Secrets of the Moneylab

It's called the Ultimatum Game. 

It's not as much fun as Doodle Jump, but it is a bit more instructional .  The rules are very simple.  There are two players.  One player, the Proposer, is provided with a sum of money, say $10.  He is instructed to offer the other player, the Responder, a portion of the money.  If the Responder accepts, they split the sum according to the portions offered.  If the Responder declines, no one receives any money.

In other words, a Responder acting as an Economic Rational Man would accept any offer, even one dollar because it is a net positive gain.

I'm guessing you already know:  it's not that simple. 

But, why do we care?

Why do we care about some academic artificially constructed "game"?  Economic science seeks to eliminate as many variables and influences as possible to distill the essence of behavior in an economic environment.  This exercise boils down economic bargaining to the basics - whether we are talking about buying a car, salary negotiations, bonuses, incentives, or splitting a piece of pie for dessert.  

I've kept you waiting long enough.  As you probably surmised, if the Respondent does not think the offer is fair to him, he will reject the offer.  The average Proposer offers a 30% split, and responders rejected about 20% of all offers.  Clearly, the Economic Rational Man would have offered a very minimal sum (under this theory one dollar would be generous), and Responders would have accepted 100% of all offers.  There is undoubtedly another factor at work here.  According to authors Chen and Krakovsky, that factor is "a motivation for fairness". 

That explains why employees can feel insulted by meager pay raises or token incentives.  Clearly, there are some very important human factors that need to be taken into account when designing and implementing any system relating to employees and pay. 

Now, would you like some of my pie?

Kay-Yut Chen and Marina Krakovsky, Secrets of the Moneylab, London: The Penguin Group, 2010