Negotiations Judgments and Decisions Psych 253

Negotiation: A process by which two or more people come to agreement on how to allocate scarce resources. Negotiation: A process by which two or more people come to agreement on how to allocate scarce resources. Parties are interdependent; neither has complete power to choose Parties are interdependent; neither has complete power to choose The process is a decision, not a contest of wills The process is a decision, not a contest of wills

Leaving money on the table (lose-lose negotiation) Leaving money on the table (lose-lose negotiation) Settling for too little (winners curse) Settling for too little (winners curse) Walking away from the table (hubris) Walking away from the table (hubris) Settling for terms that are worse than your current situation (agreement bias) Settling for terms that are worse than your current situation (agreement bias) Common Problems in Negotiation

Absence of relevant and diagnostic feedback Absence of relevant and diagnostic feedback Search for confirming information Search for confirming information Egocentrism Egocentrism Satisficing Satisficing Versus Optimizing Versus Optimizing Self-reinforcement Self-reinforcement Fear of change and experimentation Fear of change and experimentation Why Are People Ineffective Negotiators?

Good negotiators are born, not made Good negotiators are born, not made Experience is a great teacher Experience is a great teacher Good negotiators are risk-takers Good negotiators are risk-takers Good negotiators rely on intuition Good negotiators rely on intuition Myths

Todays Negotiation: Synertech-Dosagen Assign Roles Read ONLY your materials (do not look at your partners materials) You have 5 minutes to read, think, and prepare You 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 for $15 M (but sellers was distressed) Plant appraised 2 years ago at $19 M with 5% real estate decline since then Similar but newer plant sold for $26 M nine months ago Relevant Facts

Best Alternative To a Negotiated Agreement (BATNA) Best Alternative To a Negotiated Agreement (BATNA) Reservation price Reservation price Bargaining zone Bargaining zone Aspiration level Aspiration level Key Negotiation Principles

Best Alternative To a Negotiated Agreement (BATNA) Best Alternative To a Negotiated Agreement (BATNA) Reservation price Reservation price Bargaining zone Bargaining zone Aspiration level Aspiration level Key Negotiation Principles

Know your BATNA Know your BATNA Do not think of your BATNA in aggregate terms Do not think of your BATNA in aggregate terms Improve your BATNA before you negotiate Improve your BATNA before you negotiate Fall in love with three rule Fall in love with three rule You want your counterpart to think you have a good BATNA You want your counterpart to think you have a good BATNA BATNA Tips

Best Alternative To a Negotiated Agreement (BATNA) Best Alternative To a Negotiated Agreement (BATNA) Reservation price Reservation price Bargaining zone Bargaining zone Aspiration level Aspiration level Key Negotiation Principles

Reservation Price is your bottom line Reservation Price is your bottom line The point at which you are indifferent to whether you achieve a negotiated agreement or walk away. Beyond the reservation price, you prefer no agreement. The point at which you are indifferent to whether you achieve a negotiated agreement or walk away. Beyond the reservation price, you prefer no agreement. Reservation Price is equal to your BATNA +/- other issues that make you want to do the deal Reservation Price is equal to your BATNA +/- other issues that make you want to do the deal e.g., opportunity costs, switching costs, ego, miscellaneous preferences e.g., opportunity costs, switching costs, ego, miscellaneous preferences Define your reservation price before negotiating Define your reservation price before negotiating Learn your opponents reservation price, if possible Learn your opponents reservation price, if possible Reservation Price

Do not reveal your reservation price!!! Do not reveal your reservation price!!! One of the critical pieces of information in a negotiation is the other partys reservation point. If it becomes known to one party, the negotiator can push for a resolution that is only marginally acceptable to the other party. One of the critical pieces of information in a negotiation is the other partys reservation point. If it becomes known to one party, the negotiator can push for a resolution that is only marginally acceptable to the other party. Do not state ranges Do not state ranges Reveal your BATNA only when: Reveal your BATNA only when: You are nearing an impasse You are nearing an impasse You have a strong BATNA You have a strong BATNA You want to make an agreement in the current negotiation You want to make an agreement in the current negotiation Should You Reveal your BATNA and Reservation Price?

Best Alternative To a Negotiated Agreement (BATNA) Best Alternative To a Negotiated Agreement (BATNA) Reservation price Reservation price Bargaining zone Bargaining zone Aspiration level Aspiration level Key Negotiation Principles

The Negotiation Bargaining Zone Buyers Reservation Price (B R ) (e.g., $25M) Buyers Target Price Sellers Reservation Price (S R ) (e.g., $17M) Sellers Target The bargaining zone is the space between the buyers reservation price (B R ) and the sellers reservation price (S R ) – that is, the zone of possible agreement. If B R > S R, then a Positive Bargaining Zone exists. The zone of agreement is from S R to B R (e.g., $8M).

A Negative Bargaining Zone Sellers Reservation Price (S R ) (e.g., $25M) Buyers Reservation Price (B R ) (e.g., $17M) If B R < S R, then there is no zone of possible agreement.

Best Alternative To a Negotiated Agreement (BATNA) Best Alternative To a Negotiated Agreement (BATNA) Reservation price Reservation price Bargaining zone Bargaining zone Aspiration level Aspiration level Key Negotiation Principles

Aspiration Level

First offers First offers Concessions Concessions Persuasion Persuasion Distributive Bargaining Tactics

Who made the first offer? Who made the first offer? How did the first offer affect the negotiation? How did the first offer affect the negotiation? First Offers

First Offers in Synertech-Dosagen 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 yourself in front of a respected 3 rd party (Fisher & Ury, 1991) As high as you can go without embarrassing yourself in front of a respected 3 rd party (Fisher & Ury, 1991) Whats embarrassing? Whats optimistic? Learn the market! Whats embarrassing? Whats optimistic? Learn the market! Only let the other party make the first offer when Only let the other party make the first offer when You have no information You have no information It is inappropriate to do so (e.g., job negotiations) It is inappropriate to do so (e.g., job negotiations) Immediately re-anchor if your counterpart makes the first offer Immediately re-anchor if your counterpart makes the first offer The First Offer

Allow yourself room to make concessions Allow yourself room to make concessions Dont go in with a first and final offer Dont go in with a first and final offer Make bi-lateral, not uni-lateral concessions Make bi-lateral, not uni-lateral concessions Make your concessions smaller as you approach your goal Make your concessions smaller as you approach your goal Use objective rationale to support your argument Use objective rationale to support your argument Again, learn the market Again, learn the market Concessions & Persuasion

Know your BATNA Know your BATNA Strengthen your BATNA whenever possible Strengthen your BATNA whenever possible Know your reservation price Know your reservation price Do not reveal your reservation price Do not reveal your reservation price Research the other partys BATNA/reservation price Research the other partys BATNA/reservation price Define your aspiration level and focus on that Define your aspiration level and focus on that Make first offers whenever possible Make first offers whenever possible If they make the first offer, immediately re-anchor If they make the first offer, immediately re-anchor Watch how you are making concessions Watch how you are making concessions Prepare objective rationale for your arguments Prepare objective rationale for your arguments Distributive Negotiation Strategies