Keynes' Attack on the Versailles Treaty: An Early Investigation of the Consequences of Bounded Rationality, Framing, and Cognitive Illusions

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.