Fairness In Game Theory

Overview | What Is Fairness? | Fairness In Game Theory | Retaliation and Reciprocity | William Baumol's Fairness Assumption | The Ultimatum Game Under Baumol's Fairness Assumption | Fairness Theory Homepage

Is it fair to assume that players are entirely self-interested?

In the neo-classical economic school of thought, the unit of analysis for economic well-being is the individual. It is assumed that this individual will make economic decisions solely for himself and seek to maximize his personal utility, rather than taking anyone else's utility into consideration. However, we must call these neo-classical assumptions into question. Can we presume that there are only selfish and self-improvement seeking individuals within the economic arena? Perhaps we should make the argument that one's personal utility is a function of others' utilities as well. Hence, this page will demonstrate that there is more involved in the analysis of economic games than simply the individual's selfish motives.

People sometimes take others' actions into consideration...

They are kind to those who act kindly towards them

They are hurtful and retaliatory towards those who are unkind

People may not only refuse to help those who are unkind, but will actually sacrifice their payoffs to hurt those who are being unfair.

The Ultimatum Game

The Ultimatum Game is a situation in which a set of individuals must decide upon the division of a fixed sum of money. The game consists of two players, the proposer, who extends an offer to the decider, who can either accept or decline that offer.

The extent to which people are willing to sacrifice their potential "material gains" to maintain fairness is dependent on the size of such gains. For instance, in a situation where the division of money is $0.90 to the proposer and $0.10 to the decider, the decider will most likely give up his share entirely to "punish" the proposer for suggesting such an unfair offer (assuming that both players receive nothing if the offer is declined). However, if the stakes had been increased from the limits of a dollar to a division of $9 million and $1 million, respectively, then the decider may be far less willing to sacrifice that amount.

Hayek's Research

Hayek conducted research dealing with the ultimatum game among several different countries with distinct cultures...

Prisoner's Dilemma versus Prisoner's Non-dilemma

Players tend to make decisions that will result in Nash equilibria / fairness equilibria. However, supposing that one player is forced to choose to cooperate, perhaps via contract, the other player will tend to completely disregard the well-being of that player and focus on his own utility. People tend to differentiate between genuine and forced behavior. No one is grateful to someone for doing something that he must.

Fairness Retailiation and Reciprocity

Reciprocity is considered distinct behavior from that which is classified as cooperative or retaliatory. Reciprocity deals with actions that are simply responses, rather than actions that will lead to future material gains.