Saturday, April 23, 2011

You are not so ethical.

A while back I made reference to, a fun blog dedicated to the many ways our brains misfire without our knowledge. Unsurprisingly, our brains also misfire when it comes to ethics, as my Harvard professor Max Bazerman and his colleague Ann Tenbrunsel point out in a recent New York Times piece.  It turns out that we're not so ethical, either.

A key misconception most of us have about ethics is that lapses are entirely a matter of choice. People face temptation and, torn between what they know they should do and what they want to do, choose one path or the other.  Bazerman and Tenbrunsel show us it's not nearly so simple.

Rather than from overt choices, much of our unethical behavior has its roots in self-delusion.  We have "motivated blindness" to overlook unethical behavior in ourselves and in others when it serves our interest to do so.   More interestingly, to me at least, is the data showing that many steps we take to prevent unethical behavior can actually increase it.

Fines for compliance and requirements to disclose potential conflicts of interest have been shown to increase the likelihood of unethical behavior by providing mechanisms for self-delusion.  Even a token fine turns a dilemma from an ethical one to a financial one.  No one thinks a basketball player is a bad person based on the number of technical fouls they rack up, because the detailed system of penalties turns fouls from cheating to just part of the game.  In the same way, sanctioning systems in business can result in more violations and cause people to see ethical decisions as economic decisions.

We are ethical beings.  We like to maintain a positive self-image and to see ourselves as ethical and moral.  Self-delusion can help us maintain this image by hiding the ethical component of decisions.  Someone who discloses a conflict of interest may feel that they have done their duty in that regard and be free to let unconscious bias guide their actions.  Research shows this bias to be substantial; Bazerman and Tenbrunsel cite the example of auditors who, given identical information, make sharply different assessments of the value of a company depending on whether they think their client is the seller or the buyer.

Negotiators need to factor this into their work.  If you are designing a long-term agreement between two parties, for example, you may be working against your interests if you build in penalties and sanctions for performance shortcomings or bad behavior.  We should all bear this in mind when examining our own behavior.  Ethical dilemmas abound and nearly everyone thinks they are far more ethical than they actually are.  You and I are unlikely to be exceptions to this rule.

Tuesday, April 12, 2011

Pat Toomey's plan for the Republican BATNA

U.S. government debt, backed with the "full faith and credit" of the nation, is the standard for risk-free returns.  Any local government, company or person that wants to borrow money pays a higher rate of interest than the federal government because it's assumed that the chance of a federal default is virtually zero.

There is, however, a fairly straightforward way that the U.S. could, in theory, default.  Since the federal budget runs at a deficit, we need to keep borrowing money to pay our bills.  This means that we have to increase our absolute debt level, and there's a legal limit -- the debt ceiling.  Once the debt hits that level we can't borrow more unless Congress passes legislation to increase the ceiling.

What would this mean?  In simple terms, the U.S. wouldn't be able to pay its bills and we would default on a number of obligations, including our debt obligations.  Even if resolved quickly this would likely attach a significant risk premium to our government borrowings which would do serious damage to our economy and make the budget deficit worse.

So far Congress has always increased the debt ceiling as needed but recent years have seen an occasional game of chicken being played, with politicians threatening to vote against an increase unless certain demands are met.  Most recently, some members of the Tea Party have demanded major cuts in spending in exchange for allowing the ceiling to rise.  Although the "grownups" of each party have kept these revolts from getting serious, the specter of a debt default is scary enough to have attracted efforts to prevent it in a more structural way.

Pat Toomey (R-Pennsylvania) has proposed an interesting way to reduce the damage that would be done by a failure to raise the debt ceiling.  He has put forward legislation that would prioritize debt service payments in the event that the debt ceiling was not increased.  As Toomey points out, tax revenues are more than sufficient to pay our debt service obligations provided only that they are prioritized under law and this would reduce the damage done by a failure to increase the ceiling.  Think of it as changing a game of chicken from being played in airplanes (with each pilot having all their loved ones on board) to being played in cars -- maybe even cars that are only going ten or fifteen miles an hour, with the drivers wearing their seat belts and having air bags.

The bill has fifteen co-sponsors in the Senate -- all Republican.  Democrats have attacked it on a number of fronts.  Why is this a partisan issue?

Of course there are political reasons for Democrats to attack any Republican proposal (and vice versa).  Accusing Republicans of putting the financial class ahead of social security recipients or putting China first grabs headlines and can be seen as part of the understandable (although unfortunate) attempts each party makes to delegitimize the other in the eyes of the electorate.  It's also quite possible that there are legitimate disagreements over whether bondholders should be the top priority among government obligations in the event that the debt ceiling weren't increased.  But let's assume for the moment that these factors aren't in play.  Specifically, let's assume that there's broad support for Toomey's logic -- failure to meet our obligations to bondholders, even for a matter of hours or days, would be catastrophic.  The Full Faith and Credit act would therefore seem like a reasonable way to reduce the risk of a catastrophe.  Why then might Democrats still oppose it?

