Chapter 3 - Negotiation (2023) PDF

THE MIND AND THE HEART OF THE NEGOTIATOR Chapter 3 : Distributive Negotiations: Claiming Value Date  PART ONE NEGOTIATIONS ESSENTIALS THE CAR DEAL (HOMEWORK QUESTION)  James Ronget wants to sell his motorcar, a 2004 Volkswagen Golf 1...

THE MIND AND THE HEART OF THE NEGOTIATOR Chapter 3 : Distributive Negotiations: Claiming Value Date  PART ONE NEGOTIATIONS ESSENTIALS THE CAR DEAL (HOMEWORK QUESTION)  James Ronget wants to sell his motorcar, a 2004 Volkswagen Golf 1.9 Turbo Diesel. He still owes R 150 000 on the motorcar. He wants to replace the motorcar with an Audi, A4, which is currently priced at R300 000. James’s friend Johan offered him R210 000 for the car.  Standard Bank is willing to finance the new Audi for him, but only up to an amount of R 240 000. Susan, a friend of James, wants to buy his Golf from him.  Standard Bank is willing to provide finance to the value of R 140 000 and Susan has R80 000 in her savings account to contribute to the payment of the motorcar. If Susan cannot buy the car relocate to stay closer to her work  Susan has offered James R 200 000 for the Golf. James, however, tells her that he wants to sell the motorcar for R 240 000. However, because he considers her as his best friend, he is willing to negotiate with her on the deal. QUESTIONS 1. What is James’s target price? 2. What is Susan’s target price? 3. What is James’s reservation price? 4. What is Susan’s reservation price? 5. What is the bargaining zone? 6. What is James’s BATNA? 7. What is Susan’s BATNA? ANSWERS 1. James’s target price – R240 000 2. Susan’s target price – R200 000 3. James’s reservation price – R210 000 4. Susan’s reservation price – R220 000 5. Bargaining zone – between R220 000 and R210 000 6. James ‘s BATNA is his friend that wants to buy his car  Susan’s BATNA is that she will relocate THE BARGAINING ZONE The bargaining zone, or Zone of Possible Agreements (Z O P A), represents the range between each party’s reservation points.  In a positive bargaining zone, negotiators’ reservation points overlap.  In a negative bargaining zone, there is no positive overlap between the parties’ reservation points; therefore, parties should pursue other alternatives rather than spending fruitless hours trying to reach an agreement. THE BARGAINING ZONE: POSITIVE Exhibit 3-1A THE BARGAINING ZONE: NEGATIVE Exhibit 3-1B THE BARGAINING ZONE: BARGAINING SURPLUS  The bargaining surplus is the amount of overlap between negotiating parties’ reservation points.  The bargaining surplus is a measure of the value that a negotiated agreement offers to both parties compared to the value of not reaching a settlement  Skilled negotiators know how to reach agreements even when the bargaining zone is small. THE BARGAINING ZONE: NEGOTIATOR’S SURPLUS (1 OF 2)  The negotiator’s surplus is the positive difference between the settlement outcome and the negotiator’s reservation point (see Exhibit 3-2).  The total surplus of both parties adds up to the size of the Z O P A or bargaining surplus.  The bargaining surplus illustrates the mixed-motive nature of negotiation: negotiators are motivated to both cooperate and compete with the other party. THE BARGAINING ZONE: NEGOTIATOR’S SURPLUS (2 OF 2) Exhibit 3-2 CASE STUDY Frieda wants to sell her house. It is no forced sale, because she just considered moving to a townhouse complex. She still owes R1 225.000 on her bond that she has to settle when she sells the house. The townhouse in which she is interested costs R1 450 000. She has already organised finance for the townhouse subject to the sale of her house. The bank can only finance R1 400 000 of the purchase price, which means that she has to put down a deposit of R50 000. Frieda has no additional savings or reserves. John is interested in Frieda’s house. The house is currently in the market for R1 315 000. He has R125 000 that he can put down as a deposit. The maximum 12 amount that his bank will finance  Calculate: 1. Frieda’s reservation price 2. Frieda’s target price 3. John’s reservation price 4. John’s target price 5. The bargaining zone Frieda eventually agrees to sell her house to John for R1 285 000. 6. What is Frieda’s surplus? 7. What is John’s surplus 13 ANSWER  Calculate:  Frieda’s reservation price : R1 275 000  Frieda’s target price R1 315 000  John’s reservation price: R1 400 000  John’s target price : R1 250 000  The bargaining zone: R1 275 000-R1 400 000  Frieda’s surplus: R10 000  John’s surplus: R115 000 ASPIRATION BASE AND REAL BASE John Frieda John Frieda 15 R250 ‘ R275 R300 ’ R315” Target Price Reservation Reservation Target POSITIVE BAIRGAINING ZONE John Frieda John Frieda 16 Positive bargaining zone R250 ‘ R275 R300 ’ R315” Target Price Reservation Reservation Target NEGATIVE BAIRGAINING ZONE John John Frieda Frieda 17 Negative bargaining zone R250 ‘ R275 R300 ’ R315” Target Price Reservation Reservation Target VALUE-CLAIMING STRATEGIES If negotiators follow these basic value-claiming strategies, they can substantially increase the probability they will obtain a favorable slice of the pie. 1. Accurately assess your BATN A. 2. Unpack your multiple alternatives. 