NegotiationsNegotiations

Judgments and Decisions Psych 253

Negotiation: A process by which two or Negotiation: A process by which two or more people come to agreement on how to more people come to agreement on how to allocate scarce resources.allocate scarce resources.

Parties are interdependent; neither has Parties are interdependent; neither has complete power to choosecomplete power to choose

The process is a decision, not a contest of willsThe process is a decision, not a contest of wills

Leaving money on the table (lose-lose Leaving money on the table (lose-lose negotiation)negotiation)

Settling for too little (winner’s curse)Settling for too little (winner’s curse)

Walking away from the table (hubris)Walking away from the table (hubris)

Settling for terms that are worse Settling for terms that are worse than your current situation than your current situation (agreement bias)(agreement bias)

Common Problems in Common Problems in NegotiationNegotiation

Absence of relevant and diagnostic Absence of relevant and diagnostic feedbackfeedback Search for confirming informationSearch for confirming information EgocentrismEgocentrism

SatisficingSatisficing Versus OptimizingVersus Optimizing

Self-reinforcementSelf-reinforcement Fear of change and experimentationFear of change and experimentation

Why Are People Ineffective Why Are People Ineffective Negotiators?Negotiators?

Good negotiators are born, not madeGood negotiators are born, not made

Experience is a great teacherExperience is a great teacher

Good negotiators are risk-takersGood negotiators are risk-takers

Good negotiators rely on intuitionGood negotiators rely on intuition

MythsMyths

Today’s Negotiation: Synertech-Today’s Negotiation: Synertech-DosagenDosagen

 

Assign RolesRead ONLY your materials (do not look at

your partner’s materials)You have 5 minutes to read, think, and

prepareYou have 15 minutes to negotiate and you

can do this outside of the classroom.

But come BACK in 20 minutes with the results of your negotiation on the handout.

Dosagen bought the plant 3 years ago Dosagen bought the plant 3 years ago for $15 M (but sellers was distressed)for $15 M (but sellers was distressed)

Plant appraised 2 years ago at $19 M Plant appraised 2 years ago at $19 M with 5% real estate decline since thenwith 5% real estate decline since then

Similar but newer plant sold for $26 M Similar but newer plant sold for $26 M nine months ago nine months ago

Relevant FactsRelevant Facts

BBest est AAlternative lternative TTo a o a NNegotiated egotiated AAgreement (BATNA)greement (BATNA)

Reservation priceReservation price

Bargaining zoneBargaining zone

Aspiration levelAspiration level

Key Negotiation Key Negotiation PrinciplesPrinciples

BBest est AAlternative lternative TTo a o a NNegotiated egotiated AAgreement (BATNA)greement (BATNA)

Reservation priceReservation price

Bargaining zoneBargaining zone

Aspiration levelAspiration level

Key Negotiation Key Negotiation PrinciplesPrinciples

Know your BATNAKnow your BATNA Do not think of your BATNA in Do not think of your BATNA in

aggregate termsaggregate terms

Improve your BATNA before you Improve your BATNA before you negotiatenegotiate ““Fall in love with three” ruleFall in love with three” rule

You want your counterpart to think You want your counterpart to think you have a good BATNAyou have a good BATNA

BATNA TipsBATNA Tips

BBest est AAlternative lternative TTo a o a NNegotiated egotiated AAgreement (BATNA)greement (BATNA)

Reservation priceReservation price

Bargaining zoneBargaining zone

Aspiration levelAspiration level

Key Negotiation Key Negotiation PrinciplesPrinciples

Reservation Price is your bottom lineReservation Price is your bottom line The point at which you are indifferent to whether you The point at which you are indifferent to whether you

achieve a negotiated agreement or walk away. achieve a negotiated agreement or walk away. Beyond Beyond the reservation price, you prefer no agreement.the reservation price, you prefer no agreement.

Reservation Price is equal to your BATNA +/- Reservation Price is equal to your BATNA +/- other issues that make you want to do the dealother issues that make you want to do the deal e.g., opportunity costs, switching costs, ego, e.g., opportunity costs, switching costs, ego,

miscellaneous preferencesmiscellaneous preferences

Define your reservation price Define your reservation price beforebefore negotiating negotiating

Learn your opponents’ reservation price, if Learn your opponents’ reservation price, if possiblepossible

Reservation PriceReservation Price

Do not reveal your reservation price!!!Do not reveal your reservation price!!! One of the critical pieces of information in a One of the critical pieces of information in a

negotiation is the other party’s reservation negotiation is the other party’s reservation point. If it becomes known to one party, the point. If it becomes known to one party, the negotiator can push for a resolution that is negotiator can push for a resolution that is only marginally acceptable to the other party.only marginally acceptable to the other party.