Remember the concept of BATNA -- a party's best alternative to negotiated agreement.  Whenever our national debt approaches the ceiling, a negotiation takes place but it's a negotiation in which the BATNA is catastrophe.  Republicans will demand spending cuts, tax cuts or specific reforms and will saber-rattle about blocking an increase in the debt ceiling but that's not really a credible threat because it would be a disaster, both for the nation and for the party that caused the default.

Toomey's plan changes that.  The game of chicken is now being played in slow-moving cars rather than airplanes and the Republican threat not to increase the debt ceiling becomes a lot more credible.  The Republican BATNA would be improved substantially so their demands become much harder for Democrats to resist.

Toomey and his co-sponsors know this, of course.  In fact, Toomey gives away that half of the plan in the op-ed that introduced the plan:
If we do not raise it, the government's tax revenue will enable us to fund roughly two-thirds of projected expenditures, including interest payments. Without the ability to borrow the other third, spending cuts would be sudden and severe: Projects would be postponed, some vendor payments would be delayed, certain programs would be suspended, and many government employees might be furloughed. Default would easily be avoided, but these cuts would certainly be disruptive. That's why I hope we can avoid this scenario.
But it would be even worse simply to raise the debt ceiling without regaining control of federal spending. The recent surge in spending, both in absolute dollars and as a percentage of our GDP, has driven us to record deficits and an explosion of debt. The growth in discretionary spending has been the most dramatic, but in the future mandatory entitlement spending will be the deficit driver. Congress must address both in order to put the government back on a sustainable fiscal path.
The vote on whether to raise the debt ceiling—and, if so, by how much—is our best opportunity to insist that any increase in our nation's debt be coupled with concrete steps toward fiscal sanity. Congress should make increasing our debt contingent on immediate cuts in spending and effective reforms of the spending process that helped get us into this mess.
While Toomey "hopes" Congress could avoid failure to agree on an increase to the debt ceiling, he makes clear both that such failure would be acceptable (assuming his bill is enacted into law) and would be superior to any agreement that didn't include clear measures to reduce spending.  In negotiation terms, his plan would shift the negotiation from one in which neither party has an acceptable BATNA (and thus attempts to capture value are both risky and likely ineffective) to one in which only the Democrats would find failure to make a deal unacceptable.

That's a pretty attractive prospect for Republicans; small wonder they're the only ones who support the plan.

Toomey's plan is a great example of a broader strategic concept.  Your BATNA is rarely static and you can often improve your negotiating position simply by improving your BATNA (or by worsening the BATNA of the other party or parties).  If you're asking for a raise or promotion at work you're better off if you have an attractive offer from another firm than if your BATNA is simply to quit or start looking.  If you're negotiating with a potential buyer for your house you're better off if you already have a solid offer from someone else.  An improved BATNA makes it easier for you to walk away which, in turn, makes it much harder for those you're negotiating with to take a hard line against your interests.

Friday, April 8, 2011

Government Shutdown & Fun with BATNAs

We approach the prospect of a new federal government shutdown.  Such a shutdown is triggered if Congress and the President cannot agree on how to fund the government going forward.  The costs of a shutdown are significant and basic funding is something Congress does regularly and routinely so it is remarkable to see us coming to close to a "no deal" situation.

I don't pretend to have a solution for the negotiation in Washington, but Negotiation theory offers some useful insights as to why the Republicans and Democrats may fail to reach a deal, and why they're making some of their most recent moves.

While all of our elected officials are dedicated public servants who place the good of their constituents and the nation ahead of all else, political calculations occasionally play just a teeny, tiny role in their decision process.  When contemplating a shutdown (i.e. evaluating their BATNA) the two parties have to predict the reaction of the American people.  Who will catch the majority of the blame?

Some conservatives, particularly those somewhat removed from the fray, remember the Clinton-Gingrich shutdown and are nervous about parallels.  Then too, an emboldened Republican majority in the House pushed hard for their agenda and found to their surprise that a crushing victory in the midterms didn't mean that the American people were on their side when it came to shutting down the government.  Republicans were blamed 2-1 and that confrontation both blunted Gingrich's revolution and likely sealed Clinton's re-election.

At that time Dick Armey pointed out a fundamental vulnerability for Republicans -- the general perception people have about the major parties' views on government.  "It is incongruous to the general public political awareness to think that Democrats would shut down government; Democrats love government. It is perfectly reasonable for them to understand that Republicans shut down government; Republicans don't like government."

Given this, and the obvious parallels between today and 1995, one might be surprised to hear many conservative voices relishing the idea of a shutdown.  Is the situation more favorable than in 1995 or is something else at play?

