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Negotiation and Competitive Decision Making

Before You Leave Class Today!

Pick Up Confidential Information for SALT HARBOR: Brims versus

Easterly

Identify your negotiating partner

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Next Class

DEBRIEF Street Streaker & Alpert-Raiffa

Experiment

NEGOTIATE Salt Harbor

In class matchups

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Course Objective

Improve your ability to achieve

your negotiating objectives in a responsible fashion.

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5

Todays Themes

HOW WE LEARN

PREPARATION

SPLIT THE PIE!

Distributive Bargaining Principles

COGNITIVE BIASES

Anchoring affects negotiation outcomes A first controlled feedback experiment

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Negotiation is a Core Competency!

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Avoid Negotiation Sand Traps Leigh Thompson Ch 1 page 5

Leaving money on the table Lose Lose Both parties could do better

Settling for too little or paying too much The Winners Curse=>You achieve agreement but

give up too large a portion of the bargaining pie

Walking away from the table You reject terms that are demonstrably better than any

other option available

Settling for terms that are worse than the alternative Agreement bias or you agree to agree even when

other alternatives are better

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How We Will Learn Practice

Calibrated Feedback and Results Analysis

To avoid self-reinforcing ineffectiveness

Outcome Based Evaluation

Seeing how others See You!

Barriers to Effective Negotiation

Egocentrism

Self congratulatory views: In Lake Woebegone, all children are above the town average in intelligence

Confirmation Bias Tendency to see what you want to see when

appraising your own performance

9

Thompson Ch. 1 Pages 6-7

Barriers =>Self Reinforcing Incompetence We tend to be blissfully unaware of our own

incompetence!

Mergers and Acquisitions CEOs develop overconfidence

They overly attribute their influence when deals are successful

This leads to MORE deals that are unsuccessful

The problem persists even when promised significant financial rewards for accurate appraisal of ones own performance

10 Thompson Page 7 cites Billet et al MGT SCIENCE (2008)

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Myths

All negotiations are fixed sum Good Negotiators are born

You need to be either tough or soft

Experience is a great teacher

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Good negotiators take risks: (translation) Good negotiators make threats in a disciplined

and organized fashion

Good negotiators know how to balance risks and rewards

Good negotiators rely on intuition: Usually not! Behavior is often influenced by

arbitrary and irrelevant aspects of a setting

Good negotiators are self-aware

They can articulate the rules that guide them and police against being fleeced

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Our focus =>skill building and learning by doing

Doing negotiations in different substantive contexts sharpens our ability to recognize untested assumptions, alternative explanations

Increases our sensitivity to what works, what doesnt work and why.

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Negotiation in a Nutshell! PARTIES

Who are the real parties to a negotiation? BATNAS

What will negotiators do if they dont reach an agreement?

INTERESTS What are the parties basic needs and

priorities?

From Negotiation Analysis: An Introduction by Michael Wheeler HBS 9-801-156

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VALUES How can value be created and who is likely to

get it?

BARRIERS What are obstacles to agreement and

maximization of value and how can they be overcome?

POWER What levers of power does each negotiator

possess and how should they be deployed?

ETHICS What is the right thing to do? From Negotiation Analysis: An Introduction by Michael Wheeler HBS 9-

801-156

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TOPICS I. Distributive BargainingSplit the Pie!

Street Streaker Salt Harbor

II. Competitive Gaming Oil Price Negotiation Iterative Prisoners

Dilemma

III. Fair Division The Rothman Family Art Collection Calculating the Efficient Frontier

IV. Contingent Contracts Jessie Jumpshot

V. Mixed MotiveIntegrative Bargaining Nelson Contracting

Alphexo vs. Betonn (negotiating an IT venture)

Winemaster.com (sale of an online wine enterprise)

CP Hong Kong vs. MegaMarket USA (email or text-message negotiation)

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VI Balanced Concerns Negotiations

