Dancing with Uncle Sam

Today, I attended the first day of a two day workshop on negotiation. We started with the Prisoners’ Dilemma: You and another suspect are arrested and your sentences depend on whether the two of you inform on the other or not. If neither of you informs on the other, both of you get 2 years. If both of you inform on each other, you both get 20 years. If only one of you informs on the other, the informant goes free and the other gets a life sentence. The goal is to minimize the amount of time for your sentence. The question is whether you inform on the other suspect.

Many of the people in class wanted to know more about the other suspect, presumably to get a hint as to what he was likely to do. One participant specifically wanted to know “is he rational?”

The instructor offered no insights into the soul of the other suspect and instead forced us to make our choice. He then went around paring people together. First we had a few rounds of random pairings with no ability to change. Then he would pair people and let them change their answer based on the pairing. Finally, he picked someone and let her pick the other suspect.

The results were scattered. I, like many others, ended up getting 20 years. Somebody got out free. And two people managed to keep their mouths shut and only had to spend 2 years in jail (this result was met with applause).

The instructor then took a survey and in total, about two-thirds of the class elected to inform on the other suspect.

I have read about the Prisoners’ Dilemma before, so it was no surprise to me that the mathematically correct answer is to inform on the other suspect because no matter what they do, you are better off. The instructor illustrated the point with one of the externs by removing the mystery: if the extern knew that the other suspect informed on him, the extern agreed that he would inform so as to serve 20 years rather than a life sentence; likewise, if the other suspect did not inform on him, the extern agreed that he would inform so as to get out free rather than serve 2 years. Even still, the extern maintained that if he didn’t know what the suspect was going to do, he would not be an informant.

Rather than trying to convince the extern (or the class) that this position was clearly irrational, he used it to illustrate that we all have a natural negotiating style that falls along a spectrum from competition to cooperation.

Competitors strive for an individual win: they view negotiation as a zero-sum game where and the goal is to get as much as possible for yourself by taking it away from the other person. By contrast, cooperators look for joint gain: they try to be inventive and expand the value to be divided between the parties. The danger for competitors is that they will not be able to reach a deal. The danger for cooperators is that they might have been able to get more for themselves. In most negotiations, there is overlap with the two approaches; first trying to expand value, then trying to get as much as possible for yourself.

The Prisoners’ Dilemma illustrates a situation that calls for a purely competitive approach. In that environment, those that cling to a cooperative approach do so at their peril. Such individuals may choose not to change, but must recognize that they are making a choice and be prepared to live with the consequences.

In the afternoon, we discussed how competitive bargaining generally works.

First, the parties each take a position. Then they take turns making concessions and that get closer to each other in a type of dance. In this dance, each concession tends to be about half the size of the one that preceded it and takes about twice as long to be made. The end point is usually the midpoint between the first two reasonable offers. As a result, the outcome of a particular negotiation is often the result of the first two opening moves.

Beyond this scientific formulation, there is a subtle art to the dance. The opening offer and counteroffer must provide enough space to dance; if either of them are too close to the end goal, there won’t be room for the expected back and forth. Furthermore, the steps themselves should be deliberate, and drawn out enough, so that the other side appreciates the level of resistance and hesitation. The goal is to reach a deal where both sides are happy that they have maximized what they could reasonably expect to receive; concessions that are too quick or too drastic frustrate this purpose because they signal that more could have been acquired.

The irony of this is that taxpayers often view tax litigation in this context and assume that the government’s assertion of a tax liability is merely an invitation to start dancing. Unfortunately, for many tax issues the government is bound to follow the law which results in an all or nothing proposition: either the government is right and it takes everything or it isn’t and it takes nothing: the difference between striking out and hitting a home run, to mix a metaphor about mixed signals.

I’m looking forward to tomorrow’s discussion on cooperative bargaining, a new dance, and more dilemmas.