A Game-Theoretic Approach to Modeling Cross-Cultural Negotiation

Faithful models of negotiation should capture aspects such as subjective incentives, imperfect information, and sequential interaction, while providing explanation for behaviors such as bluffing, trust building, and information revelation. All of these objectives are elegantly addressed by theory of sequential games, and some of these phenomena have no convincing explanation without game theory’s key assumption, namely, that of the rationality (or approximate rationality) of the negotiators. In this paper we discuss a game-theoretic approach to modeling negotiation. In addition to accounting for a range of behavior and reasoning styles we also address several aspects specific to cross-cultural negotiation. We argue that the existence of culture-specific beliefs and strategies can be explained by the existence of multiple game-theoretic equilibria. Within a culture, repeated interaction and learning lead to an equilibrium. On the other hand, across cultures, infrequent interaction leads with high probability to disparate (and often incompatible) equilibria. We hypothesize that inefficiency in cross-cultural negotiation can be attributed to this incompatibility. We discuss recently-developed algorithms that can be used to fit models of culture-specific behavior from data while incorporating rationality constraints. We anticipate that the additional structure imposed by rationality constraints will yield both statistical advantages and game theoretic insights.