Tuesday, May 22, 2012

The Brinkmanship Trap

We're witnessing two new examples of brinkmanship in world politics.  In Europe, Greece (both its newly-elected government and its voters) is in a showdown with Germany and much of the rest of Europe over the austerity plan agreed as part of the Greece's bailout.  In May, Greek voters shifted dramatically against the incumbent parties that had agreed to the austerity package in favor of parties that opposed it.  With no coalition government proving possible, Greece is headed into another set of elections in June with the very real prospect that Greece will shift further against austerity, putting the rescue package and indeed Greece's ability to remain in the Euro at risk.

At home, meanwhile, Republicans and Democrats are rattling sabers over the debt ceiling again.  We may be headed for a repeat of our recent showdown, in which Republicans stake out an extremely aggressive position and threaten to bring about default if their demands aren't met.

What is brinkmanship?

I define brinkmanship as a tactic in which one or more parties stakes out a position that, if granted, would capture far more of the ZOPA than might be expected from normal negotiation and then attempts to a real or perceived commitment to that position, such that the other parties think that failing to grant it may mean no deal is possible.

Commitment is a critical component.  If you and I are dividing $1,000,000 in a situation where we both go home empty-handed if no deal is reached, a "demand" by me that I get $900,000 is something you'd probably laugh off as an aggressive opening.  You know that you can hold firm at a much better split and that it would be irrational for me not to move.

But what if I show you a contract that compels me to pay $2,000,000 to a third party in the event that I agree to accept less than $900,000?  Now I'm committed to my position and the math has shifted against you.  Beforehand you could say, "Sorry, Chad, but I'm not going to be taken advantage of.  We can split the money evenly or we can walk away."  You'd be presenting me with a choice of $500,000 or nothing. Now, however, you're offering me a choice of negative $1,500,000 or nothing because if I accept your deal I lose far more on the contract.  It's irrational of me to take any deal less than $900,000 and thus you're the one who has to choose whether to take $100,000 or nothing.

Commitment can take many forms.  Public statements that would be embarrassing to step back from, contractual commitments or steps to make it literally impossible to step back all serve the same basic purpose of blotting out a large chunk of the ZOPA so that the other party(ies) must accept a deal they would normally balk at.

What's wrong with brinkmanship?

As we saw above, effective brinksmanship can be very rewarding.  So what's wrong with it?  Why shouldn't every rational negotiator consider brinkmanship merely another available tool, like making multiple offers or adding parties to a negotiation or anchoring?

The most obvious problem is that brinksmanship is extremely damaging to relationships.  It's essentially an effort to use force and intimidation to capture more than one's fair share of the pie -- and since it's out in the open there's no way to soften the effects.

Beyond that, brinkmanship can lead to no deal at all, even when the ZOPA is large.  There are two principal reasons for this.

First, brinksmanship is rarely clean.  My contract in the example above would be clean brinksmanship.  One moment we are negotiating on equal terms over how to split $1,000,000.  The next you can see that any deal that gives me less than $900,000 is impossible for me to accept.  In the real world, brinksmanship involves only partial commitments.  When Boehner declares publicly that he won't accept any revenue increases as part of a debt ceiling deal he's making it harder to accept them but certainly not impossible.  Many commitment gambits carry a risk that they'll be viewed as bluff and bluster by the other side.

Second, the incentive to engage in brinksmanship is generally mutual and can be mutually reinforcing.  If, in fact, the ZOPA is genuinely large that means that both sides have a lot to lose if no deal happens.  Remember, the ZOPA can be thought of as the total amount of money sitting on a table waiting to be divided.  Brinksmanship can be self-reinforcing because our rational side often takes a back seat to our emotions if we think someone is treating us unfairly or trying to push us around.  Since brinksmanship is pretty much explicitly unfair and bullying as a tactic, our natural response to it is to push back just as hard.

Thus, while brinksmanship seems like a sensible tactic in a lot of game theory scenarios it is highly problematic (at best) in most real world situations.  Moreover, it is almost never a good thing to be on the receiving end of.  This brings us to our final question.

How can we prevent our counterparts from employing brinkmanship against us?

The key to fighting brinksmanship is to remember the ingredients that make it attractive:

  1. Large ZOPA, relative to value creation opportunities
  2. Rational expectation that brinksmanship may lead to capturing the lion's share of the ZOPA
Both of these can be fought.  Let's start with the ZOPA.  A large ZOPA is a good thing but sometimes a ZOPA is big because both sides have a terrible BATNA rather than because the deal is wonderful.  A strong BATNA makes you less vulnerable to brinksmanship (and a number of other strong-arm tactics), which is another reason why you should never think of your BATNA as fixed.

It's also important that brinksmanship (because it tends to shut down value creation efforts) depends on a ZOPA that's large relative to value creation opportunities.  You can't always ensure that every deal you do has value creation but you can often influence deals in this direction.  Moreover, you can improve the chance that your counterpart is aware of value creation possibilities by raising them up-front, e.g. by including multiple options in your initial proposal.

Next, you can attack the "rational expectation" problem.  The simplest way to do this is not to give in to brinksmanship and to let other parties know that you haven't.  I like sharing stories of times people have attempted strong-arm tactics against me in part because they're often good learning examples but also because it reminds people that while I'm a sweetheart of a guy who loves to share information and to create value I'm not a pushover.

Similarly, if you are facing brinksmanship now you want to send a clear signal that you're not going to give in to it and also consider building a bridge that will let the other party pull back.  This can include suggesting a shared principle by which the disagreement could be settled or a third-party whose opinion could be sought.  Brinksmanship is a gambit in which the aggressive party traps him or herself in the hopes that doing so will force you to give in.  If you're not going to give in (and most often you shouldn't) then it may be that the only way to save the deal is for you to help the person out of their trap.


  1. Great topic. :)

    You discussed deterrence - but any interest in sharing your thoughts on battling brinksmanship once it's in play? Often, it seems like you're dealing with subrational actors - what sort of approach would you take to someone like Boehner?

  2. I think it's hard to generalize, but you need to convince them that brinksmanship won't work and either show them or create a "golden bridge" that lets them back down without incurring too much of the cost they created as part of their commitment. Of course, this is problematic if you truly can't afford a no-deal outcome which is why Boehner's tactic is so appealing.