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Abstract:
Principal-agency theory has analyzed "the principal's problem" - how to write a contract so that incentives will induce an agent to provide the principal with the maximum feasible expected gain. In practice, principal-agent contracts are negotiated not imposed. This paper reports an experiment which reveals that agent compliance is determined less by the negotiated terms of the contract than by expectations shaped by the negotiation process itself. These results justify further research on the politics of negotiation and of bureaucratic politics. The experiments also extend the study of negotiation beyond the construction of an agreement between parties to an examination of the post-negotiation implementation of that agreement.

Negotiation, Agency Theory, Social Exchange

Abstract:
The Paris Peace Conference was arguably the most complex negotiation ever undertaken. The principal product of the conference, the Treaty of Versailles, failed to accomplish any of the major goals of its framers. Relations between Allies and with the defeated enemies seriously deteriorated as a consequence of the negotiations and attempts to implement the treaty. Economic conditions in Germany, the rest of Europe, and eventually the United States deteriorated as well. At the time of the Treaty's publication, John Maynard Keynes and a number of other participants predicted these events, pointing to the errors and oversights of the negotiators as a primary cause. The logic of Keynes' argument is re-examined in light of recent research on the psychology of human information processing, judgment and choice. The analysis reveals that his approach was quite consistent with and actually anticipated both Simon's conception of bounded rationality and recent work on cognitive heuristics and illusions. Negotiator bias has been studied almost exclusively using simple laboratory settings. The catastrophic lose-lose nature of the Versailles Treaty illustrates the way in which complexity necessitates the reliance on simplifying heuristics and organization while propagating and amplifying the impact of the bias that is generated. Evidence from the treaty negotiations and the failed implementation of the treaty suggest some very significant boundary conditions for the application of rational choice models in business, politics, and international relations. It also demonstrates the need for negotiations researchers to focus much more attention on the implementation of agreements and their long-term effect on relationships.

Abstract:
Experimental studies consistently indicate that human information processing and decision making violate basic precepts of rationality. Yet rational choice theory is increasingly used to model organizations, politics, and international relations. Experimental evidence of cognitive bias is often discounted as a methodological artifact because analysis, organization, specialization, and the presence of strong incentives are presumed to eliminate bias outside the laboratory. A controversy in the historiography of the Paris Peace Conference of 1919 provides an opportunity to address that assumption. Did "the vindictiveness of the British and French peace terms; the exclusion of Germany and Russia from the peace conferences . . . the foolish attempts to draw the blood of reparations and war debts . . . usher in a second vast military conflagration" (Kennan, 1996)? Or, was the peace treaty "a flexible instrument crafted by relatively well intentioned and rational leaders" (Ikenberry, 2000)? The extensive record of primary and secondary sources was used to reconstruct beliefs, strategies, and actions of the decision makers over an extended time frame. That pattern was tested against three conceptions of rationality: The pure form of noncooperative game theory, the semi-strong form of Williamson's "contractual man", and the strongly bounded form of behavioral theory. Hypotheses regarding the structure and implementation of the Treaty derived from these three paradigms were tested. Both semistrong and strongly bounded conceptions of rationality accounted for the structure of the Treaty. Only the behavioral conception of rationality could account for the systematic failure in treaty implementation and the evolution of the Allied policy of appeasement. This strategy permitted the Hitler regime to repeatedly and unilaterally deviate from the provisions of the Treaty to improve its political, economic, territorial, and military position at the direct expense of the Allies. The tragic course of the war that followed is directly attributable to policy errors of the 1930's which derived from earlier errors in the initial construction of the Treaty.

bounded rationality, cognitive illusions, organization

Abstract:
The principal-agent problem is fundamental to organization design. A principal must negotiate an incentive contract to motivate a more risk averse agent to undertake costly actions that cannot be observed. In rational choice theory, the problem is solved through an inefficient shifting of risk from principal to agent. However, neither field studies nor prior experiments have observed the types of contracts nor the agent response predicted by this theory. Two experiments were conducted to test a modular social cognition theory explanation for this discrepancy. According to this alternative to rational choice theory, individuals have evolved specialized cognitive capabilities for dealing with exchange relations. These very human capabilities do not operate by the same logic as rational choice. Both a study of individual agent decisions to a series of hypothesized contracts in experiment one and the interactive bargaining of experiment two yielded results consistent with the modular theory. The logic of social exchange is quite different from the logic of individual choice or game theory. Implications for theory and practice are considered.

Negotiation, Gift Exchange, Principal Agent Theory

Abstract:
Social, economic, and organizational development require a degree of stable policy making. The instability of group decision making under majority rule has preoccupied social theorists since Condorcet in the late 18th century. In theory, subtle institutional modifications to pure majority rule may be sufficient to induce stability. This paper reviews experimental evidence regarding these stability inducing modifications. The experiments examine the impact of agenda control, super-majority voting requirements, veto powers, and bicameralism on group decision making.

Voting, agenda control, veto power

Abstract:
Social and economic development requires some degree of stable policy making. The instability of group decision making under majority rule ahs preoccupied social theorists since Condorcet. In theory, subtle institutional modifications to pure majority rule should induce stability. This paper reviews experimental evidence regarding these stability inducing modifications. The experiments examine the impact of agenda control, super-majorities, veto powers, and bicameralism on group decision making.

Abstract:
Walton and McKersie's Behavioral Theory of Labor Negotiation sought to provide a descriptive theory of the process by which union and management negotiators reached settlements. Their paper drew on existing psychology, behavioral decision theory, and game theory. The basic psychological model of the negotiator was essentially the same as that used in most rational choice theory. Since then descriptive research on negotiation has branched into numerous subfields. Thompson recently characterized the state of research as a many sided prism. In this paper we use recent developments in evolutionary psychology to suggest an alternative psychological foundation for a general behavioral theory of negotiation. Such a theory would not be wedded to the particular institutional structure of collective bargaining. It may begin to synthesize the empirical regularities regarding different aspects of negotiation that have been discovered since the work of Walton and McKersie.

