Negotiation
Making rational decisions on Negotiation
We have spoke of decision making as an individual activity based on the goals of the
individual or a group of like minded persons.
Negotiations is about making decisions that by nature are conflicting to a small or great
degree.
Gaming Theory
- outlining the conditions that define how decisions are to be made and attach utility
measurements of outcomes for each player to every possible combination of player
moves.
- predicts whether or not players will reach an agreement and what the specific
agreement will be.
Advantage
- given absolute rationality, it provides the most precise prescriptive advice available to
negotiators.
Disadvantages
1. Needs to describe all options and associated outcomes for every possible
combination of moves in a given situation, possibly infinite combinations.
2. All players must act rationally.
Decision- analytical Approach to Negotiations
Raiffa (1982,2001) developed an alternative to Gaming theory
Focus is on prescriptive thinking of your position but descriptive of the other persons
likely actions.
Structure of this approach is based on three key sets of information
1. Each party's alternative to a negotiated agreement
2. Each party's set of interests
3. The relative importance of each party's interests
The approach is to consider these three pieces of information along with how the other
persons considers them along with the common biases which prevent rational thinking.
Alternatives to a Negotiated Agreement
What are the consequences of not reaching an agreement?
If we understand the monetary or utility value of not reaching an agreement the we can
establish our rational willingness to accept or reject an offer.
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If the offer is better than this best case for not reaching an agreement then we should
accept. Otherwise reject.
Question: what factors would lay a role in our accepting an offer that is worse or
rejecting a better offer?
Question: what is a Reservation Price and how should be establish it?
- this is your walking away price.
The interests of the parties
Many times we consider money to be the primary negotiating barrier. Once we have
addressed this issue all will be good. Not always?
Parties may have multiple interests that are outside of the current negotiations.
These may include contracts with other unions or personal issues that may on the
surface not seem to be relevant but are to one party.
It is important to learn as much as you can about the other party, including the
negotiator, what you would want in there position.
Understand how these interests rank.
Some of these factors may not seem to be rational; revenge, wanting to be right
Sometimes they may just want to be recognized.
If all fails ask Why?
why are they so invested in a given factor?
Question: how does this structure apply to our current Budgetary Negotiations?
Claiming Value in Negotiations
Positive bargaining Zone vs Negative Bargaining Zone.
Based on each party's Reservation points
Trick is to determine the others reservation point.
Creating Value in Negotiation
Bazerman argues that to creat value within a negotiation it is necessary to increase the
number of issues beyond a single issue negotiation. By considering multiple issues an
impasse on one issue can be resolved thru the summation of utility gained from
combining across all issues.
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Some could argue that this creates complexity which could result in no agreement.
I think this is true if one of the issues is of primary importance to one party.
The example he used the 1978 Camp David accords where Israel and Egypt discussed
the issue of control over the Sinai.
Bazerman notes that by adding the issues of safety and sovereignty they were able to
come to an agreement.
But I think they simply asked the question Why do you want the Sinai. Or redefined the
issue which then they could agree.
Trading on Issues to Create Value
This concept relates to trading what you have a lesser value for to gain an issue that
you have a greater value/ utility. To make this work you must feasible you must
understand what is important to the other side. Once you recognize this area of
potential Tradeoff the you can make an offer where you both gain.
To be effect you must subscribe to the notion that negotiations can be a win- win
proposition.
To make this Tradeoff requires that multiple issues be consider at the same time. A
single issue negotiation, such as money, will not allow for this Tradeoff.
But if you can reframe the monetary question as to why each side wishes to have more
money then it may become prefer ant that each side is using money to satisfy a different
need.
Example: I am asking my employer for more money. The reason is that I equate
money to appreciation of my work. An alternative is a better office and a high profile
assignment.
Example: my employer is asking for wage concessions. The reason is that the current
job structure has too many classifications which requires more overtime in some depts
why others are idle. An alternative is to to lower the number of job classifications to
allow more free movement of personnel to where the work is needed.
So to make the Tradeoff possible it is necessary to increase the number of issues being
considered in the negotiations. Too many over complicates the talks but too few limits
the alternatives.
