Chicken

Topic Summary: Compare dealing with people to the “chicken” game.

Goal: Share a thought about what people are like.

Why are you posting this in Unbounded? For critical discussion.

Do you want unbounded criticism? (A criticism is a reason that an idea decisively fails at a goal. Criticism can be about anything relevant to goal success, including methods, meta, context or tangents. If you think a line of discussion isn’t worth focusing attention on, that is a disagreement with the person who posted it, which can be discussed.) Yes.

Dealing with people is like a game of chicken.

You have to escalate as much as you can without them leaving/quitting/aborting. You go as close to the line as you can without crossing it, like in the chicken game.

The less you escalate or push, the less you get from people. They treat you worse, give you less, take as much as they can get away with while having no empathy, objectivity or senses of fairness or justice.

But if you go too far, things can blow up.

This is a super dumb, bad system. People incentivize you to intentionally push them close to blowing up.

This comes up in how people negotiate deals, like the price for buying a company. People will generally only pay the max for your company if you get close to ruining the deal and making them walk away. If you aren’t pushy and risky, they’ll do their best to take advantage of you, and in fact will try to push you to the point of almost walking away from the deal, in order to get the best deal for themselves.

I don’t know much about buying companies. But I’ve seen what I think is similar behavior in real estate deals. I’ll talk about some of my thoughts below about that context if you’re interested. As a summary I think I agree with:

But I also think it arose because of a real problem, and I don’t know of a workable and better alternative to address that problem.

I think for most negotiated transactions, like houses, there are lots of potential mutually beneficial deals to be made. Meaning: for a given house there are lots of buyers and prices where both the buyer and seller would benefit from a deal (be better off than if there was no deal). And for a given house buyer there are lots of houses for sale that would be more valuable to that buyer than they are to their current owner. But each house is to at least some extent unique. And in most cases there aren’t enough house buyers at any one time to have a truly competitive auction for any particular house. So there’s not a clear “market price” that can be set such that the sellers and buyers must either take it or leave it with regard to any particular house like there is with regard to shares of stock or bushels of corn.

The distribution of a deal’s benefits (gains from trade) matters a bunch in large transactions. And the true amount of value creation on each side of a potential deal at a given price is almost completely unknown to the opposite party. But each side wants to secure as much of the gains from trade for itself as it can while still leaving enough gain for the other side to agree to a deal.

For example, the current owner may value keeping his house at $200,000, and is willing to sell because he expects to get something more than $200,000 for it. And a buyer for the house may expect to derive $800,000 of value from it, and is willing to buy because he expects to pay something less than $800,000 for it.

So there’s a gain from trade of ~$600,000 minus transaction costs to be had from making this deal. But how much of that gain does the seller get and how much of it does the buyer get?

They can’t just talk about that subject openly.

Firstly they can’t talk about it because people usually don’t explicitly and accurately know how much they value the house. Instead they are likely to know market signals, like what similar houses recently sold for. Market signals are way more useful than nothing at all for price setting. But they tell you little about whether this particular deal is more or less valuable to each party than prior market deals have been. And that (difference from prior deals) is what needs to be known to arrive at a price for this deal and to set the market signal for future deals (among other things: should the price of this deal move the market signal up or down?)

Secondly, even if they do know explicitly they can’t talk about it because talking about it gives away critical bargaining intel and leverage that will not be reciprocated unless your counterparty is as scrupulously honest and capable of value introspection as you are (which they probably aren’t, and you also have no way to know).

Thirdly, they can’t talk about it because the cultural / traditional knowledge about what is “fair” with regard to value split is substantially less complex than the transaction typically calls for - probably because the first and second problems have stifled the creation of such knowledge. Most people’s intuitions say something like splitting the excess value 50/50 is what’s “fair” because each side gets about half of the gains from trade. But the reality of what’s “fair” depends on things like what the supply of houses vs. house buyers in the area is, how hard or easy that is to change, how long people are willing to wait, gain as a percentage vs. gain in absolute value terms, etc. So invariably one side or the other would feel backed into a deal meeting the culturally normal definition of “fair” that doesn’t match the actual market circumstances.

