A New Solution Concept for the Ultimatum Game leading to the Golden Ratio

Abstract

Abstract The Ultimatum Game is a paradigmatic two-player game. A proposer can offer a certain fraction of some valuable good. A responder can accept the offer or reject it, implying that the two players receive nothing. The only subgame-perfect Nash equilibrium is to only offer an infinitesimal amount and to accept this. However, this equilibrium is not in agreement with experimental observations, which show varying accepted offers around 40%. While some authors suggest that the fairest split of 50% vs. 50% would be explainable on theoretical grounds or by computer simulation, a few authors (including myself) have recently suggested that the Golden Ratio, about 0.618 vs. about 0.382, would be the solution, in striking agreement with observations. Here we propose a solution concept, based on an optimality approach and epistemic arguments, leading to that suggested solution. The optimality principle is explained both in an axiomatic way and by bargaining arguments, and the relation to Fibonacci numbers is outlined. Our presentation complements the Economic Harmony theory proposed by R. Suleiman and is based on infinite continued fractions. The results are likely to be important for the theory of fair salaries, justice theory and the predictive value of game theory.