Wednesday, February 18, 2015

Beware of the Ultimatum Game

Although the situation between economically distressed Greece and its European lenders changes daily, in the runup to one deadline, European leaders gave Greece an ultimatum: Agree to an extension of the bailout program or lose the funding Greece needs to avoid default and exclusion from the Eurozone.   They made a vague promise to renegotiate the original terms of the austerity program at a later date, but it was essentially a take it or leave it offer.  

Rather than acquiesce, the Greek finance minister reacted angrily: “…nothing good has ever come out of ultimatums. I have no doubt that in the next few days any notion of an ultimatum will be withdrawn.”  The new Greek government maintains that the austerity demanded of its people in exchange for the original bailout devastated the Greek economy and imposed untold social damage. It argues that if the European Union wants a chance of recovering its loans to Greece, it must loosen the austerity terms so that the economy can grow again.

But why would Greece reject the European lenders’ commitment to distribute billions  of of dollars of desperately needed funds when the alternative is bank runs, bankruptcy, exclusion from the Euro zone, and possible social chaos? At first glance, the Greek response doesn’t seem rational: the proposal provides needed breathing room and a commitment by the European lenders to alter the austerity terms in future negotiations.  While the reasons for the Greek reaction are politically and economically complex, the simple explanation is that the Greek government views the European lenders’ proposal as too unfair. 

So what does this have to do with lawyers negotiating a divorce or couples pursuing an uncontested divorce onlinehttp://negotiateddivorce.com/?  It’s the issue of fairness, or at least what the parties perceive as fair, and how it can propel or stall a negotiation. 

Using an experimental procedure called the Ultimatum Game, social scientists have demonstrated that people’s perception of unfairness will lead them to turn down a sure gain.  Here’s how it works: the subject must decide whether to accept or reject an offer for a portion of a fixed amount, say $100, which is to be split between the subject and the offeror.  The offeror decides how the money is to be split, but if the subject rejects the offer, neither receives any money.  There is no second round, that’s the ultimatum: take it or leave it.  The offeror might propose a fair split (e.g., $50 each), or an unfair one (e.g. $95 for the offeror, $5 to the subject).  In either case, the subject receives more than he or she had at the beginning of the exercise. $5 is better than $0. Right? 

Actually, no.  The results of these experiments show that even though getting a small amount is better than getting nothing, the rejection rate for offers perceived as unfair (generally 30% or less of the total amount being distributed) is very high. 

Why?  Because humans value more than economic return.  Civil conduct, following social norms, and reaching social agreement are important to a society’s and an individual’s well-being.  From that perspective, turning down an unfair economic offer is not irrational at all; it is saying that there are other interests at work which the offeror must also take into account. 

The Ultimatum Game being played by European lenders and Greece on the international stage rather than in a social scientists’ laboratory provides a lesson for divorcing spouses:  In instances when there is no Plan B or rejection of a take-it or leave-it offer will lead to dire circumstances (e.g., litigation), an offer  that leaves your spouse better off but is perceived by him or her as unfair is likely to be rejected, even when considerable cost attends the resulting outcome.  If you plan to make an offer, anticipate what he or she is likely to perceive as fair and be prepared to explain why your offer is, indeed, fair.  And if it’s not, change it.


1 comment:

  1. Dr. Mark, my sister is currently going through a divorce. You bring up some interesting points about the ultimatum game. It seems like many people fall victim to ultimatums and I can see how it is a good idea to avoid them all together. Even her divorce lawyer suggested not giving her husband any ultimatums when it came to her child.
    http://www.nsnlaw.com/practice-areas

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