I think the chicken game is one way people attempt to get hard to forge intel about a counterparty’s actual value in the deal without talking about it directly. If your counterparty really is close to walking away, it means you’re getting close to as much of the deal’s value creation as you can for yourself. So you want to push until they seem like they’re close to walking away.

Of course, savvy counterparties also know this and bluffing about being close to walking even when there’s still a lot of gain for your side is common. As are deals that would’ve been mutually beneficial but blow up because one side or the other misjudged how hard they could push the other party without blowing up the deal, often because they assume the other side was bluffing when they weren’t.

So chicken isn’t particularly effective at achieving its goal. And it reduces gains from trade. And most people find it unpleasant. But I think it’s the best thing people know about when actual negotiation needs to happen and the stakes are large.

I haven’t read @AndyDufresne’s whole message yet but a few comments on both posts above:

  • I don’t have an easy, complete answer for negotiations worth millions of dollars but I do think there’s accessible room for improvement.
  • It’s an easier problem for people to behave better in lower stakes interactions.
  • Dealing with people with a good reputation, who you can put some trust in and expect good faith from, is easier. (This kind of thing is actually common in business. Lots of people do lots of their business with people they have long term relationships with and trust.)
  • Some people – e.g. Steve Jobs or Hank Rearden – have reputations.
  • Although international reputations are rare, having a reputation in a field or geographical area is common, particularly for the people who would actually be involved in deals worth over a million dollars.
  • Even if someone has no reputation, you may know them well. They could be your friend, family member, co-worker, classmate, etc. Dealing with people you’ve dealt with before is common both in life in general and for high stakes things.
  • Developing a good reputation for yourself (both generally and with this specific counterparty) is beneficial.
  • Dealing with the same person again is common. (Or someone similar, e.g. a person from the same company who knows what happened last time.) It’s often an iterated game in prisoner’s dilemma terms.
  • People often treat their friends in the “chicken” way (certainly not always for eerything, but I think doing it sometimes makes a big difference).
  • Logan on the TV show Succession does the “chicken” stuff a lot in high stakes business contexts and I think what he does is bad and that people can do better. My basic read on him is that he doesn’t know or care much about objective reality, and instead focuses on some other stuff like smelling and pouncing on weakness in counterparties. He also seems to have a “it can be done if I have enough power/influence and order it, and people try to obey” mindset that ignores reality (this mindset was criticized in Atlas Shrugged).
  • There does exist pretty good advice about how to negotiate in a fair, non-adversarial way that leaves your counter-party happy and friendly. I’ve seen it from people like Chris Do and Jonathan Stark. It’s aimed primarily at freelancers agreeing on prices with clients. It involves a lot of honesty and being a reasonable person who looks at, quantifies and discusses value for both yourself and the client.
  • I think people like Jobs and Rearden negotiate in better ways that aren’t like “chicken”.

You often do have a way to know: reputation or past history with that counterparty. I read this paragraph before and it’s why I talked about reputation a bunch (to refute the “you also have no way to know” – you often do), but I didn’t quote it to connect my replies to it.

Most people’s intuitions say something like splitting the excess value 50/50 is what’s “fair” because each side gets about half of the gains from trade.

That can actually be very unfair in ROI (return on investment) terms. Maybe making the (expected) ROI similar for each party would be fairer. (I agree there are lots of other problems with this kind of “fairness”; I just thought of splitting ROI 50/50 as a first approximation to consider as an alternative to the splitting absolute dollars of profit 50/50 approximation.)

Ya, that makes sense in lots of contexts (like freelance contracts).

I think I overlooked it in the real estate context because doing enough transactions to develop a reputation or past history is rare for buyers and sellers themselves. Real estate agents can & do cultivate reputations though.