Cold War Schelling - A Game of Chicken!

Dr Thomas Schelling was a different sort of Nobel-prize winning economist –let’s call him a ‘hatke’ economist - who worked on the fascinating science of game theory and its utility in the cold war and in nuclear strategy. He presented an unusual option in cold war negotiation – which remains as debated as it is controversial – that went as follows:

One side in a negotiation can strengthen its position by narrowing, not expanding, the options available to it. 

Imagine that there are two drivers driving towards each other on a collision course (I am getting nervous writing about it!).  One must swerve, or both may die in the crash.  But if one driver swerves and the other does not, the one who swerved will be called a ‘chicken’, a coward, the one who blinked first. 

     Your first reaction is likely to be, ‘…but this will never happen.  Humans love their lives way too much.’

Well, sorry to disappoint you, but it happened for half a century after the Second World War, when the two superpowers drove towards each other.  It happens – with lower consequences – in traffic jams, when people refuse to move and glare with hostility.  It happens in conflicts at home and at work. 

So, it happens. 

The fear of being labelled a chicken triggers the aggression (both emotions emanating from the amygdala).

So, ol’ Schelling suggested that one option could be that one of the drivers who is hurtling towards the other could rip the steering wheel from the steering column and brandish it so that his opponent can see that he no longer controls the car.

Have you done this? (no, not while driving, but while negotiating….)

1000 or 1500 ?

 Let me offer you a choice of a prize: I either give you a gift of Rs 1,000 or a gift of Rs 1,500 (absolutely no strings attached to either option). 
Please choose what you’d like.
Sounds silly?  Is there a possibility that you could opt for Rs 1,000?

Amongst my pet peeves (of which there are many) is one about how we all believe in humans being rational – Homo economicus.  If you have seen a post or two earlier, I tend to go on about it (which is pretty irrational, I agree).

In this blogpost is an example where you might just opt for the thousand in that example above and feel better about it.  It is about context.  Context.  Context.  

Michael Shermer in The Mind of the Market (a splendid book which I highly recommend) says: …studies show that when it comes to money, neither utility nor logic prevails.  Let us take one of Nobel prize winning economist Richard Thaler’s favourite examples  

He presented people with a choice of being either Mr. A or Mr. B in the following scenario: 

Mr. A is waiting in line at a movie theatre.  When he gets to the ticket window he is told that as the one-hundredth-thousandth customer of the theatre, he has just won $100. 

Mr. B is waiting in line at a different theatre.  The man in front of him wins $1,000 for being the one-millionth customer of the theatre.  Mr. B wins $150.  

Have you made your choice (be honest, please!) ?
Are you now smiling? 😊

This irrational behaviour, Dr. Thaler says, is regret aversion.  At a generic level, people are willing to earn absolutely less if they can make relatively more.  We are willing to pay a price for relative rank and status, which is traded in a different form of currency – social capital. 

This is also the reason for another fascinating discovery:  
Research has shown that silver medallists feel worse, on average, than bronze medallists. (Gold medallists, obviously, feel best of all.) The effect is written all over their faces, as psychologists led by Thomas Gilovich of Cornell University found out when they collected footage of the medallists at the 1992 Olympic games in Barcelona. Gilovich's team looked at images of medal winners either at the end of events – that is, when they had just discovered their medal position – or as they collected their medals on the podium. They then asked volunteers who were ignorant of the athlete’s medal position to rate their facial expressions. Sure enough, the volunteers rated bronze medallists as consistently and significantly happier than silver medallists, both immediately after competing, and on the podium. 

The reason is to do with how bronze and silver medallists differ in the way they think events could have turned out – what psychologists call “counterfactual thinking”. In a follow-up study, the team went to the 1994 Empire State Games and interviewed athletes immediately after they had competed. Silver medallists were more likely to use phrases like "I almost…", concentrating their responses on what they missed out on.  (we are Home sapiens, after all.  Whew!). 

Bronze medallists, on the other hand, tended to contemplate the idea of missing out on a medal altogether. These differences in counterfactual thinking make silver medallists feel unlucky, in comparison to a possible world where they could have won gold, and make bronze medallists feel lucky, in comparison to a possible world where they could have returned home with nothing! 

So the research seems to add a bit of scientific meat to Hamlet's famous line "there is nothing either good or bad, but thinking makes it so", as well as revealing something about the psychology of regret. Even though we must deal with the world as it is, a vital part of life is imagining the world as it could be – thinking about a job you should have applied for (or said “no” to), or a stock that you should have bought when it was a quarter of its current price (but nobody remembers the reverse!). 

