Negative Sum Games: Situations That Destroy Value

Negative sum games – what does it mean? While most people attend a mediation or negotiation hoping to walk away with the most possible value, when the goodwill between the parties breaks down, they may leave the table with little to nothing to show for their work.  When both parties leave the table feeling as though they have “lost” and leave the value between the parties at empty, they have participated in a negative sum game.  Game theory views this as the worst result of a negotiation, and encourages the parties to avoid it when possible.  However, to avoid it, it is important to understand what a negative sum game is, how it functions, and how to deal with it when it arises.  In this article, we will explore exactly what negative sum games are with examples and outline some ideas for how to deal with them when one encounters one.

Negative Sum Games | Situations That Destroy Value:

As mentioned above, a negative sum game is an idea that arises from game theory.  Game theory is an approach to understanding the various ways a negotiation can be resolved by using a variety of math analogies to describe the situations that can result.  It is a way of describing how people interact with each other and analyzes how they cooperate and how they act when there is a theory of distrust.  It can help the parties identify the risks and rewards that are associated with certain behaviors as well.  Value is the end goal of the game or negotiation—it is what all of the players are fighting over.  Value can be created, distributed, and destroyed during a game.  In game theory, there are three types of “games” that can result.

  • Positive Sum Games: Positive sum games are the result of value being created during the game. This happens when the parties find a way to add more to the outcome of the game by working together and finding a solution.  Occasionally, an outside source will add more value to the game.
  • Zero Sum Game: A zero-sum game is the result of the value being distributed during the game. When one party takes from the value, the other party has to give.  Little to no value is added in this type of game.
  • Negative Sum Game: A negative sum game is one where the value is destroyed either by the parties or an outside source. Throughout the game, the parties deplete the value such that the overall outcome combined for the parties is less than the value when they started.  The value may also be depleted by outside forces removing some of the value.

When looking at negative sum games, we are looking at situations that destroy the value between the parties before it can be claimed.

Examples of Negative Sum Games:

Another way to understand a negative sum game is to consider several examples of situations that may result in a negative sum game.  These situations are ones where the value is depleted to the point that it is destroyed.  Examples of negative sum games in real life include:

  • Large Overhead: When a product or service costs more to create or complete than the completed task is worth or the cost of paying executives is dramatically high, it creates a negative sum game. No matter how many products a business sells, it cannot come out ahead.  The value of the return on the product or service is always going to be lower than the cost it takes to create.
  • War: When two or more countries go to war, it will always result in a negative sum game. Regardless of what either country can achieve through violence, the cost will always be greater.  In war, the cost is often the lives of soldiers and civilians, the cost of supplies, and the destruction of infrastructure.  While there are often moral values added to war, the true analysis of war will usually end in a negative sum.
  • Speculation: In the financial world, speculation will often result in a negative sum game because the speculators will inflate the price of an asset to the point where it eventually collapses. While there may be some people that win, it ends up harming the overall investors.
  • Environmental Impact: As the global warming crisis has ramped up in recent history, there has been a rise in products that are supposed to help with the crisis. While some products are produced and sold sustainably, many are sold under the guise of being good for the planet, yet their production or shipping harms the planet.  Often, these will be sold to raise money for environmental causes, but the gain for those causes is far outweighed by the impact on the environment.

Not all negative sum games create a loss for the parties, even though the value is depleted.  This is particularly true when the depletion of the value is caused by an outside source.  Take the following example into consideration:

  • Budget Cuts: Schools are often experiencing budget cuts due to the funding that they receive. When these are announced, every section of the school will be concerned about its budget getting smaller.  While the value of their budgets will decrease, they may still win if the value does not decrease as much as they expected.  For example, if the art department expected their budget to be cut by $5000, but it was only cut by $3500, they likely won in the situation, even though it was a negative sum game.

When determining if a situation is a negative sum game, it is important to look at the overall value that the parties are walking away from the situation with, not just if the party won or lost.  Some situations may look like zero-sum or even positive-sum situations based on how the parties feel they faired, but the value was depleted in such a way that it was a negative-sum game.

How to Deal with Negative Sum Games:

When considering how to deal with a negative sum game when it arises, the most common advice will be to avoid entering the game at all.  While this may be the best option in most cases, it is also important to understand how to work with the game to find value even when it is depleting.  Some ways that a party may be able to deal with negative sum games include:

  • Losing the Least: When a person enters a game knowing or expecting the value of the game to deplete, the best tactic is to attempt to lose the least and create a “win.” This can be illustrated through the budgeting example above.  If the art department agrees to take a $3500 budget cut and the music department has to take a $5000 cut, the art department would create value for itself by losing the smallest amount of the budget.
  • Honor the Cause: In the environmental impact example above, the negative sum game can be dealt with by the companies that are attempting to profit off commitment to a cause also honoring the objective of the cause by working on reducing their impact. By reducing the negative impact, they may not eliminate the negative sum, but they may lessen the depletion.
  • Avoidance: In many situations, it is best to avoid a negative sum game if possible, which is why it is vital to understand negative sum games to spot them. Avoiding a negative sum game can stop a party from losing more than the value that can be gained and can help create value in knowing that they avoided a loss.

A negative sum game cannot always be avoided or dealt with, but understanding when a negative sum game appears and how to handle it when it does can help a party find value in the game as it is being depleted, which creates a win.

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