Abstract:
This study tests the adequacy of the axioms underlying Luce and Weber's (1986) conjoint expected risk model. Risk judgments are found to be transitive. Monotonicity or the substitution principle per se seems to hold, but the related probability accounting assumption is violated. The conjoint structure assumptions about the effect of change of scale transformations on risk hold for negative-outcome lotteries but encounter some difficulty for positive-outcome lotteries. Possible explanations for violations are suggested, and implications of these results for the modeling of perceived risk are discussed.

Abstract:
Complex negotiations occur within a broader stream of ongoing social exchange, but negotiation research focuses on narrowly circumscribed encounters. Building on Trivers’ model of reciprocal altruism and Thaler’s theory of mental accounting, we propose a model of a negotiator who opens and updates ‘relational accounts’ that regulate social exchange. The accounts generate particular emotional response profiles forming the basis for social motives to compete, cooperate, or self-sacrifice. In one study we manipulated Thaler’s mental accounting scenarios to test whether these emotional responses mediate the impact of specific social events on social motives. Having found evidence for this mediation, we ran a second study testing whether social motive mediates the impact of specific events on the vigor with which a party implements the terms of a negotiated agreement. Evidence for this mediation helps to fill a significant gap in our current understanding of the implementation process. Implications of mental accounting for the development of a general, multi-level behavioral theory of negotiation are considered.

Abstract:
Generic advertising, the promotion of an entire product or service category, is an increasingly common form of inter-firm cooperation. Voluntary participation in such a campaign represents contribution to a public good. Based on the pattern of recent campaigns, we argue that this cooperation is dependent on adaptive aspirations and an increased willingness to tolerate social risk in light of declining sales. Three experiments are reported that tested these ideas. In each study, subjects assigned to four person groups chose how many resources to contribute to a generic advertising campaign the effectiveness of which depended on total funding levels. Each group member represented a different "store" in the same mall. The instructions framed the problem by presenting varying sales trends for the stores - Positive, Negative, or Neutral. The first two experiments were one-shot games with a dominant strategy of non-contribution and free riding. The results showed that subjects confronting the declining trend contributed significantly more than those in either of the other two conditions. Sales history framing actually created a focal point because it also positively influenced their expectations that others would contribute as well. The third experiment demonstrated that this decline-induced focal equilibrium persists over trials of a finitely repeated game with a known stopping point. Contribution levels in the negative history condition dropped only in the final trial. Even in the very last round they remained higher than those for any of the other conditions. Surprisingly, the specific introduction of a competitor mall as the cause of the decline in sales actually resulted in lower levels of contribution. The implications for research and practice are discussed.

Generic advertising, public goods, adaptive aspirations

Abstract:
Group decision making is commonly used in juries, businesses, and in politics to increase the informational basis for a decision and to improve decision accuracy. Recent work on generalizing Condercet's jury theorem provides a compelling justification for using groups in this manner. But these theories rely on a model of the individual as an optimal Bayesian decision maker. Do groups effectively aggregate information when the individuals are the flawed, non-Bayesian decision makers that actually populate acting groups? We first survey the evidence that individuals systematically violate Bayes' theorem under certain conditions. We then report two experiments designed to test whether individuals follow Bayesian reasoning and whether groups are able to overcome biased individual information processing. The experiments show that under certain conditions, with extreme probabilities and with signals that vary in diagnositicity, that individual accuracy actually deteriorates as information increases. For certain problems, majority rule effectively aggregates individual information. For the most difficult problems, majority rule fails to attenuate individual bias. The implications of these findings for research on individual and group judgment are discussed.

Jury Theorem, Bayes Theorem, Judgment Bias, Asymmetric Signals

Abstract:
The reference points negotiators use to evaluate outcomes have a dramatic influence over concession-making and agreements. However, the conventional finding that low reference points Induce more concessions and fewer impasses is limited to situations with deterministic payoffs. Indeed, the impact of framing 15 virtually reversed when parties negotiate under uncertainty. Two experiments demonstrate these relationships in varied contexts. In such cases, negotiators seeking cooperation should frame their counterpart's outcomes as losses rather than gains. These findings also resolve a theoretical question by demonstrating that reference dependent shifts in risk attitude are essential to a descriptive theory of bargaining.

Abstract:
The present study was designed to assess cross-cultural differences in the perception of financial risks. Students at large universities in Hong Kong, Taiwan, the Netherlands, and the U.S., as well as a group of Taiwanese security analysts rated the riskiness of a set of monetary lotteries. Risk judgments differed with the nationality of the respondents, but not as a function of their occupation (students vs. security analysts). The risk judgments of each individual were modeled by the Conjoint Expected Risk (CER) model (1), which uses a weighted sum of component aspects of a risky prospect to predict its perceived overall riskiness. The CER model provided an excellent fit of the risk judgments of respondents from the four different countries, capturing both cross-cultural similarities in risk judgments (i.e., the functional form by which probability and outcome information was combined) as well as differences (i.e., differences in the weights given to different probability and outcome components). Cross -cultural differences in perceived risk were captured by differences in three of the six parameters of the CER model. Consistent with cultural differences in country uncertainty avoidance (2), CER model parameters of respondents from the two Western countries differed from those of respondents from the two countries with Chinese cultural roots: The risk judgments of respondents from Hong Kong and Taiwan were more sensitive to the magnitude of potential losses and less mitigated by the probability of positive outcomes.