The Mind and Heart of the Negotiator, EBook [Global Edition] Chapter 3 PDF

3 DISTRIBUTIVE NEGOTIATION: CLAIMING VALUE Headquartered in Perth, Australia, Invictus Energy Limited is an oil and gas exploration company that focuses its operations on high-impact energy resources in sub-Saharan Africa. Invictus Energy...

3 DISTRIBUTIVE NEGOTIATION: CLAIMING VALUE Headquartered in Perth, Australia, Invictus Energy Limited is an oil and gas exploration company that focuses its operations on high-impact energy resources in sub-Saharan Africa. Invictus Energy has a tremendous advantage over both potential competitors and governments in southern Africa as they have already been able to tap regional markets and secure the best locations and the most profitable ways of exploiting the natural resources. It is now the 80% owner and operator of the potentially lucrative Cabora Bassa Basin Project in northern Zimbabwe. The Cabora Bassa Basin is believed to be the largest under-explored interior rift basin in Africa. It was granted an exploration license in 2017 for an initial 3-year period, which was renewed in 2020. The license covers 250,000 acres in potentially the biggest seismically tested and undrilled part of onshore Africa. The Zimbabwean government and other operators have few choices as they enter negotiations with Invictus to push the project forward. Invictus, on the other hand, has four major advantages going into the negotiations: The onshore loca- tion reduces risk and the existing infrastructure reduces costs; it already has MoUs with customers to bankroll the development of the project; like neighboring South Africa, Zimbabwe is desperate for energy supply; and finally, Emmerson Mnangagwa, the President of Zimbabwe, has enacted ­investor-friendly legislation. Both Zimbabwe and South Africa suffer electricity shortages and need an immediate solution to their energy crises. Zimbabwe has a severely underfunded and dilapidated energy sector, and South Africa is reliant on hydroelectric sources and its aging coal-fired power plants. Invictus can drive a hard bargain with Zimbabwe knowing there are few other viable alternatives.1 T he opening example highlights the fact that, even in single-issue negotiations, negotiators can make the most of their advantages and weaken the other party’s bargaining position. In this chapter, we focus on how negotiators can best achieve their outcomes—economic (e.g., money and resources) as well as social (e.g., preserving relationships and building trust). We address the question of how best to claim resources. We consider the question of who should make the first offer, how to respond to an offer made by the other party, the amount of concessions to make, and how to handle an aggres- sive negotiator. The entire process of making an opening offer and then reaching a mutually agreeable settlement is known as the negotiation dance.2 Unfortunately, many of us have never taken dance lessons or know what to do once we find ourselves on the dance floor. Should we 1 Kalkin Media. (2020, July 16). Invictus Energy’s first mover advantage in Cabora Bassa & elephant scale potential. kalkinemedia.com; Invictus Energy. Official website. www.invictusenergy.com. 2 Raiffa, H. (1982). The art and science of negotiation. Cambridge, MA: Harvard University Press. 54  Chapter 3 Distributive Negotiation: Claiming Value 55 lead? Should we follow? A few hard-and-fast rules of thumb apply, but the negotiator must make many choices that are not so clear-cut. We wrestle with these issues in this chapter. Although this chapter deals with slicing the pie, most negotiations involve a win–win aspect (expanding the pie), which we discuss in detail in the next chapter. However, even in win–win negotiations, the pie of resources created by negotiators eventually has to be sliced. THE BARGAINING ZONE Typically, negotiators’ target points do not overlap: the seller wants more than the buyer is will- ing to pay. The job candidate wants a higher salary than the recruiter is willing to offer. However, it is often the case that negotiators’ reservation points do overlap, such that the most the buyer is willing to pay is more than the least the seller is willing to accept. Under such circumstances, mutual settlement is profitable for both parties. However, the challenge of negotiation is to reach a settlement that is most favorable to oneself and does not give up too much of the bargaining zone. The bargaining zone, or zone of possible agreement (ZOPA), is the range between ne- gotiators’ reservation points.3 The final settlement of a negotiation should fall somewhere above the seller’s reservation point and below the buyer’s reservation point.4 The bargaining zone can be either positive or negative (see Exhibits 3-1A and 3-1B). In a positive bargaining zone, negotiators’ reservation points overlap: the most the buyer is willing to pay is greater than the least the seller will accept. This overlap means that mutual agreement is better than resorting to BATNAs. Consider the bargaining zone in Exhibit 3-1A. The seller’s reservation point is $11; the buyer’s reservation point is $14. The most the buyer is EXHIBIT 3-1A Positive Bargaining Zone Seller's Bargaining Range Positive Bargaining Zone Buyer's Bargaining Range $5 $10 $15 $20 ST, Seller's Target Point BR, Buyer's Reservation Point SR, Seller's Reservation Point BT, Buyer's Target Point 3 Lax, D. A., & Sebenius, J. K. (1986). The manager as negotiator. New York: Free Press. 4 Raiffa, “The art and science of negotiation.” M03_THOM9461_07_GE_C03.indd 55 05/02/21 7:29 PM 56 Part I Negotiation Essentials EXHIBIT 3-1B Negative Bargaining Zone Seller's Bargaining Range Negative Bargaining Zone Buyer's Bargaining Range $5 $10 $15 $20 ST, Seller's Target Point SR, Seller's Reservation Point BR, Buyer's Reservation Point BT, Buyer's Target Point willing to pay is $3 greater than the very least the seller is willing to accept. The bargaining zone is between $11 and $14, or $3. If the negotiators reach agreement, the settlement will be some- where between $11 and $14. If the parties fail to reach agreement in this situation, the outcome is an impasse and is suboptimal because negotiators leave money on the table and are worse off by not reaching an agreement than they are by reaching an agreement. In some cases, the bargaining zone may be nonexistent or even negative, and nego- tiators may spend fruitless hours trying to reach an agreement. This situation can be costly for ­negotiators; during the time they are negotiating, their opportunities may be worsening (i.e., negotiators have time-related costs; see Chapter 2). For example, consider the bargaining zone in Exhibit 3-1B, in which the seller’s reservation point is $14 and the buyer’s reservation point is $12. The most the buyer is willing to pay is $2 less than what the seller is willing to ­accept at a minimum. This negative bargaining zone indicates that there is no positive overlap between the parties’ reservation points. In this situation, negotiators should exercise their best alternatives to agreement. Because negotiations are often costly to prolong, it is in both parties’ interests to determine whether a positive bargaining zone is possible. If not, the parties should not waste time negotiating; instead, they should pursue other alternatives. Consider the failed merger between T-Mobile and Sprint. Both companies wanted complete ownership of the new entity that would come from a merger. T-Mobile believed that an acquisition of Sprint could cre- ate value for customers and shareholders. Sprint also wanted the merger, but its owner, Softbank, refused to relinquish control and wanted to keep the headquarters in the U.S. Negotiations stretched on for quite some time between the two telecom companies and ultimately, they could not find any positive overlap between their reservation points.5 5 Associated Press. (2017, November 4). Sprint and T-Mobile call off merger talks after failure to reach agreement. The Guardian. theguardian.com; Reuter, E. (2017, November 8). Behind the (failed) deal: Sprint CEO dishes on merger at- tempts. The Kansas City Business Journal. bizjournals.com/kansascitynews  Chapter 3 Distributive Negotiation: Claiming Value 57 Bargaining Surplus Bargaining surplus is the amount of overlap between parties’ reservation points. It is a measure of the size of the bargaining zone (what we refer to in this chapter as “the pie”). The bargaining surplus is a measure of the value that a negotiated agreement offers to both parties over the value of not reaching settlement. Skilled negotiators know how to reach agreements even when the bargaining zone is small. Negotiator’s Surplus Negotiated outcomes will fall somewhere in the bargaining zone. But what determines where in this range the settlement will occur? Obviously, each negotiator would like the settlement to be as close to the other party’s reservation point as possible, thereby maximizing his or her slice of the pie. In our example in Exhibit 3-1A, the seller would prefer to sell close to $14; the buyer would prefer to buy close to $11. The best possible economic outcome for the negotiator is one that just meets the counterparty’s reservation point, thereby inducing the other party to agree, but allows the focal negotiator to gain as much as possible. This outcome provides the focal negotiator with the greatest possible share of the resources to be divided. In other words, one person gets all or most of the pie. The positive difference between the settlement outcome and the negotiator’s reservation point is the negotiator’s surplus (see Exhibit 3-2). The total surplus of the two negotiators adds up to the size of the ZOPA or bargaining surplus. Obviously, negotiators want to maximize their surplus in negotiations; surplus represents resources in excess of what is possible for negotiators to attain in the absence of a negotiated agreement. The fact that negotiated settlements fall somewhere in the ZOPA, and that each negotiator tries to maximize his or her share of the bargaining surplus, illustrates the mixed-motive nature of negotiation: negotiators are motivated to cooperate with the other party to ensure that a settle- ment is reached