Saturday, September 07, 2013

Bargaining Using Adam Smith's Insight

Tim Worstall posts (6 September) on “The Pin Factory Blog”, Adam Smith Institute
Cooperation works for humans, not competition”
“This isn't as much of a breakthrough as the Mail thinks I'm afraid:
“ls 'survival of the fittest' finished? Scientists 'prove' that generosity - not selfishness - is the only way modern civilisation can survive.”
“We've known for some years now that the correct solution to the prisoners' dilemma is tit for tat: as long as the game is running in repeated iterations. And given that life is a repeating series of interactions with very much the same people this is thus the winning strategy in life. If someone cooperates with you then cooperate back: if they do you over then do them over back. We also know from the ultimatum game that people will damage their own interests in order to enforce their vision of fairness. So there's no real surprise about the idea that cooperation works for human beings: we've seen both that in the way that life is actually lived it brings rewards and also that humans seem hard wired to punish those who do not.
I comment with some claims to authority after many years of running “Red-Blue” games in Europe and elsewhere, including the USA, and studying the results from managers from many cultures,  as the normal introduction to my thousands of negotiation workshops that  I ran until my retirement.
It may be misleading to draw sharp conclusions such as its really about ‘markets v. socialism’, or worse: ‘self-interest v. co-operation’.  Human behaviour is not easily squeezed into tidy labelled boxes like that, and neither are the categories so clearly defined by such asserted properties.
Markets are not about ‘survival of the fitness’, or the home of all that is ruthless. Socialism is not a humanitarian tea-party (in fact, the Soviet experience of socialism – and its modern bastard in North Korea – have a lot to answer for in the crimes against humanity's book of account).
Competition can only operate well with even a minimal but necessary degree of co-operation, but that didn’t exclude a high degree of co-operation too.  
Adam Smith correctly noted this in chapter 2 of Wealth Of Nations, where he discussed the human phenomenon of bargaining between a diner seeking to buy the ingredients for a dinner from a “butcher, brewer, and baker”.   Smith’s advice was to exchange offers with the sellers in search of a bargain: “Give me that which I want, and you shall have this which you want, is the meaning of ever such offer”. That, noted Smith: “it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.” 
Bargaining is a form of persuasion, that is, it is not an exchange of ultimatums that, if maintained, will usually result in no transactions at all between two solely self-interested egoists.
Bargainers need a degree of patience. The ‘wham, bam, gimme it now’ school of negotiation is the ante-chamber of angry disappointment. 
Smith advised the dinner buyer to address the self-interests of the seller and not their own self-interests, and not just plead for the other party to exercise their feeling of humanity.  He advised to talk of the seller’s “self-love”, that is, their self-interests, and how they may be met as a result of the transaction on mutually bargained terms.
Now this seems to me to be clear understanding of how negotiations are conducted in the real world by negotiators, who understand that their best interests are served by addressing the interests of the other party.  This requires them to find a mutually satisfactory basis for both parties to co-operate to mutually agree on the specifics of the terms of their transaction, using condition bargains ("If you - then I").
Now Tim, of course, understands that. Sadly, many “rightist” economists, including among my “harder” libertarian colleagues, and most sociologists, many (most?) of whom are on the ‘left’, and sundry others on the ‘left’, do not.
The enduring lesson of the “Red-Blue” game of “Tit-for-Tat” is clear evidence for inducing co-operation as the safe anchorage of workable competition, with each party’s self-interested behaviour mutually contributing to the acceptable agreement from the conduct of both parties.


Blogger Tim Worstall said...

In my business life I'm sometimes thought of as being a bit simple. Because I always open any negotiation with "Well, what do you want the result to be then?"

It just seems so much simpler that way. If what they do want the result to be is acceptable to me then why not just agree?

9:40 am  
Blogger Gavin Kennedy said...

As aways you are on target.
Bargaining is appropriate where there are differences.
Rain dances are not appropriate when it's already raining.
Indeed, imagine markets where all prices are negotiated. Markets work best through visible prices; if the price is acceptable, it's easier to pay up and go and do something more useful.
Total bargaining cultures usually are poorer than they need to be.
Shopping at Sainsbury, Waitrose, or Tesco is already a chore.
Negotiating large contracts with various bid prices are different and the bargainers earn their fees.

8:46 am  

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