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Teaching Negotiation





                        1
How We Will Learn
• Practice: in a variety of settings
• Feedback: Share experiences
• Analysis: Mathematical and Descriptive
•	 Outcome Based Evaluation: Your grade
   depends on your performance!



                                           2
•	 Our focus is on skill building and learning
   by doing
•	 We all can benefit from practice by doing
   negotiations in different substantive
   contexts
•	 Practice sharpens our ability to recognize
   untested assumptions, alternative
   explanations
•	 It increases our sensitivity to what works,
   what doesn’t work and why.

                                                 3
(# in class = 100)            Scoring          (# in class = 100)

   Games vs. All Others                          Games vs. Specific Player
    (Two roles - A & B)                       (Labor vs. Management - 50 Pairs)

1) Write down your A-strategy                 1) You = Labor, “Henry” = Mgmt.

2) Your A-strategy pitted against             2) You score 710 points,
   50 B-role strategies                       “Henry” score 36 points.

B Player            Your Score                3) Compare your score with 49
   1                   63                     other Labor scores:
   2                   61
                                              Other Labor Player           Score
  50                    81                             1                    670
Your average score = 67                                2                    745
A Player overall mean = 73
A Player overall std. dev. = 4                         49                    640
                                              Other Labor Player mean =      680
3) Your Z-score as an A-player:               Other Labor Player std. dev. = 40
          67 - 73                                               710 - 680
        =         = - 1.5                     4) Your Z-score =           = .75
             4                                                     40     4
Why Negotiation is Difficult

              Leigh Thompson Chapter 1

• Cognitive Hard Wiring:
  – We are programmed to simplify information
  – Our need for closure blinds us to consideration
    of alternatives
  – We make faulty, simplifying assumptions
• Need for confirmatory feedback
  – inhibits learning optimally from experience
• Intuition
  – Doesn’t lead to a general framework for
    effective negotiation
                                                  5
Myths

• Good Negotiators are born:
  – Wrong! They are self-made
  – Buying a car is NOT a broad negotiation
    experience builder
• Experience is a great teacher:
  – While confidence improves with experience,
     unaided experience doesn’t provide good
    feedback
  – We remember successes, forget failures


                                                 6
• Good negotiators take risks: (translation)
  – Good negotiators make threats in a disciplined
    and organized fashion
  – Good negotiators know how to evaluate a
    decision situation and choose a best course of
    action
• Good negotiators rely on intuition:
  – Many do use ‘gut feeling’
  – In reality, behavior is often influenced by
    arbitrary and irrelevant aspects of a setting
  – Good negotiators are self-aware
  – They can articulate the rules that guide them
    and police against being fleeced
                                                     7
“Distinguishing Best and Strategic 

                  Practices” 

             Keith Allred (2000)

•	 Moves to claim value tend to block moves
   aimed at creating value

• Claiming is competitive and assertive

•	 The downside of pursuing a cooperative
   strategy aimed creating value is that it often
   exposes you to exploitation
                                                    8
Best versus Strategic Practices

• BEST PRACTICES:
 – Those that work well irrespective of what your
   negotiating counterparts do


• STRATEGIC PRACTICES:
 – Practices that work well in particular situations
   with some counterpart responses and poorly in
   other situations with other responses

                                                       9
•	 Within a formal game-theoretic framework,
   equilibrium strategies are often, but not
   always “Best Practice”
  – Stud Poker bluffing strategies


•	 Prisoners’ Dilemma games are an example
   of cases where equilibrium strategy choice
   may not be a “Best Practice”
  – Dominance leads to poor outcomes for both
    parties
  – Holdup!
                                                10
Understand the interests of your 

      negotiating counterpart(s)

•	 Interests are self-evident in formal zero-sum
   and non-zero sum games
•	 Interests of your negotiating counterparts
   are NOT self-evident in multiple issue
   negotiations where each party possesses
   private information
  – In particular, information about your
    counterparts’ BATNA’s are often revealed only
    through the dynamics of negotiation
                                                11
Distributive Bargaining


   Principles and Key Ideas





                               12
Distributive Bargaining 

             Principles

• Target Point
  – Your preferred settlement, taking into account
    limits imposed by the interests of your
    counterpart
  – Your target is likely to change as negotiations
    unfold

