Transcript Exercise on negotiation

Judgments and Decisions
Psych 253
Negotiations

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
 The process is a decision, not a contest of wills

Common Problems in Negotiation

Leaving money on the table (lose-lose
negotiation)

Settling for too little (winner’s curse)

Walking away from the table (hubris)

Settling for terms that are worse than your
current situation (agreement bias)
Why Are People Ineffective Negotiators?

Absence of relevant and diagnostic feedback
Search for confirming information
 Egocentrism


Satisficing


Versus Optimizing
Self-reinforcement

Fear of change and experimentation
Myths

Good negotiators are born, not made

Experience is a great teacher

Good negotiators are risk-takers

Good negotiators rely on intuition
Today’s Negotiation: Synertech-Dosagen
Assign Roles
Read ONLY your materials (do not look at your
partner’s 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.
Relevant Facts
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
Key Negotiation Principles

Best Alternative To a Negotiated Agreement
(BATNA)

Reservation price

Bargaining zone

Aspiration level
Key Negotiation Principles

Best Alternative To a Negotiated Agreement
(BATNA)

Reservation price

Bargaining zone

Aspiration level
BATNA Tips

Know your BATNA


Improve your BATNA before you
negotiate


Do not think of your BATNA in aggregate
terms
“Fall in love with three” rule
You want your counterpart to think you
have a good BATNA
Key Negotiation Principles

Best Alternative To a Negotiated
Agreement (BATNA)

Reservation price

Bargaining zone

Aspiration level
Reservation Price

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.
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

Define your reservation price before negotiating

Learn your opponents’ reservation price, if possible
Should You Reveal your BATNA and
Reservation Price?

Do not reveal your reservation price!!!
 One of the critical pieces of information in a
negotiation is the other party’s 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

Reveal your BATNA only when:



You are nearing an impasse
You have a strong BATNA
You want to make an agreement in the current negotiation
Key Negotiation Principles

Best Alternative To a Negotiated
Agreement (BATNA)

Reservation price

Bargaining zone

Aspiration level
The Negotiation Bargaining Zone
Buyer’s Target Price
Buyer’s Reservation Price (BR)
(e.g., $25M)
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.
Key Negotiation Principles

Best Alternative To a Negotiated Agreement
(BATNA)

Reservation price

Bargaining zone

Aspiration level
Aspiration Level
Final Price (in millions)
$23.5
$23.0
$22.5
$22.0
$21.5
$21.0
$20.5
Buyer focused on
BATNA
Buyer focused on
aspiration level
Distributive Bargaining Tactics

First offers

Concessions

Persuasion
First Offers

Who made the first offer?

How did the first offer affect the
negotiation?
First Offers in Synertech-Dosagen
Final Price (in millions)
$25
$24
$23
$22
$21
$20
$19
$18
$17
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
The First Offer

How high should the first offer be?
 “As high as you can go without embarrassing yourself in
front of a respected 3rd party” (Fisher & Ury, 1991)

What’s embarrassing? What’s optimistic? Learn the
market!

Only let the other party make the first offer when
 You have no information
 It is inappropriate to do so (e.g., job negotiations)

Immediately re-anchor if your counterpart makes the first
offer
Concessions & Persuasion

Allow yourself room to make concessions
 Don’t go in with a “first and final offer”

Make bi-lateral, not uni-lateral concessions

Make your concessions smaller as you approach
your goal

Use objective rationale to support your argument
 Again, learn the market
Distributive Negotiation Strategies

Know your BATNA
 Strengthen your BATNA whenever possible

Know your reservation price
 Do not reveal your reservation price

Research the other party’s BATNA/reservation price

Define your aspiration level and focus on that

Make first offers whenever possible
 If they make the first offer, immediately re-anchor

Watch how you are making concessions

Prepare objective rationale for your arguments