The Ultimate Game Of Economics Analysis

Have you heard about the ultimate game of economics? Here’s how it goes.

A person - let’s call him proposer - is given a hundred bucks and asked to split the money with a stranger, called responder. The split doesn’t have to be equal. Proposer could split it 50-50 or he could even keep 90 for himself and offer 10 to the stranger. But the condition is that if the responder rejects the offer, none of them get any money.

If you were the responder, at what split ratio would you accept the offer?

50-50? Most people would consider that fair. But is it rational?

What if you didn’t know about the total sum involved in the deal and you’re told only about the amount that proposer offers you? Isn’t it like a free money, something that you found lying
“How dare the proposer offer less than 50 to me?”

Some would consider it fair that the proposer should keep even less than 50 for himself and offer more to the responder. That way, even if the responder is little high on the irrationality, responder’s offer is more likely to get accepted.

The Ultimate Game of economics isn’t something that I have coined myself. Wikipedia mentions -

When carried out between members of a shared social group (e.g., a village, a tribe, a nation, humanity) people offer "fair" (i.e., 50:50) splits, and offers of less than 30% are often rejected.

The Law of Higher Good

But how exactly do we define what’s fair? Here’s another hypothetical situation. I have taken this example from Prof. Sanjay Bakshi’s post -

You are in charge of running a retail store and one of your cashiers, an elderly woman, is caught committing a minor embezzlement. Fearing that she might be dismissed, she approaches you to plead forgiveness. She tells you that this is the first time she embezzled money from the company and promises that she’ll never do it again. She tells you about her sad situation, namely that her husband is very ill and that she was going to use the money to buy medicines for him. She becomes extremely emotional and your heart is melting. What do you
Let’s talk about morality and investing.

Should you invest in a business that manufactures tobacco products or even alcohol for that matter? These products are harmful to the society so isn’t it unethical to promote these businesses? But scientists have proved that even sugar is very harmful too. Should you then reject the businesses that use sugar in their products? If yes, then you’ll have to filter out almost all the businesses selling packaged foods.

It’s a very difficult question. And the answer is very subjective. Call it the investing version of the trolley problem.

Coming back to the proposer-responder game, it’s not just the ultimate game of economics but the ultimate game of life. My intention in this discussion is to nudge you to think about these paradoxes of fairness and morality in the context of your own life and the decision that you’ve made or are going to make in future.

And while you do that let me go and find that scientist who would like to play the ultimate game of economics with me. It would be a good opportunity to make few easy