President Donald Trump, who quite literally wrote the book on the art of the deal, has lost the first major negotiation of his presidency over the American Health Care Act. And it was his final strategic move that may have pushed the bill over the cliff.

After tense negotiations with the House Freedom Caucus over the particulars of the bill Thursday, Trump called for an end to the bargaining and issued the reticent Republicans an ultimatum: Pass this bill, or Obamacare stays.

“At some point, you either have a deal or you don’t,” said press secretary Sean Spicer Friday, explaining the president’s state of mind.

Around the same time Spicer was briefing the press, House Speaker Paul Ryan rushed to the White House to tell the president he wouldn’t have enough votes to pass the bill. Hours later, House Republicans pulled the bill just ahead of a scheduled vote, handing both Ryan and Trump a major defeat.

That failure of the bill may prove a crushing blow for Republicans who have long promised a swift repeal of Obamacare. But it comes as no surprise to those familiar with what academics call the “ultimatum game.”

Game Time

Here's how the ultimatum game works: Two people receive a single pot of money. One person plays the proposer, and it’s his job to offer his compatriot a share of that pot. That other person, the responder, has two options. He can either accept the offer, in which case the proposer gets the rest of the money. Or he can reject it, in which case no one gets anything. As it turns out, research has consistently shown that if the proposer offers less than 20 percent of the pot, the receiver is much more likely to turn it down.

Which, when you think about it, seems mystifying. Who wouldn’t take $19 out of $100 when the alternative is to walk away empty-handed? People who value self-respect more than money, which ends up being most of us.

“If you offer me $1 out of $10, that doesn’t seem fair, and I’m willing to pay a dollar to say fuck you,” says Richard Thaler, professor of behavioral economics at the University of Chicago’s Booth School of Business.

Enter the Freedom Caucus. Trump and Ryan asked this secretive coterie of nearly three dozen congressmen (and yes, they are all men) to vote for a bill that manages a measly 17 percent approval rating. President Trump did make some concessions with the far-right wing of the party, agreeing to cut language about so-called “essential health benefits” like mental health and emergency room coverage. But the bill preserves some pieces of Obamacare, which members of the Freedom Caucus have long promised to repeal.

“This is a case where it does seem that the advantages to him are clear, and the advantages to the members are unclear,” Thaler says. Trump's ultimatum, then, appears to have overplayed its hand. It was precisely the kind of deal that gets turned down.

Cut and Run

So, now that Republicans have pulled the AHCA, does the loss undermine President Trump’s self-proclaimed proficiency at the negotiating table? Not so, says Erez Yoeli, a research scientist at Harvard’s Program for Evolutionary Dynamics, who argues that President Trump was in an almost impossible position. He could either pass the Ryan-designed bill, which overwhelmingly hurts his constituents, or he could risk his reputation as a tough negotiator by continuing to whittle away at the AHCA, trying to appease both moderates and extreme conservatives. In the face of such a dilemma, Yoeli says, Trump has more to gain walking away. That is, as long as he doesn’t ultimately go back on his word to punish Republicans for their inaction by leaving Obamacare in place.

An ultimatum can only work, after all, if it has credibility. “What determines whether your ultimatum is credible? If you have a reputation for having stuck to your guns in the past, and have a lot to gain in the future from maintaining such a reputation, even if it means losing out on a deal today,” Yoeli explains. Trump has nearly four more years of negotiations ahead of him. Compromising his position as a tough negotiator today sets a bad precedent for all of those tomorrows.

'The advantages to him are clear, and the advantages to the members are unclear.' Richard Thaler, University of Chicago

For Trump, this bill had obvious upsides, but also significant downsides. While it would have marked a massive political win, in practice, its policies would have disproportionately gutted insurance in Trump country, which would reflect poorly on the president down the line. In other words, his loss today, however embarrassing, may ultimately benefit him and his constituents.

Which is why Yoeli argues that the ultimatum made sense. "My guess is he knew he had a decent shot to lose and was OK with that, because generally Obamacare is better for his constituents than whatever Paul Ryan cobbled together in a few weeks," he says.

If that theory holds, then Trump will have to stick to his word to let Obamacare stand. Otherwise he will have sacrificed not just his health care plan, but his reputation too.