3. Improve your BATN A. 4. Determine your reservation point, but do not reveal it. 5. Research the counterparty’s BATN A and estimate their reservation point. 6. Set high aspirations (be realistic but optimistic). FIRST OFFERS – THE A I M MODEL The Anchoring Information Model (A I M) states that first offers have two effects:  They serve as anchors that pull final settlements toward the initial first-offer value (anchoring).  They convey information about the sender’s priorities which makes the sender vulnerable to exploitation and increases the risk of a first- mover disadvantage. FIRST OFFERS – SYMMETRIC INFORMATION (1 OF 2)  In the situation in which the negotiator has good information and the counterparty is believed to also have good information, it is wise to make the first offer (see Exhibit 3-4).  When negotiators have good information they are not likely to fall prey to the winner’s curse or the chilling effect.  Instead, they can make an assertive opening offer that operates as a psychological anchor.  FIRST OFFERS – SYMMETRIC INFORMATION (2 OF 2) Exhibit 3-4 Blank You have good You do not have good information information Counterparty has Make first offer Let other party open first good information Counterparty does Let other party open Make first offer not have good first information Unknown Let other party open Let other party open first first 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. FIRST OFFERS – ASYMMETRIC INFORMATION  When one party is prepared and has good information and the counterparty does not, the prepared negotiator does not run the risk of being anchored by the counterparty.  In this situation, the non-prepared negotiator can be anchored by the prepared party and also has a higher possibility of falling victim to the winner’s curse.  In this scenario, it is advantageous to the informed party to prompt the naïve negotiator into making the opening offer. FIRST OFFERS – RANGE OFFERS  The key disadvantage 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 and negotiate down from there.  FIRST OFFERS – PRECISE V S. ROUND-NUMBERS  People habitually use round numbers as first offers in negotiation.  However, precise offers are more potent than round number anchors because precise offers are viewed as based on more information and greater negotiator competence.  A word of caution: precise offers work when the recipient is an amateur, but can backfire when the recipient is an expert. FIRST OFFERS – EARLY V S. LATE FIRST OFFERS  Late first offers are more likely to lead to creative agreements that meet parties’ interests as compared to early first offers.  Late first offers give negotiators more time to learn about the each other’s interests. FIRST OFFERS – RE- ANCHORING Even though as a negotiator you have a plan for whether to open first or not, the counterparty may not follow your plan. Counteroffers do two things: They diminish the prominence of the counterparty’s initial offer as an anchor point. They signal your willingness to negotiate.  Concessions are the reductions that a negotiator makes during the course of a negotiation. Negotiators need to consider CONCESSI four things when formulating counteroffers and concessions: ONS  Concession reciprocity  The pattern of concessions  The magnitude of concessions  The timing of concessions CONCESSIONS – RECIPROCITY V S. AVERSION  Concession reciprocity: the tendency of negotiators to reciprocate concessions  Concession aversion: the tendency for some negotiators to be disinclined to make concessions CONCESSIONS – PATTERN  Unilateral concessions are concessions made by one party.  Bilateral concessions are concessions made by both sides.  Premature concessions happen when one party makes more than one concession in a row before the other party responds or counteroffers. CONCESSIONS – MAGNITUDE  Another consideration when making concessions is to determine how much to concede.  The magnitude of a negotiator’s concessions is a powerful communication tool and it is unwise to make consistently greater concessions than the counterparty.  Negotiators are advised to match the concession magnitude of the counterparty.  Negotiators can signal they are getting near their reservation point by reducing the size of their concessions. CONCESSIONS – G R I T MODEL  The Graduated Reduction in Tension (G R I T) model is a conflict resolution method in which parties avoid escalating conflict to reach mutual settlement within the bargaining zone.  The model, based on the reciprocity principle, calls for one party to make a concession and invites the other party to reciprocate with a concession. CONCESSIONS – THE EVEN-SPLIT PLOY  A common concession technique is called the even-split ploy where one party suggests “meeting in the middle” of the offer that is currently on the table.  