in the case of a positive bargaining zone, but they are motivated to compete with one another to claim as much of the bargaining surplus as they can. EXHIBIT 3-2 Bargaining Range and Surplus Seller's Bargaining Range Seller's Surplus Buyer's Surplus BR SR Buyer's Bargaining Range $10 $15 Settlement M03_THOM9461_07_GE_C03.indd 57 05/02/21 7:29 PM  58 Part I Negotiation Essentials VALUE-CLAIMING STRATEGIES The most frequently asked question about negotiation is, “How can I claim most of the bargain- ing surplus for myself?” How do you get information about the other party’s reservation point? Most negotiators will not reveal their reservation point, but it may emerge unintentionally. Raiffa cites a humorous story wherein one party opens with a direct request for information about the opponent’s reservation price: “Tell me the bare minimum you would accept from us, and I’ll see if I can throw in something extra.” The opponent, not to be taken in, quips, “Why don’t you tell us the very maximum that you are willing to pay, and we’ll see if we can shave off a bit?”6 This quip illustrates the essence of negotiation: how do people make sure they reach agree- ment if the ZOPA is positive, while simultaneously claiming as much of the pie as possible? Another problem emerges as well. Even if someone reveals their reservation point, we have no way to verify that they are telling the truth. Indeed, the most commonly used phrase in any negotiation is, “That’s my bottom line.” When the counterparty tells us their reservation point, we are faced with the dilemma of whether the information is valid or an exaggeration. The negotiator is always at an information deficit because the other party’s reservation point is usu- ally not verifiable (because it includes subjective factors), whereas a BATNA is based on objec- tive factors and can therefore be verifiable. Given that “private” information about reservation points is inherently unverifiable, ­negotiation seems rather pointless. After all, if you can never verify whether the other person is telling the truth, talking is fruitless (economists refer to such discussions as “cheap talk”7). However, cheap talk does, in fact, matter.8 Some conditions allow negotiators to be more confident about the counterparty’s reser- vation point. For example, a car buyer may invite the dealer to call the competitor as a way of verifying that the buyer can indeed get the same car for less money at a different dealership. Similarly, if a person says something that is not in his or her interest, we may have more reason to believe it. For example, if a seller tells us she does not have another buyer and is under pres- sure to sell, we might believe her because this statement is not in her interest. This factor leads to an important cautionary note: it is not necessarily in your best interest to misrepresent your res- ervation point because you risk the possibility of disagreement. With regard to claiming value, negotiators should be willing to settle for outcomes that exceed their reservation point and reject offers that are worse than their reservation point. However, people frequently settle for outcomes worse than their BATNA (the agreement bias) and often reject offers that are better than their BATNA (hubris). For example, strikes are often settled on terms that could have been reached earlier, without parties incurring the costs that the strike imposed.9 The key question is why such irrational behavior occurs. The problem can usually be traced to either cognitive or emotional biases. We will elaborate on some of these biases later in this chapter. 6 Raiffa, H. (1982). The art and science of negotiation (p. 40). Cambridge, MA: Harvard University Press. 7 Croson, R., Boles, T., & Murnighan, J. K. (2003). Cheap talk in bargaining experiments: Lying and threats in ultima- tum games. Journal of Economic Behavior & Organization, 51(2), 143–159. 8 Bazerman, M. H., Gibbons, R., Thompson, L., & Valley, K. L. (1998). Can negotiators outperform game theory? In J. Halpern & R. Stern (Eds.), Debating rationality: Nonrational aspects of organizational decision making (pp. 78–98). Ithaca, NY: ILR Press. 9 Keenan, J., & Wilson, R. B. (1993). Bargaining with private information. Journal of Economic Literature, 31(1), 45–104; Roth, A. E. (1993). Bargaining experiments. In J. Kagel & A. E. Roth (Eds.), Handbook of experimental economics. Princeton, NJ: Princeton University Press. M03_THOM9461_07_GE_C03.indd 58 05/02/21 7:29 PM  Chapter 3 Distributive Negotiation: Claiming Value 59 Accurately Assess Your BATNA Many negotiators do not think about their BATNA before negotiating. I’ve had countless ­students and executives lament, “I don’t have a BATNA.” Yet, everyone has a BATNA— even if it means waiting and hoping! As a first step in accurately assessing your BATNA, brainstorm every option you can imagine in the event that you do not reach an agreement in your current negotiation. Generate as many options as you can. As a second step, assign a probability to the likelihood of being able to exercise that BATNA. For most negotiators, BATNAs involve some uncertainty (see Chapter 2). However, uncertainty is not a good ex- cuse for failure to assess your BATNA. Nothing can help a negotiator get a bigger slice of the pie than having a great BATNA. After you have assigned a probability to the likelihood of being able to exercise a given BATNA, the third step is to rank order your alternatives in terms of attractiveness to you. Unpack Alternatives It would seem that negotiators who have several alternatives would be in a better bargaining position than negotiators with only one alternative. However, negotiators who have multiple al- ternatives may actually perform worse (than those with a single alternative), because they make fewer demands and achieve worse outcomes.10 Why? Negotiators who have multiple alterna- tives often have a distorted view of the ZOPA. Is there a way to leverage the potential power of multiple alternatives? Yes, by unpacking their multiple alternatives, negotiators can make more aggressive opening offers and ultimately achieve better outcomes. Indeed, negotiators who unpacked (separated) the likelihood of attain- ing an alternative job offer (e.g., from Firm A, Firm B, or any other firm) judged those outcomes to be more likely to occur and achieved better negotiated outcomes compared to negotiators who considered their alternative options as a single package.11 However, a word of caution: in the event that negotiators unpack extremely negative outcomes (e.g., not receiving another job ­offer), they develop lower aspirations and ultimately claim less value.12 Improve Your BATNA Your BATNA is not static. Rather, think of your BATNA like a living plant: at any given time, it is either flourishing or withering. Thus, BATNAs need maintenance and nourishment. Negotiators should spend a considerable amount of time attempting to improve their BATNA before entering into a negotiation. Determine Your Reservation Point, but Do Not Reveal It If you reveal your reservation point, be prepared for the other party to offer you your reserva- tion point—but not more. Some negotiators reveal their reservation point to demonstrate good faith. These negotiators rely on the counterparty’s goodwill and trust their opponent not to take 10 Schaerer, M., Loschelder, D. D., & Swaab, R. I. (2016). Bargaining zone distortion in negotiations: The elusive power of multiple alternatives. Organizational Behavior and Human Decision Processes, 137, 156–171. 11 Haselhuhn, M. P. (2015). Support theory in negotiation: How unpacking aspirations and alternatives can improve ­negotiation performance. Journal of Behavioral Decision Making, 28(1), 1–13. 12 Haselhuhn, “Support theory.” M03_THOM9461_07_GE_C03.indd 59 05/02/21 7:29 PM 60 Part I Negotiation Essentials advantage of this information. There are more effective ways to build trust. For example, you could show a genuine concern for the needs and interests of the other party. The purpose of ­negotiation is to maximize your surplus, so why create a conflict of interest by “trusting” the other party with your reservation point? Thus, do not reveal your BATNA or your reservation price during the course of negotiation, even in the friendliest of situations. If you do, the coun- terparty has no incentive to offer you more. In only two circumstances do we think it is appropri- ate to truthfully reveal your reservation price: Situation #1: You have exhausted your time to negotiate and are about to exit the ­negotiation without a deal and you sense that the bargaining zone may be very small or perhaps negative. Situation #2: You have a great BATNA and consequently, an aggressive reserva- tion price, and you would be happy if the counterparty matched or barely exceeded your reservation point. In this sense, negotiators “signal” their BATNA. When Onyx Pharmaceuticals, the developer of several drugs for bone marrow cancers, was for sale, they felt confident about their attractive BATNA. They rejected an offer from biotech company Amgen valued at $8.7 billion and entertained offers from Amgen’s competitors, including Pfizer and Novartis. In response, Amgen increased their of- fer to $10 billion and Onyx rejected it a second time. Amgen increased their offer to $10.4 billion, or $125 per share. At this point, Onyx accepted Amgen’s offer, making the purchase one of the five biggest-ever takeovers of a biotechnology company at the time.13 Consider how another company, AOL, signaled its BATNA. One tactic involved an AOL deal maker pitching a deal to a prospective client. The AOL rep’s PowerPoint presentation would include the logo of the client’s rival—as if AOL had accidentally mixed up some of the slides from another presentation. The AOL rep would then feign embarrassment and apologize. However, the slip up was completely intentional and meant to signal AOL’s BATNA to the client.14 Many negotiators reveal their true reservation point if they trust and like the other party, or desire a long-term relationship. However, we think this is ill-advised. There are many other ways to demonstrate trust and build a relationship, short of revealing your BATNA. Revealing information about a BATNA or reservation point is not a value-creation strategy; it is a value-claiming strategy, and as a claiming strategy it reduces a negotiator’s power in a negotiation. We do not believe that negotiators should lie about their BATNA or reservation point. Lying is unethical (see Chapter 8). Moreover, if you lie about your reservation point, you effec- tively reduce the size of the bargaining zone. A positive, but small bargaining zone may appear to be negative and result in negotiation impasse. It is difficult to save face in such a situation because you appear untrustworthy if you retract your demand. 