Using Game Theory to Claim Advantage in Negotiations

Despite its numerous and wide-ranging applications – in families, teams, boardrooms, supply chains and even international conflicts - negotiation is, ultimately, a game of sorts.

In a variety of everyday situations, people play different kinds of negotiation games, whether buying something in a shop, negotiating for a new car, getting the kids to do their homework, or discussing with a partner where to go on holiday.

Whatever the scenario, negotiation always involves some sort of exchange and is the process by which two or more parties confer or interact to reach a consensus or agreement. As such, many forces and dynamics can emerge, within all parties, when people play the negotiation game.

Understanding these drivers will, of course, improve performance, so it is no surprise that game theory is sometimes applied in negotiation to maximize favourable outcomes.

What is Game Theory?

Game theory is the study of how intelligent, rational decision-makers choose strategies in everyday social or economic situations. It uses mathematical models to explain how individuals choose between conflict and cooperation.

The concept first emerged in Theory of Games and Economic Behaviour by John von Neumann and Oskar Morgenstern and was subsequently introduced as a tool for negotiators within the Red Sheet® methodology.

Game theory can significantly enhance overall negotiation preparation, help negotiators understand the way a negotiation is unfolding and, crucially, offer opportunities to change approach to achieve a better outcome.

At the heart of Game Theory is a series of around 30 games that model all sorts of life scenarios. Four are particularly relevant to negotiation. These are Chicken, Trust, Prisoner’s Dilemma and Stag Hunt.

There is no right or wrong game. The most appropriate will depend upon the circumstances and may even need to change throughout the negotiation.

The key point is that, as negotiators, we can have a choice as to what game we play. While we may not be able to influence games the other party chooses, an understanding of game theory will help identify their strategy and change the game in our favour.

Chicken

Chicken is the most common game and the one that inexperienced negotiators play. It is when two players engage in an activity that will result in serious harm unless one backs down. One party uses the strength of their position to leverage the other and force them to concede. Chicken is not collaborative but is about one party winning over the other.

The Cuban missile crisis in 1962 – a 13-day stand-off between the United States and the Soviet Union together with Cuba – was the ultimate game of Chicken. World nuclear war was the inevitable outcome if parties had continued trying to use power and force over each other to try and secure their individual goals. But nuclear war did not happen because Russian premier Nikita Khrushchev and US President John F Kennedy stopped playing Chicken and instead reached a negotiated agreement.

In effect, the game changed from Chicken to another game: Trust.

Trust

In the game of Trust, one party (the proposer) holds a position of power over the other (the responder) and can therefore determine the distribution of benefit between the parties.

The responder is completely passive and has no real power here, and therefore chooses to make a gift or concession at the outset in the hope that it will influence the split in their favour. The gift-giving is a judgement made by the less powerful party in the hope it will enable a better end-position and there will be reciprocation.

Trust can work in either direction when one party is dominant over the other. However, the choice to play this game lies with the lesser party who decides to make a gift to influence the outcome. Without any gift, the game is simply that of a dictator who holds all the power and can decide whether to concede or not.

In practice, this gift can take many forms. A supplier can provide some sort of loyalty bonus, free time, or agree to accept unfavourable terms to a powerful buyer in the hope that they will win or retain key business. A buyer can offer flexibility on timing, to promote the supplier to their customers or suggest the supplier can use them as a reference site.

Prisoner's Dilemma

Perhaps the most famous game, Prisoner’s Dilemma is difficult to understand. In this game, two parties meet and agree on a deal or a course of action, and then part company to go and effect the deal, each deciding if they will honour the deal or defect.

The name comes from a story used by Albert Tucker at Stanford University and reported in the Philadelphia Inquirer (Hagenmayer, 1995). Tucker told how two burglars were arrested by police, taken away separately, placed in separate interview rooms and interrogated intensely in an attempt to get a confession. Each is told separately that they must choose carefully whether to confess and implicate the other.

If neither confesses, then the police can only charge both on minor charges and each will serve one year in prison. If both burglars confess and implicate the other, each will serve a 10-year sentence. However, if one confesses and implicates the other, but the other does not, then the one who collaborated with the police will go free while his accomplice will serve 20 years in prison.

The outcomes (benefits or penalties) of Prisoner’s Dilemma depend upon the choices each makes, but crucially there is a greater benefit available to one by duping the other, providing the other party doesn’t try the same thing. At the heart of the game is self-interest driving actions that appear rational to the individual in the situation. However, when both parties place self-interest first they end up both being worse off.

Fishing quotas, introduced in the 1970s as fish stocks dwindled, provide a good example of the game of Prisoner’s Dilemma. Enforcement of quotas proved difficult, as individual fishermen had no long-term stake in a fishery but were focused on maximizing their harvest.

Where fishing grounds fell between two countries with a shared quota, and if both ensured fishermen honoured the quotas, the catch would be mediocre yet sustainable. However, if one country turned a blind eye to fishermen taking more than agreed, the catch would be plentiful. This would boost the economy but lead to fewer fish the following year. If both countries did this then both would gain in the short term but when the fish ran out both would need to find other fishing grounds.

Today some 250 fishing quota arrangements are in place around the world and technology is used to enforce them.

Stag Hunt

Stag Hunt describes a conflict between taking the safe option and social cooperation. Two individuals go on a hunt. Each can choose whether to hunt for stag or hare, without knowing the choice of the other. An individual can hunt hare by himself, but a hare is worth less than a stag. However, if he hunts hare, then he knows he will eat. If an individual hunts stag, he must have his partner’s cooperation in order to succeed. With more than two hunters the chances of a successful Stag Hunt increase sharply.

The key to understanding it is the benefit both parties receive if they work together. Similar to Prisoner’s Dilemma, the key difference is there are two states of joint benefit: if both parties hunt hare, neither is disadvantaged as both can eat; if both hunt stag then both benefit more.

An example of the game of Stag Hunt can be illustrated by neighbours with a large hedge that forms the boundary between their properties. The hedge is shared so both parties are responsible for maintaining it. If both choose to leave the hedge it will grow tall and bushy but neither will be wasting money on the services of a gardener. If both parties decide to cut the hedge regularly it will look neat and tidy for both. However, if only one party decides to cut the hedge on his side while the other saves his money, then only one side of the hedge will look neat, but the hedge will remain tall and overgrown on the neighbour’s side. This is visible to both neighbours, thus wasting the efforts and money of the neighbour who cut his side.

Choosing which game to play

From sustainable fish stocks to world peace, the use of game theory can yield real advantages but in any negotiation scenario, it is important to ascertain which game can potentially generate the best outcome.

Despite being a way of explaining different aspects of human nature and behaviour, game theory is not part of mainstream business development programmes. Sales teams do not typically decide they are going to play Chicken or Prisoner’s Dilemma: these games just happen to be what they end up doing.

As part of negotiation planning, games should be determined in advance and it is sometimes appropriate to play a series of games and switch from one to another, depending on how things unfold.

At all stages, we need to be aware of the scenario in play and be alert to the fact that this can change. Enjoy the game!