Creating value thru bets
Negotiations can stall due to differing opinions of future success of the company or the
person. Each makes an estimate with the buyer being conservative and the seller being
more optimistic. When these reservation points do not produce a positive bargaining
zone then the use of contingencies can be used to prevent and impasse.
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The most common example are incentive clauses in professional sports. A player is
given performance targets in order to gain additional compensation. This can result in
an agreement on a suspect player as well as serving as a motivational tool.
Contingencies for lawyers in civil suits are common.
The most common is with insurance.
The insurance company promises to pay if specified damage occurs to you, your house,
your car within the time limit of the contract. If you sell the house or car then the
contract become invalid.
Bazerman and Gillespie (1999) describe several ways that contingent contracts help
negotiations.
1. Bets build on differences to create joint value.
a. Fills the gap between differences to allow a mutually beneficial action.
2. Bets help manage biases
a. Overconfidence, endowment, egocentric sense of fairness
3. Bets diagnose disingenuous parties
a. Brings out false claims and bluffs.
b. If you agree but with contingent then if the party is confident that they will
meet the goal then they will accept. If not then they are bluffing.
4. Bets establish incentives for performance
The Tools of Value Creation
The following are six strategies for determining information about the other side.
Build Trust and Share Information
- companies are beginning to share their financials with employee unions. This is a bit
self- serving but it shows that they are not bluffing.
- be clear with your objectives though this does not mean you have to share your
reservation pt.
Ask Questions
Try to understand why the other side has the position that they have proposed.
Even when both sides think in rational terms they maybe at differing points because
their goals and beliefs are different.
Try to understand their true goals and what is the basis. This does not mean that they
will be forthcoming.
Part could be because previous Negotiations by previous management may not have
been performed in a trustful manner.
Why do we not ask the questions
1. We do not think they will answer
2. We are not listening, forming our next statement, do not believe them.
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3. We are doing all the talking with the intent to persuade them with our words and not
by understanding their needs and seeing how we can come to a mutual agreement
Strategically Disclose Information
Provide information on one or two areas of interest that you are willing to compromise.
This is to move forward a stalled negotiations. But if the other side does not reciprocate
then do not give more information, but try another tactic.
Screaming gets screaming.
Negotiate Multiple issues Simultaneously
Where do we begin?
- best to start with easier topics to develop trust. These would be ones that you are.
Too far apart on.
- bazerman does not think this is good as you can use it as a chip to trade later during
the discussion of the big issues. I disagree as these have little incremental value. It is
necessary to trade issues which have relatively similar value to each party.
When asked what is your starting salary your response should be it depends on the
total compensation packet.
- insurance, promotion potential, job assignment, relocation packet, job title, etc
Bazerman says that in a negotiation make it clear that nothing is final until all things are
discussed and agreed upon.
Make multiple offers simultaneously
Do not place an early offer on the table as it anchors your position and sets the tone for
the discussions.
- too low and someone maybe insulted, too high and you may have less room to
negotiate before you reach your reservation point. Wait until you have heard what the
other side wants.
By providing multiple offers at the same time, you can ask which is preferred allowing
you to understand the importance if issues to the other side.
Indicates that you are flexible, or maybe not. What do you think?
Search for Post Settlement Settlements
Is there a better solution?
Possibly the stress of not having a deal is removed and you can find small areas of
improvement.
Sometimes most are happy to reach agreement and want to move on.
Negotiator Cognition
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Bazerman cites six key mistakes that negotiators make.
1. The mythical fixed pie of Negotiating
- if you accept the idea of a fixed pie then you subscribe to the notion that for the other
side to win you must lose this adversarial get all that I can approach results in our
limiting the evidence towards a solution, in essence we fall prey to the MySided Bias.
- Bazerman has noted that the pie size may change if we consider expanding the
issues being discussed.
- this perspective causes us to look with a skeptical eye to solutions proposed by the
other side. We consider the negative consequences and weigh them more heavily that
the positive, both in terms of probability of occurrence and value.