13 Pollack, A., & De La Merced, M. J. (2013, August 25). Amgen buys producer of drugs for cancer. The New York Times. dealbook.nytimes.com; Speights, K. (2013, August 26). Amgen and Onyx: Half a billion dollars’ worth of drama. The Motley Fool. fool.com 14 Klein, A. (2003, June 15). Lord of the flies. The Washington Post, p. W06.  Chapter 3 Distributive Negotiation: Claiming Value 61 Research the Other Party’s BATNA and Estimate Their Reservation Point The most valuable piece of information you can have about the counterparty is his or her reservation point. This information allows you to make the counterparty an offer that barely exceeds their reser- vation point and to claim the entire bargaining surplus for yourself. However, you should assume the counterparty is as smart as you are and therefore, not likely to reveal their reservation point. Negotiators can use a variety of tactics to garner information that may reveal information about the counterparty’s alternatives. However, be careful when the other party discloses their BATNA early. When the counterparty discloses their BATNA at the outset of the negotiation, negotiators actually make less demanding offers, disclose more truthful information, and settle for less profit than when the counterparty does not disclose a BATNA.15 Set High Aspirations (Be Realistic but Optimistic) Your aspiration, or target point, defines the upper limit on what you can get in a negotiation. Because you will usually never get more than your first offer, your first offer represents an im- portant anchor point in the negotiation. According to Raiffa, the final outcome of any negotiation is usually the midpoint between the first two offers that fall within the bargaining zone.16 For this reason, it does not make sense to make offers that are wildly outside the bargaining zone. When we use the first offer made by each party as a measure of his or her aspirations, those aspirations or target points determine the “final demands” made by negotiators, more so than BATNAs do.17 Negotiators who set high aspirations end up with more of the ZOPA than those who set lower aspirations. Negotiators whose aspirations exceed those of the counterparty get more of the bargaining zone.18 For example, negotiators who have unattractive reservation points and high aspirations demand more from their opponents than negotiators with attractive BATNAs and low aspirations. Buyers who set more ambitious aspira- tions achieve better economic outcomes; however, the sellers they are dealing with regard them to be less likeable, and as a result they are less willing to cooperate with them in the future.19 CHILLING EFFECT When negotiators make proposals that the other party considers extreme, it may cause the chilling effect. Making an extreme offer is a risky strategy because the recipi- ent may be offended and walk away from the table. Both low- and high-power negotiators are equally offended by extreme offers, but it is low-power negotiators who walk away.20 For these reasons, it is strategically wise to make your first offer slightly inferior to what you discern to be the counterparty’s reservation point, and then you can bargain up to their reservation point. Most people are not going to immediately accept your first offer, but they ultimately might accept an offer that is equivalent to their reservation point (see Exhibit 3-3). 15 Paese, P. W., & Gilin, D. A. (2000). When an adversary is caught telling the truth: Reciprocal cooperation versus self interest in distributive bargaining. Personality and Social Psychology Bulletin, 26(1), 79–90. 16 Raiffa, H. (1982). The art and science of negotiation. Cambridge, MA: Harvard University Press. 17 Thompson, L. (1995). The impact of minimum goals and aspirations on judgments of success in negotiations. Group Decision and Negotiation, 4(6), 513–524. 18 Chen, Ya-Ru, Mannix, E. A., & Okumura, T. (2003). The importance of who you meet: Effects of self- versus other concerns among negotiators in the United States, the People’s Republic of China, and Japan. Journal of Experimental Social Psychology, 39(1), 1–15. 19 Lai, L., Bowles, H. R., & Babcock, L. (2013). Social costs of setting high aspirations in competitive negotiation. Negotiation and Conflict Management Research, 6(1), 1–12. 20 Schweinsberg, M., Ku, G., Wang, C. S., & Pillutla, M. M. (2012). Starting high and ending with nothing: The role of anchors and power in negotiations. Journal of Experimental Social Psychology, 48(1), 226–231. M03_THOM9461_07_GE_C03.indd 61 05/02/21 7:29 PM  62 Part I Negotiation Essentials EXHIBIT 3-3 Winner’s Curse and Chilling Effect High Chilling Effect Final Outcome Winner’s Curse Low Your RP Slightly above Moderately Other party’s RP Slightly Above Wildly Above your RP above your RP other’s RP other’s RP Assertiveness of Your Opening Offer Setting specific, challenging, and difficult goals results in greater profit than setting easy or nonspecific goals does.21 Nonspecific or easy goals lead to suboptimal, compromise agree- ments. High aspirations exert a self-regulating effect on negotiation behavior. Negotiators who are assigned easy goals tend to set harder new goals; however, in spite of adjustments, their new goals are significantly easier than the goals chosen by the difficult-goal negotiators. Thus, it is to a negotiator’s advantage to set a high, somewhat difficult aspiration point early in the negotiation. The combination of high goals and cooperation is associated with the best outcomes.22 In one investigation, negotiators who set goals that were extremely difficult achieved better negotiation outcomes.23 GOAL-SETTING PARADOX When a negotiator focuses on his or her target point during nego- tiation, this increases the value of the outcome that is ultimately received.24 Consider two types of negotiators: promotion- and prevention-focused. Promotion-focused negotiators conceptual- ize goals as ideals and opportunities; conversely, prevention-focused negotiators conceptualize 21 Huber, V. L., & Neale, M. A. (1986). Effects of cognitive heuristics and goals on negotiator performance and subsequent goal setting. Organizational Behavior and Human Decision Processes, 38(3), 342–365; Huber, V. L., & Neale, M. A. (1987). Effects of self- and competitor goals on performance in an interdependent bargaining task. Journal of Applied Psychology, 72(2), 197–203; Northcraft, G. B., Neale, M. A., & Earley, C. P. (1994). The joint effects of goal-setting and expertise on negotiator performance. Human Performance, 7(4), 257–272; Thompson, “The impact of minimum goals.” 22 Halpert, J. A., Stuhlmacher, A. F., Crenshaw, J. L., Litcher, C. D., & Bortel, R. (2010). Paths to negotiation success. Negotiation and Conflict Management Research, 3(2), 91–116. 23 Miles, E. W., & Clenney, E. F. (2012). Extremely difficult negotiator goals: Do they follow the predictions of goal- setting theory. Organizational Behavior and Human Decision Processes, 118(2), 108–115. 24 Galinsky, A. D., Mussweiler, T., & Medvec, V. H. (2002). Disconnecting outcomes and evaluations: The role of ne- gotiator focus. Journal of Personality and Social Psychology, 83(5), 1131–1140; Thompson, “The impact of minimum goals.” M03_THOM9461_07_GE_C03.indd 62 05/02/21 7:29 PM  Chapter 3 Distributive Negotiation: Claiming Value 63 goals as obligations and necessities. Promotion-focused negotiators who focus on “ideals” rather than “oughts” do better in terms of claiming value.25 Negotiators who focus on their accomplish- ments, hopes, and aspirations claim more resources than negotiators who focus on avoiding negative outcomes, holding constant their actual economic positions.26 The impact of promotion and prevention focus depends on the aggressiveness of the negotiator’s economic aspirations: Prevention-focused negotiators who set goals in the upper end of the ZOPA are less likely to concede and outperform promotion-focused negotiators.27 Promotion and prevention affect sub- jective outcomes as well. Negotiators who focus on ideals do not feel as satisfied as negotiators who focus on their reservation point or BATNA.28 This is known as the goal-setting paradox.29 Thus, focusing on your target will lead to an attractive outcome, but it may not feel satisfying. In contrast, focusing on reservation points leads people to do worse but feel better. If negotiators think about their BATNA after the negotiation, they feel better.30 WINNER’S CURSE The winner’s curse occurs when the negotiator’s first offer is immediately ac- cepted by the counterparty. Immediate acceptance signals that the negotiator did not set his or her aspirations high enough. Furthermore, we caution negotiators to avoid a strategy known as boulwar- ism. Boulwarism is named after Lemuel Boulware, former CEO of General Electric, who believed in making one’s first offer one’s final offer. This strategy can engender hostility from the counterparty. Another piece of advice: do not become “anchored” by your reservation point. Many nego- tiators who assess their BATNA and set an appropriate reservation point fail to think about their aspiration or target point. Consequently, the reservation point acts as a psychological anchor and, in most cases, people make insufficient adjustments—they do not set their target high enough. FIRST OFFERS Folklore dictates that negotiators should let the counterparty make the first offer. Many negotia- tors have been advised to avoid making opening offers, presumably to avoid the winner’s curse. Indeed, concern about being taken advantage of is so pervasive that negotiators experience anxi- ety about making the first offer, and when they do make the first offer, they are less satisfied with the negotiation.31 However, in some situations it may be advisable to make the first offer. The practitioner-researcher paradox refers to the fact that intuition and folklore advises negotiators to never open first, whereas much scientific research argues that negotiators should always open first due to a “first mover advantage.”32 One situation in which making a first offer 25 Galinsky, A. D., & Mussweiler, T. (2001). First offers as anchors: The role of perspective-taking and negotiator focus. Journal of Personality and Social Psychology, 81(4), 657–669. 