Monday, May 9, 2011

Being Optimally Crazy

During negotiations what you signal to your counterpart is incredibly important.  What you are capable of has an incredible impact on how your counterpart will act and react and thus how you should act and react.  Think of Mutual Assured Destruction in the Cold War (or just think of Dr. Strangelove).  Total Annihilation from a nuclear winter? Bad for everyone.  Credibly signaling that in the event of attack the worst possible scenario would happen to everyone? In light of the fact that no nuclear war took place between the US and Soviet Union, good for everyone.

Now apply that thought process to the following hypothetical: 

You are engaged in negotiations around a 100 million dollar business deal.  Your counterpart is an aggressive negotiator with a history of walking out on big deals because of, if the rumors are true, minor disagreements over contract language.  After six months of working on the deal it appears signatures on the contract are imminent.  But your counterpart declares something in the contract that is not especially favorable to his company is a problem, enough of a problem that he will nix the deal.  Walking out on the deal would be bad for both of your businesses.  But you know he might actually walk out, leaving both of you with nothing and six months of work wasted.  What is the right choice? 

The right choice is to compromise, give in, whatever it takes to seal the deal.  The risk of him actually walking out, which his reputation indicates is a real possibility, is too much in the face of a minor loss at the negotiating table for your company.  In other words, because your counterpart would be willing to do something crazy and detrimental to you both, he was able to negotiate from a position of power.  Whether this is an optimal strategy in the long run is open to debate but in this case, probably a good move by him.

Now, look at recent political negotiations between the Democrats and the Republicans.  It feels like the Republicans are smacking around the Democrats with frequency, especially on budget matters, and definitely on raising the debt ceiling.  It feels like the Republicans win the PR battle easily every time, mobilizing their base, staying mostly unified and sticking to extreme positions.  This picture is an oversimplification of what is actually occurring but it does play into the larger narrative of Republican means strong and Democrat means weak.  Or from the Democrat viewpoint Democrat means reasonable and Republican means crazy.
I think it is because the Republicans will credibly signal that they will do something crazy if they do not get a lot of concessions.  Much of their rhetoric is devoted to not backing down.  Many of the platforms conservatives ran on in the midterm elections were platforms of non-governance.  This lends credibility to any negotiating position they take.  Based on the political philosophy that got them elected stalemate, or simply not acting at all, is a viable goal to have. 

The current example of note is their refusal to raise the debt ceiling.  Everything I have read on the topic indicates that not raising the debt ceiling would be a total disaster for the US economy and for the US Government’s ability to meet its financial responsibilities including such basics as paying our soldiers on time.  Yet there is debate over whether to raise the debt ceiling.  And the Democrats will concede something to raise the debt ceiling.  Because they absolutely believe the Republicans will allow potential disaster to occur.  With the stakes so high the Democrats cannot in good conscience call their bluff.  The right choice is to concede just as it was in our hypothetical above.  Regardless of whether the Republicans would actually not raise the debt ceiling without serious concessions, the fact that they can credibly signal that they wouldn’t is part of their optimal strategy.  This imbalance in credibility shifts any negotiation equilibrium towards the right on the political spectrum. 

As with any game involving multiple actors, a predictable strategy can eventually be exploited.  So why does this imbalance exist?  Why don’t the Democrats change their strategy, take more extreme positions, let the Republicans take the lead on stalemate and move the negotiation equilibrium further to the left?  Because, while that is an optimal strategy for Republicans it isn’t for Democrats.  Recent research done by Pew shows that the Republican base overwhelmingly prefers political candidates who stand by their beliefs over candidates who compromise with opponents.  Meanwhile, the Democrat base overwhelmingly prefers candidates who compromise with opponents over candidates who stand by their beliefs. 

This is a core difference in values, thought process and approach to problem solving among the supporters of the two parties.  And it creates a strange equilibrium where representatives of both parties practice optimal strategy based on the constituents they represent but the optimal strategy means one group of constituents will consistently give up more of what they believe in than the other group.  Of course, from the perspective of the right it likely feels that the equilibrium remains too far to the left because even as Republicans win negotiation battles they still, in the end, compromise, albeit with much stronger results than would otherwise be expected in the absence of credibly extreme positions.

This is a topic I would like to explore further.  The negotiation game and the optimal strategy for achieving the desired results can be applied in an interesting way to some education issues.  Also the differences between the supporters of the parties explains a lot about why supporters of both parties often have a hard time understanding each other and why they have the attitudes they do about government.  While the question of supporting strict adherence to values or compromise isn’t the focus of the Pew research it does have huge implications that deserve to be explored further.

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