• BATNA or Reservation Point
  – Walk away point at which you are indifferent
    between settlement and walking away
                                                      13
• Reason backward to determine BATNA:
  – Brainstorm alternatives to determine what your
    best alternative to no agreement really is
  – Base it on facts not wishes
  – Do NOT change your BATNA unless the facts
    change
  – Do NOT allow others to talk you into change
•	 Bargaining Zone--the region between
   parties’ reservation points
  – Positive when parties’ reservation points
    overlap and doesn’t exist when there is no
    overlap

                                                 14
•	 Agreement is possible when bargaining
   zones are positive and not possible when
   there is no reservation point overlap

• Bargaining Surplus
  – The amount of overlap produced by reservation
    points
  – A measure of the size of the bargaining zone




                                                15
Buyer’s Bargaining Range
                 Settlement

                                    Buyer’s
           Seller’s
                                    Surplus
           Surplus                                    Seller’s
                           Bargaining Zone            Target


Buyer’s Seller                                    Buyer
Target Reservation                                Reservation
       Price                                      Price

                      Seller’s Bargaining Range



    Bargaining Zone = Zone of Possible Agreement
                 or ZOPA                                   16
Prepare,Prepare,Prepare!
• 1) Determine your BATNA.
  – It is your most important source of POWER!
• 2) Improve your BATNA.
  – It is never as good as we would like
  – A really good BATNA ensures a good chance
    of a large share of the surplus
  – Search out possible alternatives that may
    enhance your ‘walk away’ point
                                                 17
•	 (3) Determine your opening offer before
       you begin negotiations

•	 (4) Do the best you can to determine your
   negotiating counterpart’s BATNA:
  – Craft a dialogue that engenders much
    information exchange
  – In mixed motive negotiations work on creating
    value before claiming it

                                                18
THE Big QUESTIONS





                     19
• Reveal your reservation price?
  – No! Unless it is very,very good. Seldom the
    case
• Lie about your reservation price?
  – No! You can back yourself into a corner and
    fail to reach agreement
• Try to convince your counterpart that her

  BATNA is no good?
  – Probably Not. Only if you have supportable
    evidence that it is really no good
  – Beware of a Boomerang effect: people often do
    the opposite of what you want them to do
                                                  20
• Tough or Soft?
• You should be neither:
  – Too tough may blow the deal
  – Too soft, you give away your bargaining
    surplus
• Ideal:
  – Try to make an offer in the bargaining zone, not
    outside
  – IF you are certain of your counterpart’s
    BATNA, offer just slightly better


                                                  21
ANCHORING

•People make estimates by starting from an 

initial value and adjusting to provide a final 

                   answer. 


  •Adjustments are typically insufficient




                                             22
• The initial value is a psychological anchor
  – Too high, the estimate tends to be too high
  – Too low, the estimate tends to be too low


•	 Fact: adjustment is almost always
   insufficient

•	 Large and systematic departures from
   accuracy can occur

                                                  23
Alpert-Raiffa Experiment
•	 Individuals specify 50-50 probability
   intervals [inter-quartile ranges] for a large
   number of uncertain quantities
• Much narrower ranges than 50-50 appear

  – Such interval estimates reflect more certainty
    than is warranted by available knowledge

  – 36% is a pseudo semi-constant!


                                                     24
•	 Irrelevant numbers can serve as anchors and
   influence perception of the bargaining zone:
  – Real estate agents are given a ten page packet
    of information including a “list price” along
    with the actual appraised price.
  – 81% of agents said they did not use list price to
    estimate sales price
  – Nevertheless, manipulating the “list price” by
    12% resulted in a significant difference in
    agents’ estimates of the property’s sales price
  – The average price with a low list price was 15%
    lower than that for the high list price anchor

                                                   25
First Offers as Anchors
•	 Does making the first offer lead to a better
   outcome for you?
  – Yes, if you are certain of your counterpart’s
    BATNA

  – Not necessarily if you are uncertain



                                                    26
• 1st offers and 1st counter-offers together are
  often good predictors of a settlement
  – Suppose A makes a 1st offer and B responds
  – If B focuses on information inconsistent with
    implications of A’s first offer, a first offer effect
    is diminished
  – IF B focuses on information consistent with
    implications of A 1st offer, a first offer effect
    persists
   Galinsky,A. and T. Mussweiler,“First Offers as Anchors: The Role
    of Perspective-Taking and Negotiator Focus”,
    Kellogg School Working Paper #231

                                                                      27
• If B shapes a response focused on:
  – A’s BATNA or
  – A’s Reservation Price or
  – B’s target price

  A’s first offer advantage is reduced.


