Negotiations

Judgments and Decisions

Psych 253


Negotiation: A process by which two or more
people come to agreement on how to allocate
scarce resources.

Parties are interdependent; neither has complete power
to choose
The process is a decision, not a contest of wills


Leaving money on the table (lose-lose
negotiation)

Settling for too little (winners curse)

Walking away from the table (hubris)

Settling for terms that are worse than your
current situation (agreement bias)
Common Problems in Negotiation

Absence of relevant and diagnostic feedback
Search for confirming information
Egocentrism

Satisficing
Versus Optimizing

Self-reinforcement
Fear of change and experimentation
Why Are People Ineffective Negotiators?

Good negotiators are born, not made

Experience is a great teacher

Good negotiators are risk-takers

Good negotiators rely on intuition
Myths


Todays Negotiation: Synertech-Dosagen

Assign Roles
Read ONLY your materials (do not look at your
partners materials)
You have 5 minutes to read, think, and prepare
You have 15 minutes to negotiate and you can do
this outside of the classroom.

But come BACK in 20 minutes with the results of
your negotiation on the handout.
Dosagen bought the plant 3 years ago for
$15 M (but sellers was distressed)

Plant appraised 2 years ago at $19 M with
5% real estate decline since then

Similar but newer plant sold for $26 M nine
months ago
Relevant Facts
Best Alternative To a Negotiated Agreement
(BATNA)
Reservation price
Bargaining zone
Aspiration level
Key Negotiation Principles
Best Alternative To a Negotiated Agreement
(BATNA)
Reservation price
Bargaining zone
Aspiration level
Key Negotiation Principles
Know your BATNA
Do not think of your BATNA in aggregate
terms

Improve your BATNA before you
negotiate
Fall in love with three rule

You want your counterpart to think you
have a good BATNA
BATNA Tips
Best Alternative To a Negotiated
Agreement (BATNA)
Reservation price
Bargaining zone
Aspiration level
Key Negotiation Principles
Reservation Price is your bottom line
The point at which you are indifferent to whether you achieve a
negotiated agreement or walk away. Beyond the reservation price,
you prefer no agreement.

Reservation Price is equal to your BATNA +/- other issues
that make you want to do the deal
e.g., opportunity costs, switching costs, ego, miscellaneous
preferences

Define your reservation price before negotiating

Learn your opponents reservation price, if possible
Reservation Price
Do not reveal your reservation price!!!
One of the critical pieces of information in a
negotiation is the other partys reservation point. If it
becomes known to one party, the negotiator can
push for a resolution that is only marginally
acceptable to the other party.

Do not state ranges

Reveal your BATNA only when:
You are nearing an impasse
You have a strong BATNA
You want to make an agreement in the current negotiation
Should You Reveal your BATNA and
Reservation Price?
Best Alternative To a Negotiated
Agreement (BATNA)
Reservation price
Bargaining zone
Aspiration level
Key Negotiation Principles
The Negotiation Bargaining Zone
Buyers Reservation Price (B
R
)
(e.g., $25M)
Buyers Target Price
Sellers Reservation Price (S
R
)
(e.g., $17M)
Sellers Target

The bargaining zone is the space between the buyers reservation price
(B
R
) and the sellers reservation price (S
R
) that is, the zone of possible
agreement.
If B
R
> S
R
, then a Positive Bargaining Zone exists. The zone of agreement is
from S
R
to B
R
(e.g., $8M).
A Negative Bargaining Zone

Sellers Reservation Price (S
R
)
(e.g., $25M)
Buyers Reservation Price (B
R
)
(e.g., $17M)
If B
R
< S
R
, then there is no zone of possible agreement.
Best Alternative To a Negotiated Agreement
(BATNA)
Reservation price
Bargaining zone
Aspiration level
Key Negotiation Principles
Aspiration Level
$20.5
$21.0
$21.5
$22.0
$22.5
$23.0
$23.5
Final Price (in millions)
Buyer focused on
BATNA
Buyer focused on
aspiration level
First offers

Concessions

Persuasion
Distributive Bargaining Tactics

Who made the first offer?

How did the first offer affect the
negotiation?
First Offers
First Offers in Synertech-Dosagen
$17
$18
$19
$20
$21
$22
$23
$24
$25
Final Price (in millions)
Buyer made first offer Seller made first offer
There is a high
correlation between
the first offer and the
final price
Counteroffers and
later concession
behavior less
predictive of final
price
How high should the first offer be?
As high as you can go without embarrassing yourself in
front of a respected 3
rd
party (Fisher & Ury, 1991)
Whats embarrassing? Whats optimistic? Learn the
market!

Only let the other party make the first offer when
You have no information
It is inappropriate to do so (e.g., job negotiations)

Immediately re-anchor if your counterpart makes the first
offer
The First Offer
Allow yourself room to make concessions
Dont go in with a first and final offer

Make bi-lateral, not uni-lateral concessions

Make your concessions smaller as you approach
your goal

Use objective rationale to support your argument
Again, learn the market
Concessions & Persuasion
Know your BATNA
Strengthen your BATNA whenever possible

Know your reservation price
Do not reveal your reservation price

Research the other partys BATNA/reservation price

Define your aspiration level and focus on that

Make first offers whenever possible
If they make the first offer, immediately re-anchor

Watch how you are making concessions

Prepare objective rationale for your arguments
Distributive Negotiation Strategies