Do not state rangesDo not state ranges

Reveal your BATNA Reveal your BATNA onlyonly when: when: You are nearing an impasseYou are nearing an impasse You have a strong BATNAYou have a strong BATNA You want to make an agreement in the current You want to make an agreement in the current

negotiationnegotiation

Should You Reveal your BATNA Should You Reveal your BATNA and Reservation Price?and Reservation Price?

BBest est AAlternative lternative TTo a o a NNegotiated egotiated AAgreement (BATNA)greement (BATNA)

Reservation priceReservation price

Bargaining zoneBargaining zone

Aspiration levelAspiration level

Key Negotiation PrinciplesKey Negotiation Principles

The Negotiation Bargaining Zone

Buyer’s Reservation Price (BR) (e.g., $25M)Buyer’s Target Price

Seller’s Reservation Price (SR) (e.g., $17M)

Seller’s Target

• The bargaining zone is the space between the buyer’s reservation price (BR) and the seller’s reservation price (SR) – that is, the zone of possible agreement.• If BR > SR, then a Positive Bargaining Zone exists. The zone of agreement is from SR to BR (e.g., $8M).

A Negative Bargaining Zone

Seller’s Reservation Price (SR) (e.g., $25M)

Buyer’s Reservation Price (BR)(e.g., $17M)

If BR < SR, then there is no zone of possible agreement.

BBest est AAlternative lternative TTo a o a NNegotiated egotiated AAgreement (BATNA)greement (BATNA)

Reservation priceReservation price

Bargaining zoneBargaining zone

Aspiration levelAspiration level

Key Negotiation PrinciplesKey Negotiation Principles

Aspiration LevelAspiration Level

$20.5

$21.0

$21.5

$22.0

$22.5

$23.0

$23.5

Final Price (in millions)

Buyer focused onBATNABuyer focused onaspiration level

First offersFirst offers

ConcessionsConcessions

PersuasionPersuasion

Distributive Bargaining Distributive Bargaining TacticsTactics

Who made the first offer?Who made the first offer?

How did the first offer affect How did the first offer affect the negotiation?the negotiation?

First OffersFirst Offers

First Offers in Synertech-First Offers in Synertech-DosagenDosagen

$17$18$19$20$21$22$23$24$25

Final Price (in millions)

Buyer made first offer Seller made first offer

• There is a high correlation between the first offer and the final price

• Counteroffers and later concession behavior less predictive of final price

How high should the first offer be?How high should the first offer be? ““As high as you can go without embarrassing As high as you can go without embarrassing

yourself in front of a respected 3yourself in front of a respected 3rdrd party” (Fisher & party” (Fisher & Ury, 1991)Ury, 1991)

What’s embarrassing? What’s optimistic? Learn the What’s embarrassing? What’s optimistic? Learn the market!market!

Only let the other party make the first offer when Only let the other party make the first offer when You have no informationYou have no information It is inappropriate to do so (e.g., job negotiations)It is inappropriate to do so (e.g., job negotiations)

ImmediatelyImmediately re-anchor if your counterpart makes the re-anchor if your counterpart makes the first offerfirst offer

The First OfferThe First Offer

Allow yourself room to make concessionsAllow yourself room to make concessions Don’t go in with a “first and final offer”Don’t go in with a “first and final offer”

Make bi-lateral, not uni-lateral concessionsMake bi-lateral, not uni-lateral concessions

Make your concessions smaller as you approach Make your concessions smaller as you approach your goalyour goal

Use objective rationale to support your argumentUse objective rationale to support your argument Again, learn the marketAgain, learn the market

Concessions & PersuasionConcessions & Persuasion

Know your BATNAKnow your BATNA Strengthen Strengthen youryour BATNA whenever possible BATNA whenever possible

Know your reservation priceKnow your reservation price Do not reveal your reservation priceDo not reveal your reservation price

Research the other party’s BATNA/reservation priceResearch the other party’s BATNA/reservation price

Define your aspiration level and focus on thatDefine your aspiration level and focus on that

Make first offers whenever possibleMake first offers whenever possible If they make the first offer, immediately re-anchorIf they make the first offer, immediately re-anchor

Watch how you are making concessionsWatch how you are making concessions

Prepare objective rationale for your argumentsPrepare objective rationale for your arguments

Distributive Negotiation Distributive Negotiation StrategiesStrategies