Regarding what is known as the ultimatum game. In this game, a prop...

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Regarding what is known as the ultimatum game. In this game, a proposer decides how to split a certain amount of money between him/herself and another player called the responder. In the first 5 questions, I asked you to tell me how much you would keep for yourself depending of the amount being split. Based on your answers, the average amount that each of you would keep was as follows: Amount being split Amount you would keep for yourself $10 $5.91 $100 $59.69 $1,000 $606.89 $10,000 $6,152.22 $100,000 $72,355.53 I then asked you to tell me whether given a certain offer, you would accept/reject the offer. If you reject the offer, then no one gets anything. The proposer keeps The responder gets Percentage of acceptances Percentage of rejections $9 $1 29% 71% $90 $10 31% 69% $900 $100 49% 51% $9,000 $1,000 64% 36% $90,000 $10,000 69% 31% Answer the following questions: 1. What do these results tell you about bargaining behaviors? 2. Were you surprised by the distribution of the data? Why or why not? 3. How could these results be applied to the trading environment? As a guide to your answers, you might want to think about the following: • What do you think is the optimal strategy for the proposer? How much money should he or she offer to the responder? • If you're offered a small amount of money, does it make sense to reject it? • Why do you think that the number of rejections diminishes as the amount at stake increases? This is consistent with what we observe in other experiments. • Do you think that people become more "rational" as the amount at stake increases? To put things in perspective, we're interested in this game because it happens quite often in what is known as dealer markets. These markets are the ones typically used to trade currencies, bonds and derivatives such as forwards and swaps.

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These results tell me that bargaining behavior is predictable. According to Andersen, et al. (2011), one can predict how people will respond to incentives because in making decisions, people are usually motivated by their self-interest, thus their acceptance or rejection of offers depend on their perception of gain (Andersen et al., 2011). Additionally, the results imply a degree of utility-maximization and rationality in bargaining, but also suggest that individual decisions are also influenced by other factors other than self-interest. Looking at the table containing the average amounts that the proposer would keep, it appears that the lower the stake, the more the proposer is willing to offer to the responder and the higher the stake the more the responder would keep for themselves...

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