By Nick Colas of Convergex
Let’s Make a Deal, Monty!
Today we’ll reprise a favorite topic from prior years of this note: the Ultimatum Game. This most-replicated of all behavioral finance studies highlights the significant role human notions of fairness play in what classical finance says should be a straightforward set of decisions. The game itself is simple: two people have to split a pot of money with one person offering a percentage and the other accepting or declining. The former results in both walking away with their agreed take; the latter means no one gets anything. Offers should be minimal – any money is good, right? But in practice offers have to be +35% to get a deal done. Recent research highlights just how capricious real people are in their decision-making. For example, attractive people can cut more advantageous deals, prolonged eye contact is a no-no, and negotiating through social media avatars seems to ease the process of getting to more agreements.
“The secret of life is honesty and fair dealing. If you can fake that, you’ve got it made.” That witticism comes from Groucho Marx, and it’s one my favorite quotes on the slippery subject of fairness. We learn early on that “Life’s not fair”, even if we spend the rest of our existence hoping that somehow we can make it so. At best we fake our way through it, grabbing bits of ersatz equality where we can.
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