• If B shapes a response focused on:
  – B’s BATNA or

  – A’s target price

  A’s first offer effect persists.


                                           28

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MIT Negotiations Lecture Powerpoint

  • 2. How We Will Learn • Practice: in a variety of settings • Feedback: Share experiences • Analysis: Mathematical and Descriptive • Outcome Based Evaluation: Your grade depends on your performance! 2
  • 3. • Our focus is on skill building and learning by doing • We all can benefit from practice by doing negotiations in different substantive contexts • Practice sharpens our ability to recognize untested assumptions, alternative explanations • It increases our sensitivity to what works, what doesn’t work and why. 3
  • 4. (# in class = 100) Scoring (# in class = 100) Games vs. All Others Games vs. Specific Player (Two roles - A & B) (Labor vs. Management - 50 Pairs) 1) Write down your A-strategy 1) You = Labor, “Henry” = Mgmt. 2) Your A-strategy pitted against 2) You score 710 points, 50 B-role strategies “Henry” score 36 points. B Player Your Score 3) Compare your score with 49 1 63 other Labor scores: 2 61 Other Labor Player Score 50 81 1 670 Your average score = 67 2 745 A Player overall mean = 73 A Player overall std. dev. = 4 49 640 Other Labor Player mean = 680 3) Your Z-score as an A-player: Other Labor Player std. dev. = 40 67 - 73 710 - 680 = = - 1.5 4) Your Z-score = = .75 4 40 4
  • 5. Why Negotiation is Difficult Leigh Thompson Chapter 1 • Cognitive Hard Wiring: – We are programmed to simplify information – Our need for closure blinds us to consideration of alternatives – We make faulty, simplifying assumptions • Need for confirmatory feedback – inhibits learning optimally from experience • Intuition – Doesn’t lead to a general framework for effective negotiation 5
  • 6. Myths • Good Negotiators are born: – Wrong! They are self-made – Buying a car is NOT a broad negotiation experience builder • Experience is a great teacher: – While confidence improves with experience, unaided experience doesn’t provide good feedback – We remember successes, forget failures 6
  • 7. • Good negotiators take risks: (translation) – Good negotiators make threats in a disciplined and organized fashion – Good negotiators know how to evaluate a decision situation and choose a best course of action • Good negotiators rely on intuition: – Many do use ‘gut feeling’ – In reality, behavior is often influenced by arbitrary and irrelevant aspects of a setting – Good negotiators are self-aware – They can articulate the rules that guide them and police against being fleeced 7
  • 8. “Distinguishing Best and Strategic Practices” Keith Allred (2000) • Moves to claim value tend to block moves aimed at creating value • Claiming is competitive and assertive • The downside of pursuing a cooperative strategy aimed creating value is that it often exposes you to exploitation 8
  • 9. Best versus Strategic Practices • BEST PRACTICES: – Those that work well irrespective of what your negotiating counterparts do • STRATEGIC PRACTICES: – Practices that work well in particular situations with some counterpart responses and poorly in other situations with other responses 9
  • 10. • Within a formal game-theoretic framework, equilibrium strategies are often, but not always “Best Practice” – Stud Poker bluffing strategies • Prisoners’ Dilemma games are an example of cases where equilibrium strategy choice may not be a “Best Practice” – Dominance leads to poor outcomes for both parties – Holdup! 10
  • 11. Understand the interests of your negotiating counterpart(s) • Interests are self-evident in formal zero-sum and non-zero sum games • Interests of your negotiating counterparts are NOT self-evident in multiple issue negotiations where each party possesses private information – In particular, information about your counterparts’ BATNA’s are often revealed only through the dynamics of negotiation 11
  • 12. Distributive Bargaining Principles and Key Ideas 12
  • 13. Distributive Bargaining Principles • Target Point – Your preferred settlement, taking into account limits imposed by the interests of your counterpart – Your target is likely to change as negotiations unfold • BATNA or Reservation Point – Walk away point at which you are indifferent between settlement and walking away 13
