Monday, April 4, 2011
Class # 18 highlights
The Road not Taken
The highlight of this class was to introduce the Nash Bargaining Solution. This suggests that surplus should be allocated to maximize the product of the happiness of the two sides. The solution follows as a consequence of 4 principles: symmetry, no money left on the tables, frames don't matter, and the road not taken. It is the only rule satisfying these principles.
The Nash solution can be used many ways. In preparation for negotiation, the solution offers a guide about the likely outcome. In the negotiation, the principles can be used to move conflict from the personal to the intellectual and thereby defuse problematic emotional responses. The solution also explains how improvements in the outside option affect the inside option. For instance, when 2 risk neutral parties compete, a $1 improvement in the value of one side's outside option raises their allocation in the deal by 50 cents.Overall, the framework provides a powerful shortcut for predicting outcomes in "messy" bargaining situations where drawing game trees is impractical.