Lesson :   Phrase an offer in a negotiation in a way that does not cause regret in the other person’s mind (such as, “had you come to me last month, I would have offered you a million more"…or "you could have had the opportunity to go onsite if you had come to office last Monday when we took the decision").   

 

 

 

 

 

 

Should We Shun An Auction?

An enduring myth that people persist with is that corporations take hard-nosed, rational, unemotional decisions. 

In general, this is nonsense.  A corporation does not take a decision; the people in the corporation do and they are subject to the twists and turns of emotional upheaval.  In case you wonder if I can back this up with an example, here is one (of many, I chose this, because it is just so egregious): in 2010, telecom companies in India paid around Rs 1 lakh crore (that is, Rs 1,000,000,000,000!) for 3G spectrum and never recovered from the experience, plunging into whipping debt.  They justified their bids with extraordinary projections of business which none of the senior guys ever believed were possible. 
Why did they commit hara kiri? 

The answer has to do with emotions.  It is a story that teaches us a great deal.  It is the story of how auctions work in the human mind.  

Elizabeth Phelps of New York University and Mauricio Delgado of Rutgers Univ (of whose team Dr Phelps was a part) have studied the issue of overbidding in auctions and here is what they have found: since auctions are, in a way, competitions for something that is limited, there are two emotions that present themselves – the need to be better than someone and the fear of losing out (or ‘fomo’, as now termed).   
Which is more dominant?

But first: have you come across dopamine? 
Dopamine is a type of neurotransmitter. Your body makes it, and your nervous system uses it to send messages between nerve cells. That's why it's sometimes called a chemical messenger. Dopamine plays a role in how we feel pleasure (after receiving a reward, for instance). It's a big part of our unique human ability to think and plan.
From Webmd 

So, here is what the studies show:

Winning an auction is intrinsically socially competitive, unlike winning a lottery.  Both wins activate dopaminergic signalling (as has been found in the study).  But, now comes the catch: losing a lottery has no effect, while losing a bidding war inhibits dopamine release.  Not winning a lottery is bad luck; not winning an auction is social subordination.  Auctions, by making people feel as if they stood to lose something, tend to manipulate them into overbidding further than they normally would.
And, finally, it would be nice for us to accept that the brain is wired to take emotional decisions. A summary of these studies in National Geographic (https://www.nationalgeographic.com/science/article/why-do-people-overbid-in-auctions) says this:   

In these auctions, for example, one and only one part of the brain – the striatum – reacted very differently. When players won, brain activity in their striatum increased. Losing, on the other hand, evoked different reactions depending on the game – the striatum didn’t react when a player lost the lottery game, but activity in this area fell when they were defeated in the auction. In fact, the volunteers with the greatest penchant for overbidding showed the deepest falls in striatal activity when they lost. 

This is not the first time that the activity of the striatum has been linked to winning and losing during psychological games, and other studies have revealed that the area plays a role in decision-making and feelings of reward. 

 

 

 

 

 

 

Stuck? Indecisive on what to do next? Ask a stranger

 A hundred and twenty years ago, in 1901, Georg Simmel, an academic, wrote a seminal essay titled The Stranger.

He offered a wise piece of advice to anyone needing to take a decision: consult a stranger. The power of strangers stems from their objectivity: they do not need to please you or watch your expression (even if they did....?), are not bound by ties or by custom or precedent. They see things differently (though they have biases, of course).

And Simmel used the example of medieval cities in Italy that recruited judges from outside because no native was truly impartial.

History has proved Simmel right. Shouldn't we learn to consult a stranger and listen before we decide?

Play the Ultimatum Game

Are you a rational or an emotional person (or a mix of the two)?

Shall we play the Ultimatum Game to find out?

ps: play it in your mind, of course.  Now-a-days, the Americans have a word for it - 'Thought Experiment' - which I dislike (intensely) because it sounds like fingernails on glass

This is a simple, take-it-or-leave-it bargaining environment. Say, a stranger (call him GameOwner) brings another stranger up to you (GamePlayer) and asks you for your participation in an activity.  You agree.  GameOwner and GamePlayer do not know each other and have just been introduced.  So, all three of you are strangers to each other. 

