Imagine a planet where the dominant species are dogs. The world is just as similar to ours, yet instead of humans, there are dogs. Building skyscrapers, driving Maseratis, and negotiating deals, ok?
You are a professional key account manager of Hoof & Bone, a 150-year-old market-leading conglomerate, and you come down to visit an ordinary customer—nothing special, just a “meh,” let’s call them “MeowMart”.
But that’s all you’ve got as a job. Your career depends on this one. You are a straight-to-the-point, no-nonsense Husky. Your boss is a German Shepherd, she demands higher than the market revenue growth, sits tight on your trade marketing spendings and can calculate ROI faster than MS Excel.
Imagine at the MeowMart reception you learn that there are two buyers who negotiate with suppliers in your category of goods, and in fact, you are free to choose any one of them as your key negotiation contact.
Whom would you choose?
Buyer 1: a Labrador – loyal, friendly, and cooperative. Buyer 2: a Pit Bull – mean, ferocious, and unpredictable.
Write below in the comments who and why would you choose!
While reading “The Art of Strategy” by Professors Dixit and Nalebuff, I’m once again reminded of the Game Theory classes we’ve so much enjoyed during our MBA program at Solvay.
Game Theory has revolutionized understanding of negotiation and decision-making, proving that rational human beings tend to make irrational decisions that lead to suboptimal settlements (Nash equilibria). The most famous and widely publicized example of Game Theory is called the “Prisoner’s Dilemma”. I’m sure that most of you know the story perfectly well. While it is a good and illustrative demonstration of the non-cooperative game, it is oversimplified, inaccurate, and somewhat naive. Reality is non-binary, as we all perfectly know.
Negotiators often inherit the weakness of such a binary approach, while the spectrum of options is virtually unlimited. Just as logs are thrown into the fire, negotiators must throw new perks into their ZOPA (Zone of Possible Agreement).
The classic negotiation theory instructs us to make the smallest concessions for the biggest gains while adding low-valued perks to the high-value deal. Each iteration should never be linear but ever diminishing (1%, 0.9%, 0.895%, 0.8945%, etc.). Thus, the real prisoner could have demanded: all charges to be waived, witness protection for him and his family, lifelong government support, and immunity for all past crimes in exchange for cooperation. Each of these demands could be secured against every diminishing bit of information.
Asymmetry of information: In real life, people’s choices are influenced by a multitude of factors, both rational and irrational. During some very difficult negotiations, I’ve asked my opponent what his BATNA (Best Alternative to a Negotiated Agreement) was, “I will be fired” was the answer. Understanding and respecting the person is the only way. No successful agreements are reached by intimidation, lie or extortion.
Both prisoners could have hired the same lawyer to avoid asymmetry and outplay the police…
Static game: In the Prisoner’s Dilemma, both prisoners are given one single choice (confess or remain silent) and must decide quickly. In real life, negotiations take weeks, months, and even years. The pieces on the chessboard move all the time, and the window of opportunity can open or close at any moment, and not necessarily at the end of negotiations. I witness over and over the same mistake in the negotiations between the supplier and a buyer, where both tend to ignore the law of demand and supply, visualizing the game and its outcome as static. The optimum outcome must include milestones that automatically trigger a revision of the deal during the contracted period, thus protecting both parties and allowing corrections.
While the prisoner’s dilemma provides valuable insights into decision-making and cooperation, it is essential to recognize its simplifications and limitations when applying its lessons to real-world scenarios.
