Testing Rationality in Ultimatum Games

Abstract

All economic theories are based on a very vital assumption that all economic agents participating in any activity behave rationally. The game theoretic prediction states that agents will accept any positive payoff over zero but there is a contradiction between groups and individuals. This arises the question; whether groups are more rational or individuals? In order to test this hypothesis, we conducted a two-person sequential ultimatum bargaining game, by exposing the participants to the element of risk. The results show that, groups are more rational as compared to individuals, as they demand more but are willing to settle for less. Also, groups are risk averse and they learn faster as they converge to the 50-50 equal split.