GameOwner then takes out a bunch of ten-rupee notes and speaks to GamePlayer in front of you: "I am giving you ten ten-rupee notes - that is a hundred rupees.  You can share how many notes you wish with this person (that's you!)."

GameOwner then talks to you: "When you receive the money, if you choose to keep whatever you receive, GamePlayer keeps what is left with him.  If you reject the offer from GamePlayer, I get back the whole amount - that is, a hundred rupees - from him!  A key condition: both of you are not allowed to speak"

GameOwner then gives GamePlayer the ten-rupee notes.  And do you know what GamePlayer does?

He keeps eight of those ten notes, and gives you just two!

What do you think you will do?  Will you keep the twenty rupees or will you reject it?  

The Ultimatum Game was designed forty years ago, in 1982, and is now one of the most popular games in Behavioural Economics, having been played thousands of times all over the World.  The key result of Ultimatum Game experiments is that most proposers offer between 40% and 50% of the endowed amount, and that this split is almost always accepted by responders.  What does this tell us?

That, by and large, people are fair and you can trust them.  (Are you willing to accept this? When I first read about the results, I wondered which planet they were referring to, but, of late, I am more receptive to positive news.  )

Now for the next (and final) question: what did you do in that Game - did you accept the twenty rupees (rational behaviour) or reject it (emotional, because it is so so unfair) ?

What experiments reveal is that, when the proposal falls to 20% of the endowment (that is, a person gets two out of ten notes, say), it is rejected about half of the time, and rejection rates increase as the proposal falls to 10%.
(results quoted from Experimental Economics and Experimental Game Theory, Daniel  Houser and Kevin McCabe)

The reason we tend to reject a bad offer is because the decision to do so is taken by a part of the brain called the amygdala which is the chap within responsible for social and emotional decisions.  The amygdala triggers a desire to punish the GamePlayer for being unfair.  

Fascinatingly, people with damaged amygdalae are generous to a fault!  They will continue to trust someone and accept their bad offers.

(for more on amygdala, the brain - and about everything else - read up a brilliant book called Behave, by Robert Sapolsky)

ps: my amygdala seems normal for the moment. 

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The Devil's Deputy

 ‘He is full of pre-conceived notions and has a ready answer for the question, “Why will this not work?” or “Why should we not do this?”.  Never contributes any positive suggestion to the team and grumbles when I do not take his path.  Very irritating chap and has a damaging effect on others.  Can be sarcastic in a subtle way that I often do not understand (though I know he is being caustic and that make me angry!).’

‘Hmm. So, how did you deal with this guy?’

‘You know, he has been in the organisation for many years, so I had to tread carefully.  Have sidelined him in decision making.  I must tell you this: his command over English is excellent, much better than mine, and he flaunts it as a way of showing his superiority.  Does this often, in e-mails with stakeholders and in meetings.’

‘So, you think he is playing a game of some sort?’

‘Very much! I think – and now I am being truly honest – I think, he wanted to lead this team and was upset that I was brought in from elsewhere.  He believes – again, this is what I think – that he has superior knowledge of the domain than I do.’

‘This whole business of managing him seems to be stressing you out?’

‘Of course. I avoid meeting or speaking to him or making eye contact in meetings.  I have worked for so long that I can do this well, but it definitely stresses a person.’

How could I tell him – one who was much older than I was and senior in rank (my boss) – that he was the problem, not his deputy ?  That the game-playing, passive-aggression and sarcasm of the subordinate was the manifestation of dejection, yet his criticism (which I often heard) was analytical and incisive and that ignoring this counter-view was costing the team? 

Should I have told him that the Roman Catholic Church had a Devil’s Advocate role assigned to a person called the ‘Promoter of the Faith’, who had to make a case against the candidates that the Church was considering for sainthood – a role to be the wet blanket, the nay-sayer?  That the deputy should have been given extra prominence and attention to boost his esteem and involvement (the chap was known to be sharply intelligent)?  That the manager had to manage himself – his thoughts, emotions and biases in that order - to manage his subordinate ?

I never said any of this on that day twenty five years ago.  

Things unravelled in months.  The deputy left, but not before he had done substantial damage to his boss’ future, who was recalled to the parent organisation.  Over the next five years, under a new leader, what followed was sheer carnage as an organisation with market-leadership status found its key employees leaving and was reduced to a bit player.  Which it still is.

It all started with a Devil’s Advocate who did not have a jury to listen to him. 