26 Galinsky, A. D., Leonardelli, G. J., Okhuysen, G. A., & Mussweiler, T. (2005). Regulatory focus at the bargaining table: Promoting distributive and integrative success. Personality and Social Psychology Bulletin, 31(8), 1087–1098. 27 Trötschel, R., Bundgrens, S., Huffmeier, J., & Loschelder, D. D. (2013). Promoting prevention success at the bargain- ing table: Regulatory focus in distributive negotiations. Journal of Economic Psychology, 38, 26–39. 28 Thompson, “The impact of minimum goals.” 29 Freshman, C., & Guthrie, C. (2009). Managing the goal-setting paradox: How to get better results from high goals and be happy. Negotiation Journal, 25(2), 217–231. 30 Galinsky, Mussweiler, & Medvec, “Disconnecting outcomes and evaluations.” 31 Rosette, A. S., Kopelman, S., & Abbott, J. L. (2014). Good grief! Anxiety sours the economic benefits of first offers. Group Decision And Negotiation, 23(3), 629–647. 32 Loschelder, D. D., Swaab. R. I., Trötschel, R., & Galinsky. A. D. (2014). The first-mover disadvantage. Psychological Science, 25(4), 954–962. M03_THOM9461_07_GE_C03.indd 63 05/02/21 7:29 PM  64 Part I Negotiation Essentials will backfire is when the offer proposer makes a first offer on an issue in which the recipient ­actually has identical compatible preferences.33 By doing so, the recipient learns that the pro- poser has identical preferences (on that issue) and can feign to have opposing preferences, in the hopes of extracting concessions. Pro-self negotiators (i.e., self-interested negotiators) are more likely to take advantage of knowledge of compatible issues than are pro-social negotiators. When the recipient has opposing preferences, the negotiator who makes the first offer has an advantage. Anchoring Information Model The Anchoring Information Model (AIM) predicts when and why making the first offer helps or hurts negotiators.34 According to the model, first offers have two effects: (1) they serve as anchors that pull final settlements toward the initial first-offer value (anchoring), which usually produces a first-mover advantage; and (2) they convey information about the sender’s priori- ties, which makes the sender vulnerable to exploitation and increases the risk of a first-mover disadvantage. Indeed, when senders did not reveal their priorities, they had a first-offer advan- tage; however, when they revealed their priorities (either implicitly or explicitly), the first-offer became a distinct disadvantage. This effect was strongest when the recipient of the offer was pro-self (as opposed to pro-social). Accordingly, negotiators need to evaluate two things when considering whether to make the first offer. First, how much information do they have regarding the negotiation, and second, how much information does the other party have about them? A first-mover disadvantage exists in some situations when there is significant asymmetric information.35 SYMMETRIC INFORMATION In the situation in which the negotiator has good information (i.e., has conducted due diligence on the negotiation object or service in question) and the other party is believed to also have good information, it is wise to make the first offer (see Exhibit ­3-4). Why? When negotiators have good information they are not likely to fall prey to the winner’s curse (asking for too little) or the chilling effect (asking for way too much). Instead, they can make an assertive opening offer that operates as a psychological anchor.36 Indeed, first offers act as an anchor point and correlate at least.85 with final outcomes. In the event that both parties lack information about the negotiated object or service in question, negotiators are advised to also make the opening offer. Why? Given that both negotia- tors are ignorant about the market value of the object or item, the likelihood of insult is low and the anchoring effect may help the negotiator who is a first-mover. ASYMMETRIC INFORMATION Now, let’s consider the two off-diagonal conditions in Exhibit 3-4. In the case of significant, asymmetric information, the negotiator is best advised to not open first.37 Suppose that the negotiator is highly informed and prepared, but has good reason to think that the other party is not well-prepared or informed. This situation would be 33 Loschedler, Trotschel, Swaab, Friese, & Galinsky, “The first-mover disadvantage.” 34 Loschelder, D. D., Trötschel, R., Swaab, R. I., Friese, M., & Galinsky, A. D. (2016). The information-anchoring model of first offers: When moving first helps versus hurts negotiators. Journal of Applied Psychology, 101(7), 995–1012. 35 Loschelder, Trotschel, Swaab, Friese, & Galinsky, “The information-anchoring model.” 36 Galinsky & Mussweiler, “First offers as anchors.” 37 Maaravi, Y., & Aharon, L. (2017). When your anchor sinks your boat: Information asymmetry in distributive negotia- tions and the disadvantage of making the first offer. Judgment and Decision Making, 12(5), 420–429. M03_THOM9461_07_GE_C03.indd 64 05/02/21 7:29 PM  Chapter 3 Distributive Negotiation: Claiming Value 65 EXHIBIT 3-4 Should I Make the Opening Offer? You have good You do not have good information information Counterparty has good Make first offer Let other party open first ­information Counterparty does not have Let other party open first Make first offer good information Unknown Let other party open first Let other party open first Source: Based on Loschelder, D. D., Trötschel, R., Swaab, R. I., Friese, M., & Galinsky, A. D. (2016). The ­information-anchoring model of first offers: When moving first helps versus hurts negotiators. Journal of Applied Psychology, 101(7), 995–1012. analogous to a “pawnshop” situation in which the negotiator is the pawnshop owner and has a lot of relevant knowledge and the counterparty is naïve and uninformed. In this situation, the ne- gotiator does not run the risk of being “anchored” by the other party, and there exists a possibil- ity that the counterparty may fall victim to the winner’s curse—either by not asking for enough or over-paying. Moreover, the pawnshop owner may be anchored by their own knowledge—so far better to prompt the naïve negotiator to open first. For these reasons, the negotiator should encourage the counterparty to make the opening offer. The final situation to analyze is when the negotiator is naïve, but the counterparty has rel- evant information. This situation is analogous to a pawnshop negotiation where you are the cus- tomer and don’t have good information, but the pawnshop owner does. In this situation, you risk falling victim to the winner’s curse by offering too much or asking for too little. The best solution is to invite the other party (in this case, the informed pawnshop owner) to make the first offer. Anchoring Effect The first offer that falls within the bargaining zone acts as a powerful anchor point in negotia- tion. Recall the example of people’s Social Security numbers affecting estimates of the number of physicians in Manhattan. That was a case of insufficient adjustment from an arbitrary anchor. Negotiators who make the first offer are protected from being psychologically anchored by the counterparty’s offer. A negotiator’s first offer acts as an anchor for the counterparty’s offer. Ideally, your opening offer should not give away too much of the bargaining zone. Many negotiators worry they will “insult” the counterparty if they open too high (if they are selling) or too low (if they are buying). However, the fear of insulting the other party and souring the ne- gotiations is more apparent than real. Indeed, people’s perceptions of how assertive they can be with others are notably lower than what others actually believe.38 The anchoring strategy may come at the expense of subjective satisfaction with the deal. Buyers who use the anchoring tactic make higher profits (claim more value) than those who don’t, but the counterparty believes their own outcome is worse than their expectations and consequently, 38 Ames, D. R. (2008). Assertiveness expectancies: How hard people push depends on the consequences they predict. Journal of Personality and Social Psychology, 95(6), 1541–1557. M03_THOM9461_07_GE_C03.indd 65 05/02/21 7:29 PM  66 Part I Negotiation Essentials they are less willing to interact in the future.39 In a market situation, anchoring decreases profit amongst negotiators because it increases the rate of impasse and prolongs negotiation. Range Offers Employers often ask prospective employees to state a range in salary negotiations. The key disad- vantage with stating a range is that the counterparty may focus overwhelmingly on the ­attractive endpoint from their point of view. In other words, the counterparty will consider the lower end of the range as the employee’s target and negotiate down from there. The tandem ­anchoring account argues that counterparties are influenced by both endpoints of the range as they evalu- ate the proposer’s reservation price as well as how polite they believe an extreme c­ ounter-offer would be.40 One investigation examined four types of offers: point offers (e.g., $100); back- down range offers ($80–$100); bracketing-range offers ($90–$100) and bolstering-range ­offers ($100–$120).41 Recipients who received bolstering-range offers assumed the negotiator had a more attractive reservation price than the negotiator who made a point offer. Backdown-range offers led to perceptions that the negotiator had the least attractive reservation price. Precise versus Round Numbers People habitually use round numbers as a first offer in negotiation. However, precise anchors are more potent than round number anchors. This is because counterparties respond more aggres- sively to round numbers than precise numbers. Why? Negotiators who make precise offers are viewed as having more information than negotiators who make round offers.42 The impact of precise offers is due to the fact that the sender appears as more competent.43 When devising a precise offer, it is important to consider how precision affects the pro- poser as well as the recipient. Whereas it is true that greater precision by the proposer enhances the anchoring effect in the recipient, it actually reduces the extremity of the offer that the pro- poser makes.44 Stated another way, the proposer’s offer is likely to anchor the recipient, but it is not as aggressive. A word of caution: offers can actually be too precise! Greater precision works when the recipient is an amateur, but can backfire when the recipient is an expert. Case in point: in a study involving both experts and amateurs in real estate, jewelry, automobile, and human resource negotiations, precise anchors backfired with experts because experts saw the precise offer as reflecting a lack of competence.45 The negative effect occurred unless the proposer provided a rationale that was legitimate in the eyes of the expert recipient. 