Even assuming nothing had changed in the objective political calculus, Negotiation theory (particularly where it intersects Behavioral Psychology) offers some possible explanations for why each party might be more willing to face a shutdown than they "should" from a purely rational calculus:

  • Escalation of Commitment.  Negotiators are vulnerable to two psychological needs -- to justify decisions already taken and to "win".  Each one can cause people to escalate prior commitments, such as an assertion that no deal is possible unless the other side makes a specific concession -- along with the other side committing that that concession is impossible!
  • Fixed Pie bias.  People tend to see negotiations as about splitting a fixed pie where whatever is good for you must be bad for me.  This is particularly true when the two parties have a mixed cooperative/adversarial relationship -- come election time, after all, things that are good for one party generally are bad for the other.  This can cause one side to feel that any agreement the other side is willing to take must be a bad deal for them.
  • Egocentrism.  We are naturally biased towards seeing things our own way.  We think our side is fairer and more reasonable than it is, we think our position is stronger than it is and we think our future is rosier than it is.  When polls show a more even perception of blame today than in 1995 this may cause Republicans to seek a fight and may be dismissed by optimistic Democrats.
These three biases (and they aren't the only ones at play!) go a long way towards explaining why Democrats and Republicans might fail to reach agreement.  Of course there are rational explanations for Republican confidence as well.  Polls show the public more divided on how to assign blame than they were in 1995 and support for spending cuts is much higher today than it was then.

With that as background, it's very interesting to see some of the tactical moves currently at play and to ask how they reflect on the lessons of 1995.

One key difference is that Republicans are playing a more nuanced game.  In 1995 the Republicans presented their budget, Clinton refused to sign it and the Republicans took no steps to avoid a shutdown. In particular, they refused to pass a continuing resolution (a temporary funding bill).  This made it relatively easy for Clinton to argue that the Republicans had presented him with an unreasonable demand and been unwilling to compromise.

Today, by contrast, the Republicans have continued to put forward continuing resolutions but have used them as tactical weapons.  They have included cuts and most recently they have included funding for the military for the year even in the event of a shutdown.  The first step forces Democrats to give some ground just to stay at the table and the second improves the Republican's BATNA by making it impossible (if the resolution is passed) for them to be accused of making soldiers fight without pay.

The Republicans have also avoided handing the Democrats an easy rhetorical weapon.  Clinton's victory in the court of public opinion was made much easier by the fact that the Republican budget combined $270 billion in Medicare cuts along with $240 billion in tax cuts, mostly for the wealthy.  Clinton juxtaposed these numbers and argued that the Republicans wanted to use Medicare as "a piggy bank" to fund "huge tax cuts for people who don't really need them".  Michael Takiff argues that Obama can do the same but his examples are much smaller and less clear cut. 

Another difference is that there's a third actor at the table -- the Tea Party.  This new movement changes the political calculus for Republicans significantly.  It may improve their BATNA (polls show that the Tea Party may be seen as the true cause of a shutdown) and it worsens many potential deals -- members from conservative districts have already seen the danger of a primary challenge if the Tea Party decides they aren't conservative enough.

The Tea Party also changes the BATNA for Democrats.  Some Democratic strategists no doubt relish the idea of arguing that the government shut down because the Republican party was held hostage by Tea Party extremists.

What fascinates me are reports that recent stumbling blocks in the negotiation have centered not around spending cuts but around specific policy riders, most notably about Planned Parenthood and the EPA.  How does this fit into the negotiation?  Some of what follows is of necessity speculation, but hopefully we can see a reasonable narrative.

First there is the communication battle.  Both parties would like to shape public perception of why negotiations have not yet reached a deal.  Public support for spending cuts is much stronger than for using a budget crisis to accomplish non-budget objectives.  Hence you have the following contradictory statements:

Schumer: The only reason the numbers aren't solved is because Speaker Boehner knows that if he did that, then everyone would know that it's the riders, and he doesn't want that out. But if you look at how many hours in the rooms of negotiators that discussing riders, it's predominant. The Speaker's folks have admitted that we've been fair on the numbers.
Durbin: At one point we had an agreement on money, even though Boehner denies it. It's hard to believe they would shut down the government because they can't get a vote on family planning and Planned Parenthood. Honest to goodness. Is that what the last election was about? I don't think so.
Boehner: There is no agreement on a number. There are a number of issues that are on the table. Any attempt to try to narrow this down to one or two just would not be accurate.
There have been enough independent reports confirming the importance of the policy riders to consider that likely.  Assuming for the moment that policy riders are the major stumbling block, why might that be the case?
One interesting clue is that insistence on the riders, particularly for defunding Planned Parenthood, is coming not from the Tea Party but from senior Republicans.  These members are closely tied to social conservatives who have expressed increasing frustration that their priorities are being left behind in the name of fiscal conservatism and "setting priorities".  Defunding Planned Parenthood would be a major victory for these groups (and thus for the politicians courting their support) and even if significant compromises are made in the end it may be useful for individual members to have "gone down fighting" against the perceived arch-nemesis of social conservatives, particularly if the compromises leave some symbolic wins on the table -- like forbidding the District of Columbia from using local tax monies to support abortion services.
It's also likely that Democrats are far more willing to play hardball over policy riders than on spending.  Given the current political climate a government shutdown caused by inability to agree on spending cuts is very dangerous for Democrats.  A shutdown caused by Republicans insisting on using the budget crisis to achieve controversial policy goals that are not widely seen as having much to do with the deficit is quite another matter.  Small wonder then that Democrats are pushing this narrative so aggressively.
It will be interesting to see whether the work each side has done to improve its BATNA will result in those BATNAs becoming reality.  We could be hours away from finding out.