(ps: much of that conv between boss and me happened in his room.  Some of it - my contribution - did not take place, but provides the continuity in the dialogue.  QED)

Haka Aggression

Are you - YOU, specifically - able to distinguish between aggression and ritualistic threats of aggression?  Between a statement or action that has aggressive intent and one that is, well, fake talk (but well faked!).  Say 'Yes, I can distinguish between these' only if the ritualistic threat does not affect you beyond the surface - it is water off a duck's back, just passes you by, that sort of thing.

And, if you still say Yes, you are in a minority (to which I only occasionally belong, because I do get affected by ritualistic threats as much as by actual aggrrresion!)

There is a lot of ritualistic aggression around us: on the road, for instance.  Or a child might tell her sibling, "if you do this, I will hammer you," though she means nothing of the sort.  At work, "if you do not get this new lead to be our client, your job is in trouble."  Coldness in language and expression is another way that the human-baboon bares his teeth.  

Look for it.  (and, when talking to yourself - which I hope you do often - make a mental mockery of the whole exercise!  Otherwise, you end up stressed. Nothing more important than to be happy.) 

There is a insightful bit on ritualistic aggression in Behave, a great (but heavy) book by Robert Sapolsky, Professor of Biology and Neurology at Stanford:

...many primates have lower rates of aggression than of ritualized threats (such as displaying their canines).  Similarly, aggression in Siamese fighting fish is mostly ritualistic.

Then there is a great contemporary version of human ritualistic aggression, namely the haka ritual performed by rugby teams from New Zealand.  Just before the game starts, the Kiwis line up midfield and perform this neo_maori war dance, complete with rhythmic stamping, menacing gestures, guttural shouting and histrionically threatening facial expressions.  It is cool to see from afar on Youtube, while up close it typically appears to scare the bejesus out of the other team.

However, some opposing teams have come up with ritualistic responses straight out of the baboon playbook - getting in the haka-ers' faces and trying to stare them down.  Other teams come out with ritualistic responses that are pure human uniqueness - ignoring the haka-ers while nonchalantly warming up; using their smartphones to film the display, thereby emasculating it to something vaguely touristy in flavour; tepidly applauding afterward with great condescension

The last response is brilliant!  Do you think you can do this the next time you are confronted by a ritualistic threat of aggression?  

 

Are performance and perception related? Here is what a fascinating (and sobering) study tells us....

 

In 2004, World Bank economists Karla Hoff and Priyanka Pandey reported the results of a remarkable experiment.  They randomly chose 321 high-caste and 321 low-caste boys in the age group of  11 to 12, from scattered rural villages in India, and set them the task of solving mazes.  

First, the boys did the puzzles without being aware of each other’s caste.  
Under this condition, the low-caste boys did just as well with the mazes as the high-caste boys, indeed slightly better.

Then, the experiment was repeated, but this time each boy was asked to confirm an announcement of his name, village, father’s and grandfather’s names, and caste.  
After this public announcement of caste, the boys did more mazes.  This time there was a large caste gap in how well they did – the performance of the low caste boys dropped significantly.

It seems to be a self-fulfilling prophecy:  when we expect to be viewed as inferior, our abilities seem to be diminished. We get further negative commentary - hardly a motivator, you will agree - and the spiral digs deeper in.

Have you heard of - or personally experienced - this?  An employee is considered an average-to-poor performer at work, gets a change of role or team or job and becomes a good-to-champion performer?  (have seen this.  Twice.  In one instance, going back twenty years, I was the average performer, so it strikes a rather sensitive chord)

The same phenomenon has been demonstrated in experiments with white and black high-school students in America, most convincingly by social psychologists Claude Steele at Stanford University and Joshua Aronson at New York University.  In one study, they administered a standardized test used for college students’ admission to graduate programs.  In one condition, the students were told that the test was a measure of ability; in a second condition, the students were told that the test was not a measure of ability. 

The white students performed equally under both conditions, but the black students performed much worse when they thought their ability was being judged.

So, what does this have to do with negotiation?  

Well, a great deal actually.  In relationship negotiations - with team members and family, for example - a perception about someone acquires reality status in everyone's heads and the person's ability to negotiate is impaired. She gives in, often permanently, allowing the other person a feeling of victory in the negotiation, but it is a shallow chimera, for there is acceptance of the decision, not ownership.   

Would I do this if I was negotiating a key decision with my child?
If not, can I do this to anyone else?