The Prisoner’s Dilemma

Martin Proulx recently attended Simon Bennett’s presentation on Game Theory and Contracting.  Martin related with interest the games that Simon used to illustrate the need for better contracting process between parties, specifically three games: The Prisoner’s Dilemma, The Pirate’s Game and The Bidding Game.  I wasn’t able to attend the event so I don’t know exactly how Simon used these game other than through Martin’s explanation, but I was intrigued by the supposition that some people treat contract negotiations as they would the Prisoner’s Dilemma.

To understand my intrigue, we need to start with an understanding of the Prisoner’s Dilemma game.  This game starts with two players, both “accused” of committing a crime together.  They are then separated with no means of communicating with each other.  The only way to “win” the game is for both players to say that their accomplice is innocent. If one person fingers the other for the crime, the innocent one goes free and the guilty one stays in prison.  If both parties accuse the other, both stay in prison.

As Martin explained Simon’s presentation, he states that the “game is interesting and demonstrates why contractual agreement has the potential to results in an optimal deal but leads most of the time to the worst possible scenario.” (italics are mine).

Woah!

[Side note:  I don’t know Simon or his background… nor do I know that Martin’s recollection of the session accurately depicts Simon’s statements.  Everything that follows is merely a response to what was posted on Martin’s blog.]

While I do think that some game theory applies to contract negotiations, I don’t believe the Prisoner’s Dilemma is an accurate game to ever use to show the contracting process.  If you’re closing deals and it feels this way, I’m sorry to tell you but you’re doing it wrong.  Time to start from scratch.  If you have been doing it this way and need to start over, here’s the scoop:

Contractual agreements should NEVER lead to the worst possible scenario.  In any negotiation, you must always remember the Five Fundamental Skills for Effective Negotiation: Information Gathering, Strategic Thinking, Time Management, Perception of Power and Communication.  To counter any potential Dilemma scenario, you only need two of these skills: Information Gathering and Communication (and really, you only need Communication).  Simply talking with your accomplice would create a better outcome.  If you add Information Gathering, you’ll discover the three possible outcomes… and then can obviously choose the best one together with even less discussion.

If, for whatever reason, you haven’t gone through the Five Fundamental Skills and are thus not ready for negotiation, don’t negotiate in the face of ill-preparedness.  Delay the negotiation until you have time to prepare properly.  Lastly, if you’ll never be ready, remember that you can always walk away.

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4 thoughts on “The Prisoner’s Dilemma

  1. Martin

    Thank you for the additional information Jeffrey.

    Let me add a little more information. The Prisoner’s Dilemma was used to demonstrate that when people do not talk to each other with the objective to maximize their outcome, their behavior can (and often) lead to a not-so-optimal outcome.

    In the case of contract negotiation, each party assumes the worst from the other party AND tries to maximize their reward.

    The presentation used a series of games to address the various assumptions being made during negotiation.

    Reply
    1. Jeff

      Martin: Thanks for your clarification. But again, I think I dispute the central premise (that each party assumes the worst AND tries to maximize their reward). If the parties believe that, they shouldn’t be negotiating in the first place. People coming to the table should at LEAST be neutral (neither positive nor negative) with respects to their feelings about the other side. Otherwise, why would you want to negotiate with them at all?

      Reply
  2. Andrew Meyer

    I am certainly not an expert in business partnership/contract negotiations, but I’ve been through a couple and are currently going through one now.

    I’m not sure the prisoners dilemma is great for negotiations, but it is quite useful for contracts. Contracts are written to resolve the distribution of assets in the worst case scenario. They are rarely ever looked at unless the worst case scenario or something something approaching that prevents the parties from resolving their issues in any other way. Knowing this is beneficial as it creates the structure within which other discussions take place.

    Negotiations are different. To me, in a negotiation, each party has an idea of what they are trying to achieve and a range of what they can live with and what they cannot. Items that may be very important to one party, maybe unimportant to the other. I have often found this to be the case. Anytime I need an example of negotiations, dating/marriage is what I use. If one wants to include contracts, the marriage license/prenuptial agreements work in nicely (or not so nicely in some cases…)

    There are usually only a couple of parameters that are important to each party and what is important to one party is rarely what is important to the other party. For each parameter, there is a range of acceptable solutions. The negotiation is about discovering which of the parameters is important to each party and what the acceptable range is for each party.

    After having discovered the important parameters and a little bit about the acceptable ranges, the parties then negotiate to trade-off the unimportant for the important. (I would work the parameters and ranges for dating into this discussion if it were talking over beer and I was sure the discussion would not be used against me at a later date…)

    What is difficult, is that optimal isn’t ever really known. While the pirate’s game is fun to think about and the prisoners dilemma is interesting in mass, neither are represent the realities of a negotiation. Usually, both parties have to continue to work together long after a negotiation has gone on. An optimal solution is one that is reach as quickly as is reasonable, allows both sides to walk away happy and one that affirms the relationship and if there is collateral damage, it can be repaired.

    Reply
  3. Jason Mark Anderman

    I think the Prisoner’s Dilemma is a good model for what goes on internally at a corporate client, which often is more complex than the actual negotiation. Routinely you have multiple parties which, while legally consisting of one entity, are often quite confrontational and have divergent agendas. For instance, when a sales department is looking to purchase new sales management software, they usually need the IT department, the procurement department, the finance department, and the legal department to all facilitate and approve the deal. While it would be optimal to pursue the best strategies in putting the draft contract together, using the techniques Jeff mentions above, I found it surprisingly common within a client that people assumed the worst which guided their behavior accordingly.

    The sales department assumes that procurement would not embrace their desired vendor so they would negotiate the deal without letting them know about it until things are rolling. Finance wouldn’t care about the financial impact of not maximizing savings (procurement’s mission) and instead would only concern itself with the sales department complying with corporate finance policies and remaining on budget, often knowingly approving a deal without legal or procurement involvement. Procurement assumes that legal would ruin the vendor relationship and string out the negotiation, so they draft and revise the contract and negotiate revisions, only contacting legal for a final blessing. Legal has so little trust in anyone that they try and insist that procurement only use a one size fits all contract with overly aggressive legal terms protecting the company that has no specific treatment of the deal at hand and the unique risks involved, which makes for a difficult negotiation with the vendor. In this sense, everyone pursues the suboptimal path.

    Reply

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