Mind Your Decisions

How Can I Make My Threat Credible Using Game Theory?

Every Tuesday is a Game Theory article at Mind Your Decisions.

A word of caution: I write this article about threats not to make you a Machiavellian prince, but rather to arm you, as an honest person, with weapons against people ready to take advantage of you.

There are two kinds of threats: credible and non-credible. A threat is credible if it will likely be followed through. For instance, when utility companies threaten to disconnect your service for non-payment, it is credible since they do follow through.

A threat is non-credible if the opposite holds: you can’t believe it since it is unlikely it will be followed through. These threats are made to encourage behavior, but a savvy person would not believe them. For instance, a defense attorney may threaten that her client will drag a matter out in court—no matter what the evidence is—to encourage the prosecution to consider out of court settlements. But the threat is not credible because if strong evidence comes out, the defense will most likely bargain.

There are two main results: (1) you should only consider credible threats in your decision-making, and (2) threats are credible only if you would follow through on them.

On a practical matter, you can achieve your goals by making your threats appear credible, even if they are non-credible. I’ve listed five methods to make your threats more believable.

Method 1: Have an alternative you are willing to do

Nothing scares a seller like when you threaten to run a competitor. If you want to negotiate a lower cable rate, internet connection, or better deal on a car, tell the seller your other offer, convince them you really want to stay but are willing to switch (even if you are not), and see how often they cave in.

I’m sure most of you have been in this position and succeeded at some point so I won’t belabor it. The truth is, if you have a true alternative, you don’t need game theory to help you. I will continue with methods that give you the illusion of leverage even when you don’t have it.

Method 2: Use a threat that is hard to disprove but would be riskier, if true, for your opponent

One summer I was a counselor of a month-long camp for high-school students at Stanford University. Being in charge of thirty high-school students is not easy because we counselors had few real punishments we could dispense.

For mild misbehavior, we would often threaten the unruly camper that we would call his parents. Most campers fell in line because they were scared. But in reality, this was a non-credible threat. A call to parents would not only anger the parents, who were spending good money for this camp, but it would raise questions to our boss, who might wonder if we were bad counselors.

There were of course some kids who still misbehaved repeatedly—perhaps they figured out our hollow threat. We devised a better solution for them: we threatened that we’d tell Stanford admissions about their poor character, which would ruin their chances of getting in. Now, I didn’t know if Stanford kept such admission files, but neither did they, and it would have been really hard for them to find out. In that uncertainty, the threat was very effective: I’ve never seen students turn obedient so fast.

Method 3: Suggest you have alternatives even if you don’t

One of my friends received a job offer during college. It was from his top company choice. The only problem was the offer didn’t contain a signing bonus. My friend had heard the company did, in fact, give signing bonuses to some new employees.

My friend was in a bind. He did not want to negotiate the offer directly because he might tip his genuine interest, which would make the company unlikely to improve the offer. He was at a slight advantage because, through interviews and congratulations calls, he was sure the company had a large interest in him.

My friend had two weeks to decide on the offer. He contacted the company and indicated the offer was nice, but he needed more time to think about it. He asked for a small extension and indirectly suggested he was considering other offers.

The company soon offered him a signing bonus and called him to encourage he work for them. And he did.

I will offer caution with this method: there are companies that direct negotiation might work better since it is a more straight-forward method, and some companies are so powerful that they will not cave in. My friend suspected he was better off hiding his true interest and that his company would make give him the standard signing bonus.

Method 4: Use the Press (or a Lawyer)

Someone I know had a terrible experience with a cell phone company. The phone they sent him was defective, and when he sent the phone back to them, they denied responsibility and claimed there was water damage on the phone (which there wasn’t).

The evidence, of course, was in the company possession, so it was hard for my friend to disprove. After days of failing to get a reasonable response, my friend decided to raise the stakes. He got in touch with a large newspaper and found a reporter willing to write about the story.

My friend contacted a high ranking executive at the cell phone company, told his story, and suggested that his newspaper contact would pick up the story if he didn’t get a favorable resolution. He quickly received a written apology from the executive and more than enough compensation for his trouble.

This tactic works equally well if you have a lawyer contact.

Method 5: (use with extreme caution) Make the other side think you are crazy

The normal economic assumption is that people maximize utility or profits. Given a choice of ten cents or no cents, a person would choose ten cents, regardless of what opponents get.

Consider the following game, known as the ultimatum game. There is $1 at stake, and your opponent offers you a take-it or leave-it portion of the dollar. If you accept the split, then you keep your portion, and your opponent gets the rest. If you reject, the $1 is burned and both of you go home with nothing.

The game theory solution is that your opponent offers you one cent (or no cents) and you accept. You don’t care that are taken advantage of because, rationally, taking home some money is better than rejecting and taking home nothing. So even if you think a one cent offer is unfair, you do not exact vengeance by rejecting.

But let’s say you threaten that if you do not get at least 50 cents you will definitely reject the offer. The threat is non-credible if you are rational and profit-maximizing. But if you are insane, it may be credible. So getting perceived as irrational may give you a more convincing threat and a larger payoff.

Nobel-prize winner Thomas Schelling came up with the idea of insanity being favorable. This thinking is powerful, and it may have influenced Nixon in the Madman theory of foreign policy.

I say to use this method with extreme caution because being labeled irrational may hurt your brand in unintended ways. You may win a small battle since you are insane, but then coworkers may never want to work with you.