1. Recognize self-interested behavior
2. Identify irrational behavior and its causes
3. Apply irrational behavior to a variety of item
The Ultimatum Game and The Dictator Game are two of the most famous games in economics that explore irrational behavior. The common approach to teaching irrationality is to show a variety of examples and ask students to list others. A more effective way to teach rationality is by having students participate in the dictator and ultimatum games. Exposing consumer irrationality can be very profitable for companies.
Start the discussion on irrationality by demonstrating a variety of goods and services that have been invented to exploit irrationality (weight loss pledges and rolling alarm clocks for example). After a brief introduction, ask for 12 volunteers to come to the front to participate. Following the demonstration, show the clip: The Wedding Gift and discuss the irrationality of gift giving.
Collect a series of personal-sized whiteboards or bring a few sheets of computer paper that students can write their answers on. Part of the fun in the game is having students write their answers down and then turn around to reveal them to the class and the other participant. You will want to make sure the students have markers that their answers are large and easy to read.
Bring two playing cards, one of a face card and one of a number. If a student draws the face card then they can play the role of “decider” and the numbered card can play the role of “receiver.” You will want to divide up your deck of cards into pairs of cards so that the students can draw from a pair and guarantee that one will serve in each role.
This game can be played for bonus/participation points in class or you can use the original application of dividing money between participants. Make sure that you have enough change to divide money between students. How much you are willing to give away also determines the number of participants you will request.
Have students come to the front and pair them off into six groups. Three of the pairs will participate in the Dictator Game and the other three pairs will participate in the Ultimatum Game. For the Dictator Game, have students draw from a pair of cards. Have the student with the face card identify himself or herself as the dictator. Inform them that they have the opportunity to write a number on their whiteboard and whatever number they write down, within a given range, is how much money/points they get to keep. Any leftovers will go to the other person. Have students stand back-to-back so that the dictator does not have any added emotional pleas from their partner. After the dictators have made their decision, have them reveal their results to the audience, then have the receiver turn around to see how much they have left.
Repeat the activity with the ultimatum game group. For this group, the decider can write a number within a range and propose a split of the money/points. The receiver has the option of accepting or denying the allocation. If the decider denies the allocation, both walk away with nothing. If the decider accepts the allocation, the split occurs as proposed.
The discussion that emerges from this activity can get heated. This is one of the first chances to talk about the differences between a rational actor and someone who values equity. Be sure to note the change in offers between the Dictator Game and the Ultimatum Game. It is also nice to ask for the second level of the Ultimatum Game where the decider can propose a counteroffer.
During this discussion, you can bring up the notion of a one-time game and repeated interactions. This activity ties nicely with future discussions on game theory, which often occurs later in the course. When discussing the Prisoners’ Dilemma, you can reference back to these activities and discuss the setup of the game and how things would change if additional stages were added.
The game has drastically different outcomes depending on whether the players know each other or if there is an opportunity to know each other later in the course. If you have a full deck of cards and enough patience, you can pair students randomly by having them draw cards and then matching two similar black cards (clubs and spades) to each other and the two red suits (diamonds and hearts). This shuffling pattern allows students to make a decision without foreknowledge of who they may be paired against.
On a pair of white cards, have students write their ID numbers and their proposed splits on the face of the card. After collecting the cards, you can determine which suit will serve as the dictator. If classes are small enough, you can even play the Ultimatum Game by identifying the student and asking if they agree with the split. If they do not like the split, then you can rip the cards up and throw them away.