Monday, April 4, 2011

A quick win-win and the importance of "Why?"

Last weekend we went to a birthday party for my older daughter's best friend.  Both of my girls (Jade 7 and Morgan nearly 5) were invited and played hard.  At the end of the party we nearly had a meltdown over the goodie bags they were to bring home.

Each goodie bag was tied to a helium balloon.  Normally my girls would each pick the bag with their favorite color balloon on it but this time Jade had picked first and taken the only bag with a red balloon.  Morgan was distraught and wanted Jade to take a bag with a green balloon.  No dice.

The day was saved with one word -- a word even professional negotiators often forget to ask.


It turns out that Jade made her choice because she saw (through the transparent bag) that the red-balloon bag had a toy she wanted.  Not only didn't Morgan care about that toy, she actually preferred the small giraffe in the green-balloon bag.  Morgan just wanted the red balloon.  Now that we knew why they each wanted that bag, we asked them if it would be OK to switch balloons so Jade got the bag she wanted and Morgan got the balloon she wanted.  Both girls were happier with that solution than if they'd just got their choice.

Multi-million dollar deals have floundered because the parties assumed they knew the answer to why and so didn't bother to ask.  Bazerman and Malhotra, in Negotiation Genius, relate an anecdote in which negotiations over an $18 million contract for an important chemical broke down when the supplier refused to agree to exclusivity.  The representatives of the buyer assumed they knew why he was refusing -- he wanted to get more money or else sell to one of their major competitors.  Only when one of them asked, "Why?" did they learn that he didn't want to break a longstanding agreement he had with his cousin who bought a tiny amount for use in a local product.  Rather than losing the deal or paying more money they were able to solve the problem by allowing a small exception to the exclusivity provision.

The Problem(s) with Fairness, part 2

Last week we explored the inherent unreliability of fairness claims.  Our sense of what's fair is so tied to our own self-interest and perspective that four out of ten people change their minds on a simple fairness standard depending on which side they imagine themselves to be on.  Given this, it's hardly surprising that when we actually are on different sides of a dispute we often find that each side thinks that their demands are fair.

This leads to two problems.  The first is that our human minds are extremely vulnerable to irrational behavior when we think we're being treated unfairly.  A popular experiment illustrates this.

Imagine you're playing the following game.  You and another person have been chosen at random to divide $100 between you, but there's a catch.  The other person gets to make the division -- that is, they decide how much they get and how much you get.  You then get to decide if you accept their split.  If you accept, the split happens and if you don't accept then neither of you gets anything.  You're not allowed to talk beforehand and the game is anonymous -- no one will ever know you were chosen to play unless you decide to tell them about it.

Now suppose the split is revealed and it's $90 to the other person and $10 to you.  Do you accept?  Remember, your only alternative to accepting is to get nothing -- there are no second chances or renegotiations.

From a purely rational perspective you should take the $10.  Refusing is equivalent to finding a $10 bill on the street and throwing it in the trash just to make sure that some stranger out there doesn't get $90.  And yet, a very large number of people will refuse "unfair" offers when this game is played with real money.

During debriefs, people who didn't accept often offered rational explanations for their decision.  They may have worried about signaling effects -- other people might see them as someone who could be pushed around or who would take any deal.  Brain scans call these explanations strongly into question.

A comparison of brain scans show that the planning section of the brain fires in people who receive "fair" splits (typically offering them at least 40% of the money).  They are thinking rationally about the money.  What part fires in the brains of people who receive unfair offers?


Now imagine you're having a dispute with someone and you're arguing about what's fair.  We know from self-interest bias that each of your perceptions of fairness are likely to be biased in opposite directions.  As a consequence, you're each likely to think that the other person is putting forward something unfair while claiming that it's fair.  We also know the natural human reaction to perceived unfairness -- disgust.  How optimistic are you that you'll be able to bridge the gap using reason when each of you are bound by this intense emotional response?