Stakes of Engagement

Aerospace Investments

VI. Many Party Negotiations

Teams: Eureka vs Flagship Renegotiate

Welsh Water Mgt-Union Negotiation

SCORING & GRADING

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Scoring

Winemaster HomeBase Outcomes =>Net Gain: $750 K $1,200 K

Overall Class Statistics

Average Net Gain: $650 K $1,100 K

Standard Deviation of

Net Gain: $1,200 K $1,600 K

Z-Scores

ZWinemaster= = .083

ZHomebase= = .0625 1200$

)650$750($

Preparation Survey

A Best Effort response will receive a +0.25 Z-score increment

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Subjective Valuation Survey

You will be asked to express your opinions about your negotiation counterpart

You will receive +0.25 Z-score points for completing the survey

We will summarize responses and feed the summary back to each of you at the course end

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How Well Do You Think You

Did? COUNTS OF ANNOUNCED VS ACTUAL

Actual Percentile

0-25th 26-50th 51-75th 76-100th

0-25 2 0 1 3 6

Announced 26-50 1 1 1 0 3

Percentile

51-75 1 2 5 10

75-100 4 0 2 9

7 7 7 7 28

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2

Negotiation Dance Records Record the sequence of offers made by you

and counter-offers made by your counterpart: Amstore versus Nelson

Stakes of Engagement

Aerospace Investment

Enter record using the online survey

You will receive +0.25 Z-score points for entry

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The Fog of Negotiation

Your negotiation dance records will help us decipher why multiple issue negotiation trajectories vary wildly.even when negotiator role information is held fixed

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Distributive Bargaining

Principles and Key Ideas

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Outcome

Who received which tangible goods?

Net Gains Yours

Your Negotiating Counterparts

See-Saw or Tug of War outcome

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Key Power Source

BATNA =

Best Alternative to No Agreement

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Other Sources of Power in Negotiation

Authority Chain of Command Moral

Relational Friends, Family, Tribe

Ability to Reward Ability to Punish Knowledge

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Distributive Bargaining Principles

Target Point=>What do I want?

Your preferred settlement, taking into account limits imposed by the interests of your counterpart

BEST ALTERNATIVE to N0 AGREEMENT = BATNA

NOT a wish-> Objective Reality determines it! Real World DYNAMIC-> a function of market

forces, changing environment. Changes as available alternatives change

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Bargaining Zone--the region between parties reservation points

Positive when parties reservation points overlap

Doesnt exist when there is no overlap

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Bargaining Surplus

Amount of overlap produced by reservation points

Measures the size of the bargaining zone

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Seller Reservation Price

Buyer Reservation Price

Bargaining Zone

Bargaining Zone = Zone of Possible Agreement or ZOPA

Settlement

Sellers Surplus

Buyers Surplus

Buyers Target

Buyers Bargaining Range

Sellers Bargaining Range

Sellers Target

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The Zirconia ZT Sale

Marcia walks in with no plan: No counter offer to the Zirconia sticker price

No thought about trade-in value of her car

No thought about max she will pay for a given bundle of options

No thought about extras, prep, insurance fee, etc.

No thought about financing options and trade-offs

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Prepare,Prepare,Prepare!

Determine your BATNA

Improve your BATNA if possible

Think through tactics in advance

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Understand the interests of your negotiating counterpart(s)

Self-evident in formal zero-sum and non-zero sum games

NOT self-evident in multiple issue negotiations where each party possesses private information

Information about BATNAs usually arrives through the dynamics of negotiation

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ANCHORING People make estimates by starting from

an initial value and adjusting to provide a final answer.

Adjustments are typically insufficient

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Calibration Prior to each of 84 days the U.S. Weather

Bureau announced a 0.60 probability of rain, snow or both

It rained or snowed (or both) on 49 of these

84 days 49/84 = 0.58, close to 0.60

The Bureau is well calibrated for

announced probabilities of 0.60.

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An initial value is a psychological anchor

Large and systematic departures from accuracy can occur

Facts: Unless carefully trained, individuals tend to be

poorly calibrated.

Adjustment is almost always insufficient.

In Global Catastrophic Risks, eds. Nick Bostrom and Milan Cirkovic

Eliezer Yudkowsky Singularity Institute for Artificial Intelligence

Palo Alto, CA

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Despite all dangers and temptations, it is better to know about psychological biases than to not know. Otherwise we will walk directly into the whirling helicopter blades of life.