39 Maaravi, Y., Pazy, A., & Ganzach, Y. (2014). Winning a battle but losing the war: On the drawbacks of using the an- choring tactic in distributive negotiations. Judgment and Decision Making, 9(6), 548–557. 40 Ames, D. R., & Mason, M. F., (2015). Tandem anchoring: Informational and politeness effects of range offers in social exchange. Journal of Personality and Social Psychology, 108(2), 254–274. 41 Ames & Mason, “Tandom anchoring.” 42 Mason, M. F., Lee, A. J., Wiley, E. A., & Ames, D. R. (2013). Precise offers are potent anchors: Conciliatory counter- offers and attributions of knowledge in negotiations. Journal of Experimental Social Psychology, 49(4), 759–763. 43 Loschelder, D., Friese, M., & Trötschel, R. (2017). How and why precise anchors distinctly affect anchor recipients and senders. Journal of Experimental Social Psychology, 70, 164–176. 44 Loschelder, Friese, & Trötschel, “How and why.” 45 Loschelder, D. D., Friese, M., Schaerer, M., & Galinsky, A. D. (2016). The too-much-precision effect. Psychological Science, 27(12), 1573–1587. M03_THOM9461_07_GE_C03.indd 66 05/02/21 7:29 PM  Chapter 3 Distributive Negotiation: Claiming Value 67 Early versus Late First Offers Thus far, we have wrestled with the question of whether to make the first offer or encourage the other party to do so. A separate question concerns the timing of the first offer. For example, some negotiations involve the exchange of pleasantries and other conversation before offers are ten- dered; in other negotiations, people immediately initiate a volley of offers. Late first offers are more likely to lead to creative agreements that meet both parties’ interests, as compared to early first offers—even when controlling for the overall duration of the negotiation. This is because late first offers allow negotiators to learn about the counterparty’s interests.46 Re-anchoring Even though you are reading this book and will have a plan for whether to open first or not, the counterparty may not follow your plan. Suppose, for example, the counterparty makes an ­opening offer. It is unwise to accept the first offer. Negotiators whose first offers are ­accepted engage in counterfactual thoughts about how they could have done better (e.g., “What ­ could have been different?”) and are less satisfied than negotiators whose first offers are not ­immediately accepted.47 Consider how Dell’s board of directors immediately countered Michael Dell’s “lowball” opening offer. In August of 2012, Michael Dell approached the board of the computer company he founded from his college dorm room in 1984. His proposition was to take Dell Inc. private, and that he was the right person to do so. His first offer was a firm $12/share. The board flatly rejected it and countered with $24/share. Over several months, rival bidders extended b­ etter offers over Michael Dell’s. In the fall of 2013, Michael Dell and partner Silver Lake raised their offer to $13.75/share and tacked on a special-dividend sweetener. The board accepted the offer.48 Counteroffers do two things. First, they diminish the prominence of the counterparty’s initial offer as an anchor point in the negotiation. Second, they signal your willingness to nego- tiate. Suppose you have determined that both parties have good information and so, you want to open first, but the other party surprises you by opening first. In this situation, you should counteroffer. Your risk of being anchored by the counterparty is reduced if you’ve planned your opening offer and presented it. If you do not plan your opening offer, you risk being anchored by the counterparty. In one investigation, some negotiators who received an offer from the other party were coached to focus on information that was inconsistent with that offer; others were not given such coaching.49 The result? Thinking about the opponent’s BATNA or reservation price or even one’s own target point negates the powerful anchoring impact that the other party’s first offer might have on you. Above all, do not adjust your BATNA based upon the counterparty’s offer, and do not adjust your target (unless you have under-aspired, such as when the other party makes an opening offer that is more attractive than your target!). It is extremely important not to be “anchored” by the counterparty’s offer. An effective counteroffer moves the focus away from the other party’s offer as a reference point. 46 Sinaceur, M., Maddux, W., Vasiljevic, D., Nückel, R., & Galinsky, A. (2013). Good things come to those who wait. Personality & Social Psychology Bulletin, 39(6), 814–825. 47 Galinsky, A. D., Seiden, V. L., Kim, P. H., & Medvec, V. H. (2002). The dissatisfaction of having your first offer ac- cepted: The role of counterfactual thinking in negotiations. Personality and Social Psychology Bulletin, 28(2), 271–283. 48 Gupta, P. (2013, September 12). Dell to invest more on PCs, tablets after $25 billion buyout win. Reuters. reuters.com; Molina, B. (2013, September 9). Carl Icahn ends bid to stop Dell buyout. USA Today. usatoday.com 49 Galinsky & Mussweiler, “First offers as anchors.” 68 Part I Negotiation Essentials CONCESSIONS Once the first offers are on the table, the negotiation is not yet done! Ideally, negotiators need to not become entrenched and instead, begin a series of counteroffers. Concessions are the reduc- tions that a negotiator makes during the course of a negotiation. Most negotiators expect to make concessions during negotiation. Negotiators need to consider four things when formulating counteroffers and concessions: (1) concession reciprocity (versus aversion), (2) the pattern of concessions, (3) the magnitude of concessions, and (4) the timing of concessions. Reciprocity versus Aversion Concession reciprocity refers to the tendency of negotiators to reciprocate concessions. Concession aversion refers to the tendency for some negotiators to be disinclined to make con- cessions. Negotiators show stronger concession aversion and ultimately claim more value when negotiation proposals are framed to highlight their own, rather than the counterparty’s, resources.50 Specifically, proposal senders show greater concession aversion when they offer their own re- sources (versus requesting the counterparty’s resources) in both buyer and seller negotiations. The opposite is true for recipients: recipients show stronger concession aversion when receiving requests rather than offers. Concession Pattern Unilateral concessions are concessions made by one party; in contrast, bilateral concessions are concessions made by both sides. Once you put an offer on the table, be patient. It is time for the counterparty to respond. Patience and silence can be important negotiation tools. Many ­negotiators make what we call premature concessions—they make more than one concession in a row before the other party responds or counteroffers. Always wait for a response before making a further concession. For example, Lewis Kravitz, an Atlanta executive coach and for- mer outplacement counselor, advises patience and knowing when not to speak in the heat of negotiations. In one instance, he was coaching a young man who had just been fired by his team. The young man felt desperate and told Kravitz he was willing to take a $2,000 pay cut and ac- cept $28,000 for his next job. Kravitz told the man to be quiet at the bargaining table and let the prospective employer make the first offer. At the man’s next job interview, the employer offered him $32,000, stunning the overjoyed job seeker into momentary silence. The employer inter- preted the silence as dissatisfaction and increased the offer to $34,000 on the spot.51 Consider unilateral concessions made during negotiations for the University of Michigan’s school-naming rights. Alumni donated millions of dollars to their business school, hoping the school will be named after them. Stephen Ross, a property developer, made the first offer of $50 million to the business school’s dean. The dean did not accept. Ross then made an immediate concession by doubling his offer to $100 million and received the naming rights.52 The haunting question is whether he could have offered less and still received the naming rights. Negotiators who make fewer 50 Trötschel, R., Loschelder, D. D., Höhne, B. P., & Majer, J. M. (2015). Procedural frames in negotiations: How offer- ing my resources versus requesting yours impacts perception, behavior, and outcomes. Journal of Personality and Social Psychology, 108(3), 417–435. 51 Lancaster, H. (1998, January 27). You have to negotiate for everything in life, so get good at it. The Wall Street Journal, p. B1. 