2. The Framing of Negotiator Judgement
- the issue is whether you frame the question in a positive or negative perspective.
Kahneman and Tversky (1982) have noted that we frame decisions such that
negative consequences are more heavily weighted than positive ones. So we work to
be more risk averse.
When we set a reference point it is based on what we believe to be a fair price or
point. The method of how we set this fair price can be varied including observations of
past prices, recent outcomes from other negotiations, or just the value that we arbitrarily
believe to be fair.
The question is how do we frame an offer if it is slightly below our reference point.
Do we lose in that it is below what we want? Or do we gain if it is better than our
alternative if we do not come to an agreement.
Example: in today's housing market, if you bought a house in 2005 you bought at the
peak of the housing bubble. If you are trying to sell today then your house is likely to be
worth less than what you paid.
But some sellers not wishing to lose will set their reservation price at the 2005 price.
Is this rational? If not what is preventing the rational thought? Sunk cost.
Examples:
Selling a house
Selling a stock
Selling a car
Setting a union wage rate
For a wage rate, Bazerman cites the following for consideration in setting the reference
point.
1.
2.
3.
4.
Last year's wage
Management's initial offer
The unions estimation of management's reservation point
The union's reservation point
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5. The bargaining position that the union publicly announced to its members
How do we consider these potentially conflicting points rationally ?
If you understand the other side's position then you can set anchors that can be viewed
as positive.
3. Escalation of Conflict
This escalation occurs when the parties are holding fast to a specific position and
unwilling to budge. This is I will prove that I am right at all costs prevents many
settlements from being arranged.
Example is the NFL Officials contract discussion.
This has similar characteristics to the Fixed Pie mistake, I. That for them to win I must
lose.
The prevention is to not get embroiled in this type of discussion. Remain open to
options. If the other party develops a last and final continue to seek a compromise.
They may not have considered all combinations.
Also a person could retain their position based upon how much they have invested into
the item or the negotiations.
- reputation
- money
- instructions from higher ups
4. Overestimating your Value in Negotiations
What are you worth?
This is the question that most of you will be asking when you entertain your first job
offers.
The psychology is that we wish together as much as we can, "leave nothing on the
table". But how do we know if you have taken every thing that the other party can offer
and still reject their offer.
This requires us to objectively evaluate what is our value. To answer the question you
need to know how much utility you are gaining from the offer.
There is the story of a independent league baseball player that was identified as being
the next great young pitcher. He was offered $4.9 million to play for eight years by the
Rockies and a latter offer of $4million for two years. He rejected these offers as he
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wanted $4.95 Million for a one year contract. He rejected even thought he was making
$1000 a year in the current league and working at Target.
Should he have accepted the offer and why?
When we look at the concept of Diminishing Utility, as he moved from making less than
$15,000 per year to over $2million a year does his utility diminish from the additional $2
million he asked for?
So when you are considering each offer use strategies to determine if the best offer is
given by the other party and to consider your alternatives if the Negotiations fail.
5. Self-Serving Biases in Negotiations
Each party will make a rational decision based on their beliefs of what is fair. Though
each party have a difference on what is fair due to their differing goals.
A relevant example is in the budget for the Sate of Illinois. We all agree that he budget
needs to result in a lowering of the deficit. We could also agree upon the amount that
the budget needs to be set but the disagreement is on what needs to be cut or limited or
taxes raised to arrive at the agreed upon budget. We each will argue for our own
expenditure to remain in tact.
6. Anchoring in Negotiations
First offers can influence the rest of the negotiations.
If the offer is too high it can scare off potential buyers, but if done correctly it can be a
way to frame the other party's perspective. If they do not have a reference point the
initial offer will establish a beginning point which can be used to determine gains when
the buyer gets the item at a lower price.
The example is sales of clothes or jewelry . If you are buying them. In a foreign
marketplace how d you know if it s a good price. The price on the item is an anchor
price. To future establish a price ask them for a lower price this further refines the
positive bargaining zone.
Ultimately, your offer or counteroffer needs to be based on your needs and analysis of
the other party's needs. The initial offer is one piece of evidence but should not be over
weighed.
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