with player B, you have to offer him more than you would if you knew that he would act so called "rationally."

If everyone acted "rationally" you could just offer him $1 and keep $99 for yourself.

It seems to me then that being an "irrational" creature is more likely to maximize your expected value than being a "rational" creature, since the "rational" creature would only get $1 and the "irrational" creature gets substantially more. Accordingly it seems more rational to me to be the "irrational" creature.

I completely agree that it's rational for Player A to offer more than $1 to the other player; it's rational to assume the other player's irrationality. I just disagree with your assertion that if you were Player B, that it would be economically rational to decline $1. That's not the case unless you're going to be interacting with this person again in the future, which the scenario did not indicate.

 

[Harry Guerrilla]

No. Milton Friedman and the monetarists were a part of standard economics, but I wasn't referring specifically to them. Most of the Keynesians fall under the standard economics banner as well, as do the supply-siders.

Got yea, they sound like a fringe element.
To me, anyone who thinks than an economy, could be completely mathematically efficient, would be crazy.

I think there are far too many examples of people behaving irrationally, even in the aggregate, for this to be a general axiom. At most, I might accept the idea that aggregations of people are better than individual experts in certain key areas of economics, like stock pricing...but even that is questionable IMO.

In strict terms of dollars and cents, I believe you're right.
Thinking in terms of the personal value of non physical things, like emotions, I believe people to generally be rational in their actions.

It's amazing how people will contort reality to match their mathematical theories, rather than designing theories to match reality.

That's terrible from a learning standpoint, they sound very close minded.
I've came to the conclusion, that perfection in an economy is the imperfections of people.

 

[Panache]

I completely agree that it's rational for Player A to offer more than $1 to the other player; it's rational to assume the other player's irrationality. I just disagree with your assertion that if you were Player B, that it would be economically rational to decline $1. That's not the case unless you're going to be interacting with this person again in the future, which the scenario did not indicate.

You don't need to interact with them again for it to be rational, you just have to assume that neither of you exist in a vacuum. If they tell their friend, who in turn tells another friend, who observed the same phenomena from someone else who acted similarly "irrationally" then it makes the possibility of an "irrational" refusal an issue for Player A to consider. If none of the players B ever refuse the money out of spite, then it would be irrational for player A to plan for such. The only thing that makes it rational to assume that player B will behave "irrationally" is the fact that they are a member of a group that has a history of behaving "irrationally".

Given that the "irrational" behavior of the group has led to a much higher gain compared to a group that always behaved "rationally," the "irrational" behavior seems to only be irrational in the short term, but more rational in the long term.

 

[Zyphlin]

I think the point he's making Panache that, in regards to the game and the information provided, you are essentially in a vacuum

 

[Infinite Chaos]

50/50 is more than fair.

Of course if B refuses, I kick him in the nuts. If I am B and A offers less, I kick him in the nuts.

So in conclusion if I get nothing, someone gets kicked in the nuts.

I certainly wouldn't agree to be player "B" for any of you lot - and it looks like Blackdog is itching to kick anybody in the nuts but he's made the best offer (excluding physical violence).

I don't know much about economics but I'd go for the most profitable amount (to me) least likely to get a rejection from Player B whereby we'd both lose.