353note6.txt January 28, 1997

BARGAINING APPROACHES

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 with classical strategy, there is bounded rationality. Actors are

willing to take a half a loaf rather than no bread: Compromise is a way of life

for them. They see the world as flexible-price sales bazaars rather than fixed-

price shopping malls. The world is full of car salespersons who use

persuasion to make a sale: It is in your interest to make a purchase. Fixed-

price selling requires search for information about the potential purchaser that

would facilitate a sale. Neither rewards nor penalties are under the control of

the salesperson. Salespersons point out unexpected consequences that may

flow from compliance and unexpected costs from noncompliance.

Strategists are not 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 requitement. They would cooperate in Prisoner's

Dilemma game. Mother Theresa is a frog; the devil--a scorpion.

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

gains.

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

follow.

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.