But be very careful not to have too much fun accusing others of biases. That is the road that leads to becoming a sophisticated arguer - someone who, faced with any discomforting argument, finds at once a bias in it. The one whom you must watch above all is yourself.

Alpert-Raiffa Experiment

A learn by doing controlled feedback exercise

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1. Greater New York Citys Metro Area is more populous than LAs. What is the New York CMSA in 106 people?

2. What fraction of the Earths surface lies above latitude 66 known as the Circum-Arctic ?

3. 100 avid basketball fans were asked, Does a player have a better chance of making a shot after having just made his last two or three shots than he does after missing his last two or three shots? What fraction answered YES?

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Individuals are asked to specify 50-50 probability intervals [inter-quartile ranges] for a large number of uncertain quantities such as: NYC Metro Area population in millions

Circum Arctic as a fraction of Earths surface

Fraction of basketball fans who believe in the Hot Hand

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Fractiles 0.25 Fractile:

The value x0.25 of an uncertain quantity such that you believe there is a chance that it is less than or equal to x0.25 and a chance that it is greater than x0.25

0.75 Fractile: The value x0.75 of an uncertain quantity such

that you believe there is a chance that it is less than or equal to x0.75 and a chance that it is greater than x0.75

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(1)

Announced 50-50 Interval

True Value Announced 50-50 Interval

(2)

True Value

COUNT

1

0

(3)

Announced 50-50 Interval

1

True Value

Outcomes

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Much narrower ranges than 50-50 appear

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

36% is a pseudo semi-constant!

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Irrelevant numbers can serve as anchors and influence perception of the bargaining zone: Reader Example: 81% of residential real estate

agents in the survey said they did not use list price to estimate sales price

Nevertheless, a list price manipulated by 12% and shown to agents resulted in significant differences in their estimates of the propertys sales price

The average price with a low list price was 15% lower than that for the high list price

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First Offers as Anchors

Does making the first offer lead to a better outcome for you?

Translation: Does anchoring work?

Hint: Think interactively!

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Subjective Values In Negotiation

Affective = Feelings and opinions about: The Objective Outcome

The Process

Myself

My Negotiating Counterpart Fairness

Empathy

Her outcome

Negotiating Sale of the Street Streaker

Some Big Questions!

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Reveal your reservation price? No! Unless it is very,very good. Seldom the

case

Lie about your reservation price? No! You can back yourself into a corner and

fail to reach agreement

Try to convince your counterpart that her BATNA is no good? Probably Not. Only if you have supportable

evidence that it is really no good Beware of a Boomerang effect: people often do

the opposite of what you want them to do

Tough or Soft?

You should be neither: Too tough may blow the deal

Too soft, you give away your bargaining surplus

Ideal: Try to make an offer in the bargaining zone, not

outside

IF you are certain of your counterparts BATNA, offer just slightly better

MIT OpenCourseWarehttp://ocw.mit.edu

15.067 Competitive Decision-Making and NegotiationSpring 2011

For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.

Lecture 2 Debrief

Street Streaker


Todays Discussion Themes

Who should make the first offer?

Bluffing, Strategic Misrepresentation & Lying!

Negotiate Salt Harbor

Private Information and Facts

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Who Should Make the First Offer?

What Should it be?

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Is there a universal, reliable advantage to making the first offer?

Only when we are highly certain of our counterpoints BATNA (reservation (walkaway) price

We can rarely determine our counterparts reservation point at the outset

The first offer can be a powerful anchor

HOWEVER!

If we have made an overly generous first offer, we may fall victim to the Winners Curse

If we have made a ridiculously low offer or ridiculously high offer, we may insult or not be

taken seriously

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Does Making the First Offer Lead to a Better Outcome for You?

YES!, if you are certain of your counterparts BATNA

NOT NECESSARILY if you are uncertain

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Let Your Counterpart Make the First Offer IF

She has more market information that you do

You are unsure about her reservation point

You suspect that you are strongly influenced by subjectivity, emotion

Ethics

Bluffing, Lying, Speaking the Truth

Bluffing

A respected business person remarked with some heat, You mean to say youre going to encourage managers to bluff? Why, bluffing

is nothing more than a form of lying!Youre advising them to lie!

