Cross-posted from my blog.
I recently read Thomas Schelling's book 'The Strategy of Conflict'. Many of the ideas it contains are now pretty widely known, especially in the rationalist community, such as the value of Schelling points when coordination must be obtained without communication, or the value of being able to commit oneself to actions that seem irrational. However, there are a few ideas that I got from the book that I don't think are as embedded in the public consciousness.
Schelling points in bargaining
The first such idea is the value of Schelling points in bargaining situations where communication is possible, as opposed to coordination situations where it is not. For instance, if you and I were dividing up a homogeneous pie that we both wanted as much of as possible, it would be strange if I told you that I demanded at least 52.3% of the pie. If I did, you would probably expect me to give some argument for the number 52.3% that distinguishes it from 51% or 55%. Indeed, it would be more strange than asking for 66.67%, which itself would be more strange than asking for 50%, which would be the most likely outcome were we to really run the experiment. Schelling uses as an example
the remarkable frequency with which long negotiations over complicated quantitative formulas or ad hoc shares in some costs or benefits converge ultimately on something as crudely simple as equal shares, shares proportionate to some common magnitude (gross national product, population, foreign-exchange deficit, and so forth), or the shares agreed on in some previous but logically irrelevant negotiation.The explanation is basically that in bargaining situations like these, any agreement could be made better for either side, but it can't be made better for both simultaneously, and any agreement is better than no agreement. Talk is cheap, so it's difficult for any side to credibly commit to only accept certain arbitrary outcomes. Therefore, as Schelling puts it,
Each party's strategy is guided mainly by what he expects the other to accept or insist on; yet each knows that the other is guided by reciprocal thoughts. The final outcome must be a point from which neither expects the other to retreat; yet the main ingredient of this expectation is what one thinks the other expects the first to expect, and so on. Somehow, out of this fluid and indeterminate situation that seemingly provides no logical reason for anybody to expect anything except what he expects to be expected to expect, a decision is reached. These infinitely reflexive expectations must somehow converge upon a single point, at which each expects the other not to expect to be expected to retreat.In other words, a Schelling point is a 'natural' outcome that somehow has the intrinsic property that each party can be expected to demand that they do at least as well as they would in that outcome.
Another way of putting this is that once we are bargained down to a Schelling point, we are not expected to let ourselves be bargained down further. Schelling uses the examples of soldiers fighting over a city. If one side retreats 13 km, they might be expected to retreat even further, unless they retreat to the single river running through the city. This river can serve as a Schelling point, and the attacking force might genuinely expect that their opponents will retreat no further....MORE
Threats and promises...