353note6.txt     January 28, 1997


Classical Strategists, Bounded Rational Strategists, and Prospect Theorists

Moses, Machiavelli, and Willy Sutton: Old Testament Prophets, the Prince,
and the Bank Robber are Classical Strategists--rational actors.

Classical Strategists are opportunists who use rational means to secure their
objectives; they would combine force and diplomacy, if necessary, to secure
their ends. They link promises of reward with threats of punishment to
achieve aims. They have leverage over their targets. They assume rationality
on the part of the prospective targets, black-box characteristics of targets, and
offer them rewards for compliance and penalties for noncompliance.

Because it is rational to defect in games of mutual conflict, classical
strategists prefer to create cooperative games of chicken rather than
Prisoner's Dilemma games of mutual conflict. Classical strategists defect in
situations like Prisoner's Dilemma, but they cooperate in Chicken.

Prisoner's Dilemma is a game of conflict in which reward for unilateral non-
cooperation exceeds both benefit for mutual cooperation AND cost of mutual
conflict. The penalty for mutual non-cooperation is not as bad as penalty for
exploited cooperation--the suckers' payoff. No threats or commitments.
Prisoner's Dilemma: situation of mutual defection. Two incentives to defect:
defensive and offensive--its better to defect if you think opponent may defect;
its better to defect if you imagine that adversary may not. So, irrespective of
what the other side may be do, there are defensive and offensive incentives
for defection. Mutual cooperation possible if players expect to meet again.
Future can cast shadow on present and encourage cooperation.

Chicken is a game of cooperation in which the penalty for mutual non-
cooperation is worse than penalty for exploited cooperation. The sucker's
payoff is not so bad in chicken! Deterrence and coercion are more relevant to
Chicken than to Prisoner's Dilemma. In coercive situations like chicken,
estimate the degree of risk you are willing to endure before yielding. Your
critical risk is a function of your utilities, e.g., what you stand to gain or lose
in a given situation. Then compare your critical risk with your estimate of the
other sides likelihood of carrying out a threat, i.e., threat credibility. If your
CR is higher than the other's threat credibility, stand fast. If your CR is lower
than the credibility of the adversary's threat, comply. With respect to threat
credibility, you can enhance the perceived likelihood of carrying out a threat
via: irrevocable commitments to foreclose alternatives to compliance,
appearing to lose control over subordinates, pretending to be reckless, and
seeming to be irrational.

In the theory of collective goods, it is not rational for members of groups to
pay their share in order to obtain a good that is collectively enjoyed.
Individuals' contributions have little or no effect on whether they obtain a
good. If you expect others to cooperate by paying dues, defectors can enjoy
collective good without paying cost. Individual defectors also avoid suckers'
payoff. Ways out of collective goods problem: coercion or provision of
selective incentives, rewards for dues-paying other than the collective good.

In contrast to classical strategy, there is bounded rationality. Sales
take place as if held at a Middle Western shopping mall with fixed prices
rather than flexible-price sales at a Middle Eastern bazaar. The world of
bounded rationality is full of car salespersons who use persuasion to make
a deal: If it is in your interest to make a purchase, the salesperson has
to engage in small talk in order to find out what your interests are.
Their fixed-price selling requires a search for information about the
potential purchaser that would facilitate a sale. Neither rewards nor
penalties are under the control of the salesperson. They point out the
unexpected benefits that may flow from the sale and unexpected costs that
may occur from not purchasing the goods. In this respect, salespersons are
not strategists manipulating rewards and punishments; they are data
collectors manipulating intelligence about potential clients. A keen sense
of timing allows for the effective use of such information in a process of

Neither strategists nor persuaders are ideologues who would prefer not to
make a sale if it involves sacrifice of principles. Ideologues would stand
on unlimited principle rather than achieve limited purpose, sacrifice
mutual gain for individual interests, prefer retribution to
rehabilitation. The Devil is an ideologue who would practice evil,
irrespective of success. The devil would defect in a game of chicken.
Jesus and Mother Theresa are ideologues who would use goodness,
irrespective of reciprocity. They would even cooperate in a single play of
a Prisoners Dilemma game.

Prospect theorists understand that people are likely to be acting from a
basement of fear rather than a window of opportunity. Rather than being
opportunists, people are paranoids.