52 News from the schools. Name games. (2007, January 23). The Economist. economist.com  Chapter 3 Distributive Negotiation: Claiming Value 69 and smaller concessions maximize their slice of the pie, compared to those who make larger and more frequent concessions.53 It is an almost universal norm that concessions take place in a quid pro quo fashion, meaning that negotiators expect a back-and-forth exchange of concessions between parties. People expect others to respond to concessions by making concessions in kind. However, negotiators should not offer more than a single concession at a time to the counterparty. Wait for a concession from the counterparty before making further concessions. An exception would be a situ- ation in which you feel that the counterparty’s offer is truly at his or her reservation point. Magnitude of Concessions Even though negotiators may make concessions in a back-and-forth method, this exchange does not say anything about the size of concessions made by each party. Thus, another consideration when making concessions is to determine how much to concede. The usual measure of a con- cession is the amount reduced or added (depending upon whether one is a seller or buyer) from one’s previous offer. It is unwise to make consistently greater concessions than the counterparty. Moreover, making concessions may not have the desired effect. For example, salespeople who make concessions to customers do not improve customer satisfaction.54 The magnitude of a negotiator’s concessions is a powerful communication device. Negotiators who make large concessions may lose credibility and the other party may be less willing to concede. For these reasons, we advise negotiators to match the concession magnitude of the counterparty or make concessions that are slightly smaller in magnitude. Each successive concession should be smaller in magnitude than the previous concessions. Negotiators can signal that they are getting near their reservation point by reducing the size of their concessions. It is far better to make a large number of small concessions than a small number of large concessions. GRIT    The graduated reduction in tension (GRIT) model is a method in which parties avoid escalating conflict to reach mutual settlement within the bargaining zone.55 The GRIT model, based on the reciprocity principle, calls for one party to make a concession and invites the other party to ­reciprocate by making a concession. The concession offered by the first party is significant, but not so much that the offering party is tremendously disadvantaged if the counterparty fails to reciprocate. One study examined the degree of concessions made by negotiators over different points in the negotiation process (e.g., early on versus later).56 Two types of concession patterns were compared: black-hat/white-hat (BH/WH) negotiators and white-hat/black-hat (WH/BH) nego- tiators. BH/WH negotiators began with a tough stance, made few early concessions, and later made larger concessions. WH/BH negotiators did the opposite: they began with generous con- cessions and then became tough and unyielding. The BH/WH concession strategy proved to be more effective than the WH/BH strategy in eliciting concessions from the counterparty. Why? The BH-turned-WH sets up a favorable contrast for the receiver. The person who has been deal- ing with the BH feels relieved to now be dealing with the WH. 53 Siegel, S., & Fouraker, L. E. (1960). Bargaining and group decision making. New York: McGraw-Hill; Yukl, G. A. (1974). Effects of the opponent’s initial offer, concession magnitude and concession frequency on bargaining behavior. Journal of Personality and Social Psychology, 30(3), 323–335. 54 Chi, S. C., Friedman, R. A., & Shih, H. L. (2013). Beyond offers and counteroffers: The impact of interaction time and negotiator job satisfaction on subjective outcomes in negotiation. Negotiation Journal, 29(1), 39–60. 55 Osgood, C. E. (1962). An alternative to war or surrender. Urbana: University of Illinois Press. 56 Hilty, J. A. & Carnevale, P. J. (1993). Black-hat/white-hat strategy in bilateral negotiation. Organizational Behavior and Human Decision Processes, 55(3), 444–469. M03_THOM9461_07_GE_C03.indd 69 05/02/21 7:29 PM 70 Part I Negotiation Essentials EVEN-SPLIT PLOY A common technique is the even-split between whatever two offers are currently on the negotiation table. The concept of the even split has an appealing, almost al- truistic flavor to it. So what is the problem with even splits? Consider a car-buying situation. Suppose you initially offered $33,000 for the car, then $34,000, and finally, $34,500. Suppose the salesperson initially requested $35,200, then reduced it to $35,000, and then to $34,600. The salesperson then suggests you split the difference at $34,550, arguing that an even split of the difference would be “fair.” However, the pattern of offers up until that point was not “equal” in any sense. You made concessions of $1,500; the salesperson made concessions of $600. Further, even concessions that were of equal magnitude do not guarantee that the middle value is a “fair” value. It behooves a negotiator to begin with a high starting value and make small con- cessions. Often, the person who suggests the even split is in an advantageous position. You can avoid the even-split ploy by watching the magnitude of your concessions. Timing of Concessions The timing of concessions refers to whether they are immediate, gradual, or delayed.57 In an analysis of buyer-seller negotiations, sellers who made immediate concessions received the most negative reaction from the buyer, who showed the least satisfaction and evaluated the object of sale most negatively. In contrast, when the seller made gradual concessions, the buyer’s reaction was most positive, with high satisfaction. SUBSTANTIATION Substantiation refers to the arguments or persuasive rationale that often accompanies an offer. The way in which an offer is presented affects the course of negotiations. Ideally, you present a rationale that is objective and invites the counterparty to buy into your rationale. If your propos- als are labeled as “fair,” “even splits,” or “compromises,” they carry more impact. Conversely, if your facts can be easily counterargued by the other party, you will not benefit by making arguments.58 Thus, it is important to be more informed than the other party. For example, agent Scott Boras, who represents many of the highest-paid baseball players in the game, totes an encyclopedic-sized binder detailing the accomplishments of every one of his clients, including seemingly obscure charts of a player’s potential impact on the team’s bottom line. When highly- prized client Prince Fielder entered free agency, Boras produced a 73-page binder of statistics, personal information, and intangibles about Fielder, which eventually netted the 27-year-old player a 9-year, $214 million contract with the Detroit Tigers.59 Power Conversation Tactics When first offers are presented in negotiation, they are typically preceded by conversational language. In-depth qualitative analyses of the conversations that negotiators engage in prior to making their first offers revealed five different power conversation tactics that negotiators use to gain power, including: information-seeking, patronizing, organizing, proposing, and sharing.60 57 Kwon, S., & Weingart, L. R. (2004). Unilateral concessions from the other party: Concession behavior, attributions, and negotiation judgments. Journal of Applied Psychology, 89(2), 263–278. 58 Maarvai, Y., Ganzach, Y. P., & Pazy, A. (2011). Negotiation as a form of persuasion: Arguments in first offers. Journal of Personality and Social Psychology, 101(2), 245–255. 59 73-page binder: Rangers target Prince Fielder could be better than Pujols. (2012, January 15). Dallas Morning News. sportsday.dallasnews.com 60 Kim, N., & Park, H. (2017). Making the most of the first-offer advantage: Pre-offer conversation and negotiation out- comes. Negotiation Journal, 33(2), 153–170.  Chapter 3 Distributive Negotiation: Claiming Value 71 Information-seeking leads to greater power, whereas failure to seek information, patronizing, and proposing lead to loss of power.61 Constraints versus Disparagement One investigation examined two types of rationales that negotiators made during negotiation.62 Constraint rationales refer to one’s own limited resources (e.g., “I can’t pay more...”). In contrast, disparagement rationales critique the negotiated object or service (e.g., “It’s not worth more...”). Negotiators who highlight their own constraints are more successful than ne- gotiators who argue down the value of an item. Constraint rationales signal negotiator’s limits and are therefore more believable. Moreover, constraint rationales are less likely to insult the counterparty. “Agreement” versus “Option” At some point in negotiation, a negotiator might label a proposal as an “agreement” or an “op- tion.” Holding the economic value of such a proposal constant, the labeling of that proposal influences acceptance rates. In one investigation, negotiators chose to give up real value and sacrifice economic efficiency when the proposal was labeled as an “agreement,” rather than as “option A.”63 Moreover, a personally advantageous option was avoided significantly more often when it was labeled “impasse” rather than “option B.” The appeal of agreement and the aversion to impasse are potent conversational phrases that affect negotiator behavior. Fairness Arguments Perhaps no other argument is used more often in negotiation than “This is fair.” Indeed, con- cerns about justice and fairness extend from the negotiation process to the outcome and into the implementation stage of negotiation.64 Consider for example, how fairness led to a conflict. For a number of years, it became the norm at Harvard for the university’s endowment portfolio to be managed by internal Harvard fund managers. In order to keep these talented fund manag- ers, Harvard structured the pay of these internal employees similarly to what fund managers would be paid if the fund was managed externally. This pay structure was seen to be fair—these employees were paid based on how their decisions grew the endowment and a number of these employee managers did remarkably well in the early 2000s, resulting in some earning in excess of $30 million in yearly pay. Their fund management success earned billions for Harvard’s endowment; the distributions of which were used for scholarships, faculty pay, and university expenditures. The university administrators saw this exchange as fair, even a bargain, compared to what the university could have paid external fund managers for the same work, until these employee pay outcomes were made transparent to the Harvard community. Alumni, faculty, and students did not see the pay distribution as fair and pressured Harvard’s president at the time, Larry Summers, to change these internal fund managing employees to what others saw as a fair, 61 Kim & Park, “Making the most of the first-offer advantage.” 