However, depending on each party’s concessions leading up to this “even-split,” the outcome of this division may not really be fair. CONCESSIONS – TIMING  The time of concessions refers to whether they are immediate, gradual, or delayed.  Analysis has shown that sellers who made immediate concessions received the most negative reactions from buyers.  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.  Ideally, a rationale is presented that is objective and invites the counterparty to buy into the rationale.  Conversely, if your facts can be easily counter-argued by the other party, you will not benefit by making arguments.  Base negotiations on facts SUBSTANTIATION – CONSTRAINTS VS. DISPARAGEMENT Negotiators often use two types of rationales:  Constraint rationales refer to one’s own limited resources (Ex: “I can’t pay more…”).  Disparagement rationales critique the negotiated object or service (Ex: “It’s not worth more…”). SUBSTANTIATION – AGREEMENT VS. OPTION  At some point in negotiation, a negotiator might label a proposal as an “agreement” or as an “option.”  Holding the economic value of the proposal constant, the labeling of that proposal influences acceptance rates.  Negotiators preferred the word “agreement” over the word “option.” SUBSTANTIATION – FAIRNESS ARGUMENTS Negotiators often use one of three fairness principles when it comes to slicing the pie:  Equality rule: prescribes equal shares for all.  Equity rule: prescribes that distribution should be proportional to a person’s contribution.  Needs-based rule: states that benefits should be proportional to needs. SUBSTANTIATION – JUDGMENTS OF FAIRNES Egocentrism affects judgments of fairness:  People will reject outcomes that entail one person receiving more than others and instead take a settlement of lower joint value but equal-appearing shares (see Exhibit 3-6).  People pay themselves substantially more than they are willing to pay others for doing the same task. SUBSTANTIATION – JUDGMENTS OF FAIRNESS (5 OF 6) Egocentric judgments of fairness emerge when people select fairness rules in a self-serving fashion:  When people make minimal contributions, they often prefer equality rather than equity.  When people’s contributions are substantial, they opt for equity rather than equality. SUBSTANTIATION – RELATIONSHIPS & FAIRNESS (1 OF 2)  People in relationships with others do not consistently employ one rule of fairness but use different fairness rules in specific incidences.  Fairness rules also depend on whether people are dealing with rewards versus costs.  Social comparisons also affect negotiators’ perceptions of fairness  SUBSTANTIATION – RELATIONSHIPS & FAIRNESS (2 OF 2) Exhibit 3-7 Self-interest v s. Social Comparison Imagine that you are being recruited for a position in firm A. Your colleague, Jay, of similar background 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  SUBSTANTIATION – RELATIONSHIPS & FAIRNESS (2 OF 2) 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. SUBSTANTIATION – EQUITY PRINCIPLE Equity exists in a relationship if each person’s outcomes are proportional to his or her inputs:  Equity refers to equivalence of the outcome/input ratio of parties.  Inequity exists when the ratio of outcomes to inputs is unequal. Complications arise if two people have different views of what constitutes a legitimate investment, cost, or reward and how they rank each one. SUBSTANTIATION – RESTORING EQUITY People use the following means to eliminate the tension arising from inequity:  Alter the inputs  Alter the outcomes  Cognitively distort inputs or outcomes  Leave the situation  Cognitively distort either the inputs or the outcomes of an exchange partner  Change the object of comparison FINAL OFFERS  Making an irrevocable commitment such as a “final offer” should be done only when you really mean what you say and are prepared to walk away from the bargaining table.  You should only walk away from the bargaining table if your BATN A is more attractive than the counterparty’s offer. FINAL OFFERS – FACE-SAVING “Face” is the value a person places on his or her public image, reputation, and status vis-à-vis other people in the negotiation.  Direct threats to “face” in a negotiation include: making ultimatums, criticisms, challenges, and insults.  When a person’s “face” is threatened, it can tip the balance of their behavior away from cooperation toward competition, resulting in an impasse.  The best way to help the other party “save face” is to not indicate that you think he or she has lost face. SUMMARY  When it comes to slicing the pie, the most valuable piece of information is a negotiator’s BATN A.  Negotiators should not reveal their reservation price and never lie about their BATN A.  A negotiator who is well versed in the psychology of fairness is at a pie-slicing advantage.