Prospect theorists accuse classical strategists of framing problems as relative
gains situations, making them difficult to solve:  Two sides tend to cooperate
when they both frame the problem as avoidance of loss than the maximization
of relative gains.

Prospect theorists accuse classical strategists of making relative gains
calculations. They focus too much on relative advantage and get involved in
arms races and interlocking Prisoner's Dilemma processes that lead to
inadvertent conflicts. Miscalulated escalation comes from classical strategy.

Prospect theorists would choose as their reference points not how much the
other side stood to gain. They would look at how much they would stand to
lose from failure to reach agreement. By focusing on losses over gains,
prospect theorists are more likely to make deals. If two bargainers stress
losses over gains, they can cooperate.

Prospect theorists say that if you frame your problems to take into account
loss aversion, you are likely to reach an accord: It is more painful to lose
$1,000 on South University than it is pleasurable to find $1,000, then you are
likely to cooperate with others in developing a security system to avoid
mutual losses. Loss aversion: People weigh losses more heavily than gains.
They are risk averse with respect to gains and risk acceptant regarding losses.
People are more willing to take risks to avoid losses than they are to make

Prospect theorists state that if you frame your problems to take into account
the endowment effect, you will recognize that people demand more to give up
an object than they would be willing to pay to acquire that object.
Endowment effect: Foregone gains are less painful than perceived losses.

Prospect theorists understand the distorting effects of reference points. They
serve as perceptual anchors blocking receptivity to new information. As a
result, bargainers may misperceive threats and rewards. Anchoring makes
people insensitive to new information.

Prospect theorists understand the certainty effect: People will choose a sure
gain rather than take a chance on a larger gain that is only probable. They
choose a sure gain of $3,000 over an 80% chance to win $4,000 ($3,200),
contrary to the rational choice expectations.

Prospect theorists are aware of reference points in negotiations. A reference
point is what a people think the status quo should be. It is an anchoring
mechanism. The reference point is a goal that anchors people in light of other
events and decisions. The connection between reference point and how a
people frame a situation is that according to their reference points, they will
frame the situation with a loss more salient or a gain that is more salient.

Classical strategists see the goal of negotiations as the maximization of their
own gains; prospect theorists view the aim of negotiations as getting to yes.
How to get to yes? Empathize with your negotiation partner: Imagine that you
are the other person, adopt their perspective in order to achieve progress.
Consider the perspective of your own situation, then the viewpoint of the
other parties, and then imagine how a third party would perceive the situation.

Prospect theorists want to get to the table: they distinguish between positions
and interests. Positions are the rationalizations used in argumentation--what
people use to argue their case; positions are what people express in opening
statements concerning a dispute. Interests are the values that led actors to
take positions--why there is a need to negotiate in the first place. Distinguish
between intrinsic and symbolic interests.

Consider the story of two persons quarreling in a library. The woman wants
the window open and the man wants it closed. They bicker back and forth
about how much to leave it open: a crack, halfway, three quarters of the way.
No solution satisfies them both. Enter the librarian. The librarian asks why
she wants the window open:  To get fresh air. Why does he wants it closed:
To avoid the draft. After thinking a minute, the librarian opens up a window
in the next room, bringing in fresh air without a draft. This solution is Pareto
Optimal: It is good for the woman yet acceptable to the man, and vice-versa.
While the parties concentrated on their positions they could not come to a
satisfactory solution. When the librarian focused on the parties' interests and
not positions, they were able to solve their problem. If the interests were
symbolic, however, there would have been more difficulty solving the
problem. What if gender differences were the underlying motivation for the
dispute? Problems are more intractable when hidden values dominate. Try to
get the tractable issues out of the way as a step to dealing with symbolism.

Prospect theorists build bridges from conflict to conciliation. They use cease-
fires as down-payments on confidence. Try to establish mutual trust because
it is rational to defect. Prospect theorists want mutually developed rules of the
game for the conduct and limitation of hostilities. They suggest the use of
prenegotiation as crisis avoidance: Identify the problem, search for options,
commit then agree to negotiate, set the parameters for the negotiations to

Prospect theorists suggest the use of third party consultation to distinguish
between incompatible differences and subjective misperceptions, try face to
face interactions to break down simplified stereotypes, are aware that
similarities between groups are often ignored while differences are
exaggerated, and use problem solving diplomacy to effect a perceptual shift.
Such a dramatic change in the ways the sides view each other could facilitate
getting to the table and getting to yes.