62 Lee, A. J., & Ames, D. R. (2017). “I can’t pay more” versus “It’s not worth more”: Divergent effects of constraint and disparagement rationales in negotiations. Organizational Behavior and Human Decision Processes, 141, 16–28. 63 Tuncel, E., Mislin, A., Kesebir, S., & Pinkley, R. L. (2016). Agreement attraction and impasse aversion. Psychological Science, 27(3), 312–321. 64 Druckman, D., & Wagner, L. (2017). Justice and fairness in negotiation. Group Decision and Negotiation, 26(1), 9–17; Druckman, D., & Wagner, L. M. (2016). Justice and negotiation. Annual Review of Psychology, 67, 387–413. M03_THOM9461_07_GE_C03.indd 71 05/02/21 7:29 PM 72 Part I Negotiation Essentials flattened pay structure. The result of this decision was Harvard then had to move a much larger share of the endowment management to external fund managers, which consequently now in- cluded several managers who were now Harvard ex-employees.65 The Harvard example makes the point that people are very concerned with fairness. Negotiators often use one of three fairness principles when it comes to slicing the pie: equality, equity, and need:66 1. Equality rule, or blind justice, prescribes equal shares for all. Outcomes are distributed without regard to inputs, and everyone benefits (or suffers) equally. 2. Equity rule, or proportionality of contributions principle, prescribes that distribution should be proportional to a person’s contribution. 3. Needs-based rule, or welfare-based allocation, states that benefits should be proportional to need. EGOCENTRISM AFFECTS JUDGMENTS OF FAIRNESS Consider the following situation: you and a college friend develop a potentially revolutionary (and profitable) idea for a new kind of water ski.67 You spend about half of a year in your dorm’s basement developing a ­prototype of the new invention. Your friend had the original idea; you developed the design and materi- als and assembled the prototype. The two of you talk to a patent lawyer about getting a pat- ent, and the lawyer tells you a patent is pending on a similar product but the company will ­offer you $3,000 for one of the innovative features of your design. You and your friend gladly ­accept. What division of the $3,000 between you and your friend would you find to be most satisfying? People’s preferences for several possible distributions of the money for themselves and the other person were assessed.68 People’s utility functions were social rather than individual, meaning that individual satisfaction was strongly influenced by the payoffs received by the other, as well as the payoffs received by the self (see Exhibit 3-5). Social utility functions were tent-shaped. The most satisfying outcome was equal shares for the self and other ($1,500 apiece). Discrepancies between payoffs to the self versus the other led to lower satisfaction. However, social utility functions were lopsided in that advantageous inequity (self receives more than other) was preferable to disadvantageous inequity (other receives more than self). Further, the relationship people had with the other party mattered: In positive or neutral relationships, people preferred equality; in negative relationships, people preferred advantageous inequity. (See Exhibit 3-6 for an examination of different types of profiles.) People will reject outcomes that entail one person receiving more than others and opt for a settlement of lower joint value but equal-appearing shares.69 This arrangement is especially true when resources are “lumpy” (i.e., hard to divide into pieces), for example, a rug.70 65 Zenger, T. (2016, September 30). The case against pay transparency. Harvard Business Review. hbr.org 66 Deutsch, M. (1985). Distributive justice: A social-psychological perspective. New Haven: Yale University Press. 67 Loewenstein, G. F., Thompson, L., & Bazerman, M. H. (1989). Social utility and decision making in interpersonal contexts. Journal of Personality and Social Psychology, 57(3), 426–441. 68 Loewenstein & Bazerman, “Social utility and decision making.” 69 McClelland, G., & Rohrbaugh, J. (1978). Who accepts the Pareto axiom? The role of utility and equity in arbitration decisions. Behavioral Science, 23(5), 446–456. 70 Messick, D. M. (1993). Equality as a decision heuristic. In B. A. Mellers & J. Baron (Eds.), Psychological perspec- tives on justice (11–31). New York: Cambridge University Press.  Chapter 3 Distributive Negotiation: Claiming Value 73 EXHIBIT 3-5 Social Utility as a Function of Discrepancy between Our Own and Others’ Outcomes   0GICVKXG4GNCVKQPUJKR  2QUKVKXG4GNCVKQPUJKR  0GWVTCN4GNCVKQPUJKR  2 7VKNKV[ 2 2 2 2 2 2 2 2 2     &KHHGTGPEG$GVYGGP1YPCPF1VJGT2C[QHH Source: Loewenstein, G. F., Thompson, L., & Bazerman, M. H. (1989). Social utility and decision making in interpersonal contexts. Journal of Personality and Social Psychology, 57(3), 426–441. Another example of egocentric bias: people pay themselves substantially more than they are willing to pay others for doing the same task.71 People were asked: if they worked for 7 hours and were paid $25 while another person worked for 10 hours, how much did they think the other person should get paid? Most answered that the other person should get paid more for doing more work—about $30.29 on average. Then they switched roles and asked if the other person worked for 7 hours and was paid $25 and they worked for 10 hours, what is a fair wage for them to be paid? The average response was $35.24. The difference between $35.24 and $30.29 is about $5, which illustrates the phenomenon of egocentric bias. 71 Messick, D. M., & Sentis, K. P. (1979). Fairness and preference. Journal of Experimental Social Psychology, 15(4), 418–434. M03_THOM9461_07_GE_C03.indd 73 05/02/21 7:29 PM  74 Part I Negotiation Essentials EXHIBIT 3-6 Profiles of Pie Slicers Have you ever wondered whether most people are truly interested in other people or are only concerned about their own profit? To examine this question, MBA students were given several hypothetical scenarios, such as the situation involving the ski invention, and asked what division of resources (and, in some cases, costs) they preferred. Further, people made responses for different kinds of relationships: friendly ones, antagonistic ones, and neutral ones. Three types of people were identified: Loyalists prefer to split resources equally, except in antagonistic relationships (27%). Saints prefer to split resources equally no matter whether relationships are positive, neu- tral, or negative (24%). Ruthless competitors prefer to have more resources than the other party regardless of relationship (36%). Source: Based on Loewenstein, G. F., Thompson, L., & Bazerman, M. H. (1989). Social utility and decision making in interpersonal contexts. Journal of Personality and Social Psychology, 57(3), 426–441. Egocentric judgments of fairness also emerge in other ways. For example, people select fair- ness rules in a self-serving fashion: when people make minimal contributions, they often prefer equality rather than equity; however, when people’s contributions are substantial, they opt for equity rather than equality.72 Even if people agree to use the same fairness rule, they think it is fair for them to get more than others in a similar situation because they think they would have contributed more.73 Another way people can engage in egocentric evaluation is to selectively weigh different aspects of the exchange situation in a way that favors them. Consider a situation in which par- ticipants are told how many hours they worked on a task of assembling questionnaires, as well as how many questionnaires they completed. The key dimensions are hours worked and productiv- ity. Participants are then asked to indicate what they believe is fair payment for their work. Those who worked long hours, but did not complete many questionnaires, emphasize the importance of hours; in contrast, those who worked short hours, but completed many questionnaires, emphasize quantity completed. Thus, people emphasize the dimension that favors them.74 Appeals to equality can also be self-serving.75 At a superficial level, equality is simple. Employing equality as a division rule in practice, however, is complex because of the multiple dimensions on which equality may be established.76 Furthermore, equality is not consistently applied. For example, when the outcome is evenly divisible by the number in the group, people will use equality more than when even division is not possible.77 The problem with egocentric judgment is that it makes negotiations more difficult to resolve. 72 Van Avermaet, E. (1974). Equity: A theoretical and experimental analysis. Unpublished doctoral dissertation, University of California, Santa Barbara. 73 Messick, D. M., & Rutte, C. G. (1992). The provision of public goods by experts: The Groningen study. In W. B. G. Liebrand, D. M. Messick, & H. A. M. Wilke (Eds.), Social dilemmas: Theoretical issues and research findings (pp. 101–109). Oxford, England: Pergamon Press. 74 Van Avermaet, Equity. 75 Messick, “Equality as a decision heuristic.” 76 Harris, R. J., & Joyce, M. A. (1980). What’s fair? It depends on how you ask the question. Journal of Personality and Social Psychology, 38(1), 165–179. 