Angus Hanton suggests that the younger generation may be in danger of accepting an intergenerational deal that sells them short
The “ultimatum game” is perhaps the most repeated and studied psychological experiment ever, and is a game about perceptions of fairness. It looks at what deals a totally dependent party is willing to accept – and it may have some application in thinking about the intergenerational bargain.
The “game” is about how two people share a windfall or, more specifically, how one of them offers to share the money and how the other responds.
In its simplest form a dominant player is given £10 and has to make an offer to give a proportion to the respondent. The offer is an ultimatum in that the respondent can either accept the offer, in which case the money is split in the way suggested, or he/she can reject it, in which case neither player gets any money. There is no room for negotiation.
In cases where the offer is £5 each, the offer is almost always accepted by the respondent, but the most interesting results come when the dominant player says he or she will keep the larger share and offer the respondent a smaller share.
The theoretically “rational” response is to accept the deal whatever is offered as long as it is something, but this isn’t what happens in the real world. If the share offered to the respondent is too low, it is perceived as unfair and is rejected – fairness is deeply ingrained even when objecting to unfairness results in a material cost to the objector.
Repeated versions of the ultimatum game show that when the share offered by the dominant player gets below about 30% it is very likely to be rejected.
The ultimatum game can be varied to get different results
Of course there are two sides to these studies: there is the question of how the offeror decides what to offer, but the more interesting questions are around what motivates the respondents.
In playing the ultimatum game, people from different societies respond somewhat differently – those that don’t trade much are more likely to accept very unequal shares such as 8 to 2, and in some very polite societies the offeror is inclined to offer even more than 50%!
The experiment has also been done with chimpanzees, children, and with individuals of high IQ, but the general pattern is that where less than 30% is offered it is likely to be rejected.
Another way in which the game has been varied is by having a competition to qualify as the player making the offer. In this case the offering player tends to make an offer where they keep a higher proportion, and the respondent seems to accept that they have “earned” the right to a higher share, and will usually accept a lower amount under these circumstances.
What are the parallels with the ultimatum game and the intergenerational deal?
The intergenerational bargain has some similar characteristics to the ultimatum game. One generation makes an offer to the next, which they have to decide whether to accept or reject. The older generation has the power to choose what it offers, but if its offer is rejected then both sides will lose out.
Of course the parallel is limited, but the game seems to show that offers perceived as unfair will be rejected even if that seems “irrational” on the part of the responding side.
What form that rejection might take in an intergenerational context is unclear but, unlike the ultimatum game, the generations do in theory have the potential to negotiate. In practice, with intergenerational deals the dominant “player” is also likely in due course to become somewhat dependent in future years, so an offer which is seem to be fair is all the more important to the older generation.
In the intergenerational context there are two points at which an unfair deal might be objected to: at the point when the deal is actually made or later when its consequences are clearer.
Would playing for high stakes change the result of the game?
The usual ultimatum game is for quite small amounts of money, with stakes of $10 or £10 being considered. However, it has also been played with $100 and the result at this level is very similar – i.e. the respondent will take a significant financial loss in order to avoid accepting what he/she perceives as an unfair offer.
Whether this would still apply to very large amounts is less clear. To take an extreme case, if the game was for £10 million and the offer made was £9 million would the respondent still reject the £1 million? Psychologists’ and economists’ research budgets haven’t so far stretched to an experiment with such high stakes.
The fact is that, with intergenerational issues, we are potentially dealing with very large sums indeed – trillions of pounds in the case of the national debt and pensions liabilities. This is not so much a sum being offered but a legacy, and the ultimatum game can be seen to apply to the degree to which the next generation accepts or rejects it.