Applying Game Theory to Negotiation CAN YOU CAN YOU?? Want a Raise?

Posted under Business, Finance by Roman

In negotiation, any factors that can increase or improve your position are invaluable; whether this negotiation is for an increase in salary or closing a major contract, the use of game theory can be this factor. Game Theory allows the users to know the probability of an event occurring. Previous knowledge is combined with information of organizational behavior may allow the user to gain control of the situation.

However; what does Game Theory imply? Game theory is the study of how players interact with the use strategic and logical thought in respect to previous knowledge and preference. A prime example of this is prisoner’s dilemma.

The prisoner’s dilemma is the solution that will benefit each prisoner the most in the long run. If each person analyzes what can occur and how it can occur; the prisoners will realize that the best option is to stay quiet due to it creating the least amount of time served. (This occurs 40% of the time.) This is a very simple example that only has two possible moves between two players, allowing for only four possible moves. These more are as followed the both serve 6 months (stay quiet), one of the convicts go to prison for ten years (betrayal) and each serves five years (both of them betray each other).

Why is it that the distribution is so dense on the six months even though, there should be a 25% chance of both? This is due to the possibility that both of them will serve five years in prison if they both speak. Therefore, they are able to see the risk and rewarded upon analyzing this situation. Into a simple win or lose mind set.

The disenchantment of prison allows both to win in a sense due to the fact that if both parties disclose information about each other they will both serve five years in prison. This amount time allows for a larger distribution of people to go towards the 6 months in fear of the longer time frames.

A more realistic example of game theory is given in the video at this link http://www.youtube.com/watch?v=ikE1pn034WA . In this video a worker uses the principles of the Nash equilibrium to gain a raise. The Nash equilibrium is, “named after John Forbes Nash, who proposed it, it’s a solution concept of a game involving two or more players, in which no player has anything to gain by changing only his or her own strategy unilaterally. If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute Nash

Equilibrium.”This was rather useful for the person who was asking for a raise because he was naturally a soft negotiator and would not have been able to get a raise a high raise without knowing that he had to switch tactics. He figured this out after creating the following chart.

In turn, if you choose the most effective game play would be to push using the hard play and to push the employer into the medium field. To create a circumstance that is beneficial to both parties. Why would this situation be a loss for both parties? for the reason that even thought this is not a standard distributive bargaining occurrence it follows many of the same principles, in the sense that there are resistance points that are created. These points are set by both parties on a spectrum and then applied to the negotiation since there is only a fixed amount of assets that can be divided. The employer does not want to lose an employee that he knows how to manage and he does not want to be without developers for a prolonged period of time. In the event that an employee asking for a raise does not want to lose his job but wants to be paid more; lastly, the employer has to switch from the hard tactic to the medium for the benefit for this own company. Furthermore; since this negotiation has come about, the employer has more of a trustworthy relationship that can develop due to the new found respect for the employee.

The knowledge of Organizational Behavior comes into affect when implementing game theory into negotiation. Organizational Behavior teaching, that’s the whole process of negotiation, can be divided into several processes. The prime and most important aspect of all is, preparation and planning; which is where theory game is implemented. This process is the most effective for the implementation for the reason that it allows for the whole negation to be played out in accordance to the patterns and tactics that are utilized by the parties. Planning of calculated moves and tactics that can win over the whole negotiation will lessen the amount of stress that the user will be subject to feeling.

Game theory also allows for the creation of a more solid and approachable strategy that is adjusted for the other party. This strategy will be designed to counter attack the tactics of the other party to improve your standings. In a no win situation resistance points can be better calculated for so that both parties are more or less satisfied with the overall out come.

Negotiation is not always about winning and you will not win all the time. Proper application of Game Theory can increase the chances of coming out with the better end of the deal. Game theory is only a tool that allows the creation and knowledge of probability out come. If a person does not know how to utilize Game Theory, then it will not be of any use for them. It will only show a possible out come but not the one you currently posses.