  • 14. • Reason backward to determine BATNA: – Brainstorm alternatives to determine what your best alternative to no agreement really is – Base it on facts not wishes – Do NOT change your BATNA unless the facts change – Do NOT allow others to talk you into change • Bargaining Zone--the region between parties’ reservation points – Positive when parties’ reservation points overlap and doesn’t exist when there is no overlap 14
  • 15. • Agreement is possible when bargaining zones are positive and not possible when there is no reservation point overlap • Bargaining Surplus – The amount of overlap produced by reservation points – A measure of the size of the bargaining zone 15
  • 16. Buyer’s Bargaining Range Settlement Buyer’s Seller’s Surplus Surplus Seller’s Bargaining Zone Target Buyer’s Seller Buyer Target Reservation Reservation Price Price Seller’s Bargaining Range Bargaining Zone = Zone of Possible Agreement or ZOPA 16
  • 17. Prepare,Prepare,Prepare! • 1) Determine your BATNA. – It is your most important source of POWER! • 2) Improve your BATNA. – It is never as good as we would like – A really good BATNA ensures a good chance of a large share of the surplus – Search out possible alternatives that may enhance your ‘walk away’ point 17
  • 18. • (3) Determine your opening offer before you begin negotiations • (4) Do the best you can to determine your negotiating counterpart’s BATNA: – Craft a dialogue that engenders much information exchange – In mixed motive negotiations work on creating value before claiming it 18
  • 20. • Reveal your reservation price? – No! Unless it is very,very good. Seldom the case • Lie about your reservation price? – No! You can back yourself into a corner and fail to reach agreement • Try to convince your counterpart that her BATNA is no good? – Probably Not. Only if you have supportable evidence that it is really no good – Beware of a Boomerang effect: people often do the opposite of what you want them to do 20
  • 21. • Tough or Soft? • You should be neither: – Too tough may blow the deal – Too soft, you give away your bargaining surplus • Ideal: – Try to make an offer in the bargaining zone, not outside – IF you are certain of your counterpart’s BATNA, offer just slightly better 21
  • 22. ANCHORING •People make estimates by starting from an initial value and adjusting to provide a final answer. •Adjustments are typically insufficient 22
  • 23. • The initial value is a psychological anchor – Too high, the estimate tends to be too high – Too low, the estimate tends to be too low • Fact: adjustment is almost always insufficient • Large and systematic departures from accuracy can occur 23
  • 24. Alpert-Raiffa Experiment • Individuals specify 50-50 probability intervals [inter-quartile ranges] for a large number of uncertain quantities • Much narrower ranges than 50-50 appear – Such interval estimates reflect more certainty than is warranted by available knowledge – 36% is a pseudo semi-constant! 24
  • 25. • Irrelevant numbers can serve as anchors and influence perception of the bargaining zone: – Real estate agents are given a ten page packet of information including a “list price” along with the actual appraised price. – 81% of agents said they did not use list price to estimate sales price – Nevertheless, manipulating the “list price” by 12% resulted in a significant difference in agents’ estimates of the property’s sales price – The average price with a low list price was 15% lower than that for the high list price anchor 25
  • 26. First Offers as Anchors • Does making the first offer lead to a better outcome for you? – Yes, if you are certain of your counterpart’s BATNA – Not necessarily if you are uncertain 26
  • 27. • 1st offers and 1st counter-offers together are often good predictors of a settlement – Suppose A makes a 1st offer and B responds – If B focuses on information inconsistent with implications of A’s first offer, a first offer effect is diminished – IF B focuses on information consistent with implications of A 1st offer, a first offer effect persists Galinsky,A. and T. Mussweiler,“First Offers as Anchors: The Role of Perspective-Taking and Negotiator Focus”, Kellogg School Working Paper #231 27
  • 28. • If B shapes a response focused on: – A’s BATNA or – A’s Reservation Price or – B’s target price A’s first offer advantage is reduced. • If B shapes a response focused on: – B’s BATNA or – A’s target price A’s first offer effect persists. 28