77 Allison, S. T., & Messick, D. M. (1990). Social decision heuristics in the use of shared resources. Journal of Behavioral Decision Making, 3(3), 195–204. M03_THOM9461_07_GE_C03.indd 74 05/02/21 7:29 PM  Chapter 3 Distributive Negotiation: Claiming Value 75 The preceding examples suggest that people immediately seize upon any opportunity to favor themselves. However, in many situations, people would ultimately benefit by not having egocentric views. Consider arbitration situations: people’s predictions of judges’ behavior are biased in a manner that favors their own side. Efforts to eliminate bias among litigants are met with virtually no success. Informing parties of the potential bias or providing them with infor- mation about the counterparty’s point of view does little to assuage biased perceptions of fair- ness, suggesting that egocentric biases are deeply ingrained.78 Most situations are ambiguous enough that people can construe them in a fashion that favors their own interests. One unfortunate consequence is that people develop different perceptions of fairness even when they are presented with the same evidence. Consider a strike situation in which people are provided with background information about a hypothetical teachers union and board of education. The background material is constructed so that some facts favor the teachers and other facts favor the board of education. On balance, the facts are equal. In one condition, both disputants are presented with extensive, identical background information concerning the dispute. In another condition, disputants are presented with abbreviated, much less extensive background information. Those who have extensive information are more likely to go on strikes that last longer and are more costly to both parties, compared to disputants who do not have extensive information, even though the information is identical for both sides.79 Information, even when shared among parties, creates ambiguity and provides fertile ground for unchecked self-interest to operate. Reducing egocentrism is not easy. In general, leading people to consider other members’ contributions to a joint task reduces self-centered judgments.80 However, this can backfire by activating egoistic theories of people’s behavior and claiming more in subsequent situations.81 RELATIONSHIPS AFFECT JUDGMENTS OF FAIRNESS When negotiators share similar attitudes and beliefs, are physically close to one another, or when it is likely they will engage in future interaction, they prefer equality rule. When the allocation is public (others know what choices are made), equality is used; when allocation is private, equity is preferred. Friends tend to use equality, whereas non–friends or acquaintances use equity.82 Further, people in relationships with others do not consistently employ one rule of fairness, but rather, use different fairness rules for specific incidences that occur within relationships. For example, when people in relationships are asked to describe a recent incident from their own relationship that illustrates a particular justice principle (equity, equality, or need), needs-based fairness is related to incidents involving nurtur- ing and personal development, whereas equity- and equality-based fairness are related to situa- tions involving the allocation of responsibilities.83 In general, equality-based pie-slicing strategies are associated with more positive feelings about the decision, the situation, and one’s partner. 78 Babcock, L., Loewenstein, G., Issacharoff, S., & Camerer, C. (1995). Biased judgments of fairness in bargaining. The American Economic Review, 85(5), 1337–1343. 79 Thompson, L. & Loewenstein, G. (1992). Egocentric interpretations of fairness and interpersonal conflict. Organizational Behavior and Human Decision Processes, 51(2), 176–197. 80 Caruso, Epley, & Bazerman. “The costs and benefits of undoing egocentric responsibility”; Epley, N., Caruso, E., & Bazerman, M. H. (2006). When perspective taking increases taking: Reactive egoism in social interaction. Journal of Personality and Social Psychology, 91(5), 872–889. 81 Epley, Caruso, & Bazerman, “When perspective taking increases taking.” 82 Austin, W. (1980). Friendship and fairness: Effects of type of relationship and task performance on choice of distribu- tion rules. Personality and Social Psychology Bulletin, 6(3), 402–408. 83 Steil, J. M., & Makowski, D. G. (1989). Equity, equality, and need: A study of the patterns and outcomes associated with their use in intimate relationships. Social Justice Research, 3(2), 121–137. M03_THOM9461_07_GE_C03.indd 75 05/02/21 7:29 PM  76 Part I Negotiation Essentials Fairness rules also depend on whether people are dealing with rewards versus costs. Equality is often used to allocate benefits, but equity is more commonly used to allocate burdens.84 For example, in one investigation people were involved in a two-party negotiation concerning a joint project.85 In the benefit-sharing condition, negotiators were told that their joint project produced a total earning of 3,000 GL (a hypothetical monetary unit) and their task was to reach an agree- ment about how to divide this amount with their partner. Participants were told they had personally incurred a cost of 1,350 GL for this project and their final profit would be determined by subtract- ing 1,350 from the negotiated agreement amount. In the cost-sharing condition, the situation was exactly the same except participants were told they had personally invested 1,650 GL. Thus, the bargaining situation was identical in both situations, with the exception of the personal investment. Obviously, an equal split of 3,000 GL would mean 1,500 GL apiece, which would result in a gain in the benefit condition and a loss in the cost condition. Negotiators were more demanding and tougher when bargaining how to share costs than benefits. Furthermore, fewer equal-split decisions were reached in the cost condition. When a situation is complex, involving multiple inputs in different dimensions, people are more likely to use the equality rule. Thus, groups often split dinner bills equally rather than compute each person’s share. This approach can lead to problems. Group members aware of the pervasive use of equality may actually spend more individually. No group member wants to pay for more than they get; if people cannot control the consumption of others, they consume more. Different fairness rules are a potential source of conflict and inconsistency.86 For example, people who are allocating resources choose different rules of fairness than do people who are on the receiving end. Allocators often distribute resources equally, even if they have different preferences. In contrast, recipients who have been inequitably but advantageously treated, justify their shares—even when they would not have awarded themselves the resources they received.87 Social Comparison Social comparison is an inevitable fact of life in organizations and relationships. How does some- one’s higher salary, larger office, special opportunities, or grander budget affect us? Are we happy for other people—do we bask in their glory when they achieve successes—or are we threatened and angry? Negotiators who feel more envious about their counterparty’s outcomes, actually perform better in negotiations than those who do not feel envy.88 For this reason, when it comes to pay and compensation, people are more concerned about how much they are paid relative to other people than about the absolute level of their pay (see Exhibit 3-7 for an example of social comparison).89 84 Sondak, H., Neale, M. A., & Pinkley, R. (1995). The negotiated allocation of benefits and burdens: The impact of out- come valence, contribution and relationship. Organizational Behavior and Human Decision Processes, 64(3), 249–260. 85 Ohtsubo, Y., & Kameda, T. (1998). The function of equality heuristic in distributive bargaining: Negotiated allocation of costs and benefits in a demand revelation context. Journal of Experimental Social Psychology, 34(1), 90–108. 86 Deutsch, M. (1985). Distributive justice: A social-psychological perspective. New Haven: Yale University Press. 87 Diekmann, K. A., Samuels, S. M., Ross, L., & Bazerman, M. H. (1997). Self-interest and fairness in problems of re- source allocation. Journal of Personality and Social Psychology, 72(5), 1061–1074. 88 Kohler, S. (2013). Envy can promote more equal division in alternating-offer bargaining. Journal of Neuroscience, Psychology, and Economics, 6(1), 31–41. 89 Adams, S. (1966). Inequity in social exchange. In L. Berkowitz (Ed.), Advances in experimental social psychology: Vol. 2 (pp. 267–299). New York: Academic Press; Blau, P. M. (1964). Exchange and power in social life. New York: Wiley; Deutsch, “Distributive justice.”; Homans, G. C. (1961). Social behavior: Its elementary forms. New York: Harcourt, Brace & World; Walster, E., Berscheid, E., & Walster, G. W. (1973). New directions in equity research. Journal of Personality and Social Psychology, 25(2), 151–176. M03_THOM9461_07_GE_C03.indd 76 05/02/21 7:29 PM  Chapter 3 Distributive Negotiation: Claiming Value 77 EXHIBIT 3-7 Self-interest versus Social Comparison Imagine that you are being recruited for a position in Firm A. Your colleague, Jay, of similar back- ground and skill, is also being recruited by Firm A. Firm A has made you and Jay the following salary offers: Your salary: $75,000 Jay’s salary: $95,000 Your other option is to take a position at Firm B, which has made you an offer. Firm B has also made your colleague, Ines, an offer: Your salary: $72,000 Ines’s salary: $72,000 Which job offer do you take: Firm A’s or Firm B’s? If you follow the principles of rational judgment, you will take Firm A’s offer—it pays more money. However, if you are like most people, you prefer Firm B’s offer because you do not like feeling you are being treated unfairly. Source: Based on Bazerman, M. H., Loewenstein, G., & White, S. (1992). Reversals of preference in allocating ­decisions: Judging an alternative versus choosing among alternatives. Administrative Science Quarterly, 37, 220–240. Equity Principle People make judgments about what is fair based on what they are investing in the relationship and what they are getting out of it. Inputs are investments in a relationship that usually entail costs. For example, the person who manages the finances and pays the bills in a relationship incurs time and energy costs. An output is something that a person receives from a relationship. The person who does not pay the bills enjoys the benefits of a financial service. Outputs, or out- comes, may be positive or negative. In many cases, A’s input is B’s outcome, and B’s input is A’s outcome. For example, a company pays (input) an employee (outcome) who gi