The ongoing discussion of Game Theory based on the book Co-opetition.
G ames in business are played in a fog. That is why perceptions are a fundamental of any game. Change people’s perceptions and you change the game. Sharing perceptions is the domain of tactics. By tactics we specifically mean actions that players take to shape perceptions of other players. Some tactics are designed to lift a fog, others to preserve a fog and yet others to stir up a fog.
The typical negotiation takes place in a fog. People tend to get lost navigating through this fog and negotitions run aground. One mistake is to overstate what you need, hang tough and kill the deal. Another mistake is trying to strengthen your hand by revealing something that in fact, would have been better left hidden. A third mistake is forcing consensus when preserving differences of opinion would actually be more helpful in crafting a deal.
Negotitions can be full of bluffing and posturing. People make extreme demands to try to anchor the subsequent back and forth in their favor. In this kind of climate, if you reveal what you really need, you can find that information being used against you. There’s a clear incentive to act tough. But if everyone acts tough, it gets much harder to reach agreements. Negotiations deadlock and then nothing gets done, even though everyone would benefit if it did.
The problem is not with the players, but with the game. University of Chicago Business School professor Rob Gertner and NYU Law School professor Geoffrey Miller have come up with a better game to play. They’ve devised some ingenious rules that enable people to behave reasonably without having their lunch eaten. They call their negotiation method “settlement escrows”.
Here’s how settlement escrows work. The buyer and seller agree to bring a neutral third party to act as a mediator. The seller tells the mediator, in private, a price at which he would be willing to sell. Likewise the buyer lets the mediator know, again in private, a price at which he would be willing to buy. The mediator checks to see whether the two prices cross, that is whether the buyers offer exceeds the seller’s bid. If so, the mediator calculates the midpoint price and the seller and buyer transact at that price. If the prices don’t cross, the mediator doesn’t reveal either price. He announces only that the prices didn’t cross. Neither side learns the other’s bid and the two parties can go on negotiating without prejudice.
Settlement escrows allow people to negotiate from behind a veil. Ordinarily when you make a demand, you reveal your hand. Settlement escrows preserve the fog. You can say what you really need without giving away much information. When the parties in a negotiation feel safe enough to make reasonable demands, they’re much more likely to reach an agreement. There’s a much better chance that whenever there’s a mutually beneficial deal to be made, it will be made.
The cat in the bag. I have something unpleasant on my mind. I suspect that you know what’s on my mind. But do you know that I suspect you know? I believe that you might, but I don’t know for sure. There’s room for doubt and that may be the best way to leave things. Some thoughts are better left unspoken.
Everything changes when I reveal what’s on my mind. Now you know for sure what I am thinking. And you know that I know you know. You even know that I know all this. The fog lifts and the truth can no longer be hidden. As they say the cat has been let out of the bag. And that’s a problem, because there’s no easy way to get a cat back in a bag.
In a marital dispute, the cat in the bag may be the threat of divorce. You may have it in the back of your mind to ask for a divorce if things can’t be worked out. You may believe that your spouse suspects as much. You may even think that your spouse senses that you believe your spouse suspects as much. But it’s still better to leave the threat unspoken. However serious the problems you and your spouse are having, there’s always a chance of working things out, the two of you are committed to trying. But once the threat of divorce is made explicit, it becomes much harder to make that commitment. Any doubts about what’s on your mind are now gone. You’ve just revealed that you are contemplating life beyond marriage. How can your spouse remain committed to trying to make the relationship work, knowing that you’ve already have one foot out the door ?
We began this discussion by asking If business isn’t war and it isn’t peace, what is it? There are elements of competition and cooperation in every relationship, business or personal. In business relationships, just as in marital relationships, some thoughts are better left unspoken.
A service provider and customer need to maintain a fog over what could happen if negotiations break down – not necessarily a thick fog, but definitely some fog. The use of a mediator may help preserve a mutually convenient fog.
Something our group found helpful when re-negotiating a contract was to hire a co-consultant. Barry Cranfill with Sentry Anesthesia Management offered a co-consultation arrangement where the hospital and our group hired him jointly to analyze our anesthesia services. This approach was similar to hiring a mediator and provided both parties valuable insights and information that we still use years later.
When the slow pace of negotiations proves frustrating, we may be inclined to make explicit threats. That’s a mistake. If you are not sure whether you can hold your tongue, consider a mediator.
Negotiations are about coming to an agreement, but that doesn’t necessarily mean that everyone has to see things the same way. Agreements can be reached even when people stick to their differing perceptions. Indeed, differences of opinion can actually make it easier to reach an agreement.
Negotiating in a Fog
1-Revealing the minimum you need. You risk getting exactly that and no more. Posturing is no solution, that risks deadlock.
2-Making threats explicit. Even if a threat is already implicit, making it explicit changes perceptions. There’s no going back.
3-Trying to resolve differences of opinion between you and the other party. This is hard to do and possibly counter-productive.
1-Establish a settlement escrow to promote good faith negotiating by both parties.
2-Bring in a mediator to help the other party understand the consequences of no agreement.
3-Recognize what you and the other party do – and don’t – have to agree on. Use differences of opinion to structure win – win deals.
As we continue discussion of Game Theory based on the book Co-opetition.