Negotiation is a big part of our daily lives — from minor debates like deciding where to eat out with friends to complex business deals. People leverage a variety of tools and techniques to navigate negotiations, resolve conflicts, and reach mutually favourable outcomes. One popular approach is “game theory.”
This blog will explore how game theory can be applied in negotiations and the benefits it brings to the table.
Game theory is a field of study that uses mathematical models to analyze and explain how people choose between conflict and cooperation.
The interactions between decision-makers are represented as "games," which consist of players, strategies, and payoffs. The basic idea is that players aim to make decisions that maximize their own outcomes while considering the decisions of others.
At its core, negotiation is a strategic interaction involving multiple parties with conflicting needs and interests. The game theory provides a structured approach to understanding negotiation dynamics and predicting possible outcomes.
Four “games” are particularly relevant to negotiations: Prisoner’s Dilemma, Trust, Stag Hunt, and Chicken.
Prisoner's Dilemma is a tricky situation where the final outcome rests on the decisions made by everyone involved. In the game, both sides sit down and agree on a plan, before each going their own way. Each side then gets to choose whether to stick to the plan or break away from it.
In this situation, the two parties will benefit more by cooperating, but there is a risk of one party defecting which would harm the outcome for both. Generally speaking, both parties will end up worse off if they put their own interests first and ignore the needs of the other party.
The game theory encourages negotiators to recognize this dilemma and explore collaborative strategies that can lead to better outcomes for all parties involved.
Trust is a key component of successful negotiations. In the game of Trust, one party has power over the other and can choose to share the benefit equally or split it in their favour.
The other party has no real power and therefore decides to make a concession (or gift) early on in the negotiation process. They hope that doing this will influence the distribution of the reward and result in a better outcome.
In game theory terms, the Trust scenario highlights the importance of building trust by demonstrating a willingness to cooperate as negotiations progress.
The Stag Hunt scenario emphasizes the conflict between cooperation and competition. It presents two hunters who must decide whether to hunt a stag (higher reward) or a hare (lower reward). Hunting a hare will be easier whereas they will need the cooperation of the other party in order to hunt a stag. Both parties should receive more benefits if they work together.
This scenario mirrors negotiations where parties must decide whether to pursue ambitious joint gains or opt for safer individual gains. The game theory highlights the importance of aligning goals and incentives for mutually beneficial outcomes in negotiation discussions.
Chicken is the most common game seen in negotiations and is often used by inexperienced negotiators. In chicken, two players take part in an activity that will harm both parties unless one backs down. It is not a collaborative approach to negotiation, as it results in one party winning over the other and often creates a confrontational atmosphere.
The game theory encourages negotiators to assess the credibility of the other party’s commitments and identify the potential consequences of pushing the situation to the brink.
The use of game theory can bring about a host of benefits in any negotiation scenario. This includes:
In conclusion, applying game theory principles in negotiations offers a structured and strategic approach to navigating complex interactions. By understanding classic game theory scenarios like the Prisoner's Dilemma, Trust, Stag Hunt, and Chicken, negotiators can enhance the quality of discussions and secure win-win outcomes for all parties involved.