Game Theory, Negotiation, and the “Black Box”

Game Theory, Negotiation, and the “Black Box”

James F. Ring and some colleagues gave a fascinating talk at the recent ABA Dispute Resolution Section on Game Theory.  Where it started was cutting a cake.  Where it ended was cutting out the lawyers, at least by implication.

In addition to his law practice, Mr. Ring runs an enterprise called Fair Outcomes, Inc.  His talk was not so much a “sell job” for his company as it was a discourse on the reasons why conventional approaches to negotiation may have serious limitations.

Game theory, according to Ring, is a discipline that describes, and to a large degree predicts, human behavior to the extent that the people participating in the game act rationally and in their self-interest.  Games can assist us in creating structures that take away all incentives or rewards for irrational or non-self-interested behavior, yielding a predicatable set of interactions.  Many students and teachers of negotiation are familiar with the theories behind the game “Prisoner’s Dilemma.”

The simplest example is “I-Cut-You-Pick.”  Jack cuts the cake and Jill chooses which piece of cake she will take.  As long as both Jack and Jill are interested in maximizing their piece of the cake, Jack has no incentive to cut anything but “fairly.”

The next varient adds what Ring variously called “commitment” or “coercion.”  The game rules are that Jack cuts, and if Jill doesn’t accept the piece Jack offers, then neither of them gets any cake.  Jack has an incentive to be piggy, and Jill will accept a smaller piece than Jack rather than having no piece at all.

But iterative results of this game show that there is a point at which Jill becomes so disgusted with Jack’s behavior that she will refuse any cake at all, thus denying them both.  So, according to Ring, the cake-cutter can take 55%, 65%, 75% and get away with it — but somewhere around an 80/20 split he ends up frustrating them both.

Similar behavior happens in legal disputes.  If a party makes a proposal that falls outside the range that most would consider reasonable, it is rejected.  Indeed, even an offer within that range might be rejected if it is made under circumstances that lead the offeree to conclude that further concessions will be forthcoming, rather than their both rolling the dice with a judge or jury.

Ring cited the behavior of Hernando Cortés in entering Vera Cruz to confront Montezuma.  Having landed his men, horses, supplies and ammunition, Cortez ordered that his ships be burnt in front of the amazed eyes of Montezuma’s army.  The strategy was what Ring called “commitment” —  Cortés was telling Montezuma that they would work something out or not work something out, but that he wasn’t going away.

Montezuma had to decide how small a piece of cake he was willing at accept.

What are the implications for bargainers?  The simple game — 50/50 — is like a “buy/sell” offer.  It is the amount of money that the offerer would either pay to purchase a partner’s interest, or accept to sell his own interest.  The varient game, on the other hand, is like a “black box.”  One party inserts a number into the box, reflecting the value s/he will accept (or, if a defendant, the value s/he will pay) in settlement.   That “demand” number is frozen inside the box and can’t be changed.   The other party puts an “offer” number in the box, reflecting the value s/he is willing to pay (or accept).  The box will tell the second party whether that “offer” number matches the first “demand” number.  If it does not, the second party can increase its offer any time over a period of (say) 30 days. If the box reports an eventual match, the matter is settled.  If the second party is unwilling to offer as high as the first party demanded, then no cake for anybody.

 The black box won’t reveal the other side’s number to you unless there’s a match, and if there is no match the box could create an attestation to the offeror of the number the other side had failed to meet — an incentive for the second party to make reasonable offers.

The implication is that negotiation not only is unnecessary, but often an obstacle to resolution.  Negotiation expends time, injects emotions, and encourages nonsense like bluffing and other expensive and time-consuming distractions into the process.

Janet Kloenhamer, who until recently was President of one Fireman’s Fund Insurance company and, before that, General Counsel of another, has sometimes wished that there was a “black box” for resolution of contested insurance claims.  Insurance companies have tens of thousands of disputes, whether between them and policyholders or among them and other insurers.  They all resolve, of course, but until they do she pays hundreds of lawyers all around the country to handle them.  Why, she has wondered, can’t there be a “black box” online somewhere, where she could put in her bid and see how many she can just close up?

Mr. Ring, meet Ms. Kloenhamer.

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