A.Z. Carr Is Business Bluffing Ethical?

HBR Jan-Feb 1968

I agreed that the basis of private morality is a respect for truth and that the closer a

business person comes to the truth, the more

he or she deserves respect. At the same

time, I suggested that most bluffing in

business might be regarded simply as game

strategy--much like bluffing in poker, which

does not reflect on the morality of the bluffer.

A.Z.Carr in Is Business Bluffing Ethical? HBR 1968

We can learn a good deal about the nature of business by comparing it with poker. While both have a large element of chance, in the long run the winner is the individual who plays with steady skill. In both games ultimate victory requires:

Intimate knowledge of the rules,

Insight into the psychology of the other players,

A bold front,

A considerable amount of self-discipline, and

Ability to respond swiftly and effectively to chance opportunities.

Poker

In poker it is right and proper to bluff a friend out of the rewards of being dealt a

good hand. In the words of an excellent

poker player, President Harry Truman, If you cant stand the heat, stay out of the kitchen. If one shows mercy to a loser in poker, it is a personal gesture, divorced

from the rules of the game. A.Z.Carr in Is Business Bluffing Ethical? HBR 1968

Poker has its special ethics, and here I am not referring to rules against cheating. The players

who keep an ace up their sleeves or who mark

the cards are more than unethical; they are

crooks, and can be punished as such--kicked

out of the game or, in the Old West, shot.

A.Z.Carr in Is Business Bluffing Ethical? HBR 1968

When Should the Truth be Spoken?

I quoted Henry Taylor, the British statesman :

Falsehood ceases to be falsehood when it is understood on all sides that the truth is not expected to be spoken

In court, everyone from the judge on down takes it

for granted that the job of the defendants attorney is

to get their client off, not to reveal the truth; and

this is considered ethical practice

I reminded my friend that millions business people feel constrained every day to say yes when they mean no and this is generally accepted as permissible strategy when the

alternative might be this loss of a job.

The essential point is that the ethics of business are game ethics, different from the

ethics of religion

Individuals within a company often find it difficult to adjust to the requirements of the

business game. They try to preserve their

private ethical standards in situations that call

for game strategy.

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John Rutledge in Forbes

walk away from a deal, any deal, rather than violate your principles to win

it.

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Ethics in Negotiation

Reitz, Wall & Love

Kelly School of Business

Indiana University

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Questionable Tactics

Lies Statements made in contradiction to

negotiators knowledge of belief about something material to the negotiation

Puffery Exaggerating the value of something in the

negotiation

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Deception An act or statement intended to mislead

the opponent about the negotiators own intent or future actions relevant to the

negotiation

Nondisclosure Keeping to oneself knowledge that would

benefit the opponent without damaging

your position

Information Exploitation Using information provided by the

opponent to weaken him, either in the

direct exchange or by sharing it with others

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What is Permissible?

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You are NOT required to disclose personal information that could be harmful to your case:

Reservation price, amount willing to pay

But you are NOT permitted to lie about it.

Are you permitted to disclose the true value of an object to a misinformed seller?

There is nothing wrong with being generous

However, if you are an agent for another, you are required to obtain the best deal possible that is

legally and ethically permissible, so you cannot

disclose the true value.

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Is it ethical to maximize your payoff at your counterparts expense? Yes, but it depends on the manner in which

the gain is pursued

What about a distributive bargain? The Golden Rule says that a negotiator

should pursue his own interests only as far as

he would want the opponent to do

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Lost Opportunities In integrative and balanced concerns

bargaining, one has the opportunity to

assemble packages of offers that, if properly exploited, leads to joint gains by

all parties to the negotiation

Unethical behavior, if detected, drives your negotiating partner to withhold information,

undermining possibilities for generating

joint gains

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In Sum

Unethical behavior often backfires and leaves you worse off than if you had done

the right thing

Recall Rutledges admonition:

walk away from a deal, any deal, rather than violate your principles to win it.

When is it Legal to Lie in Negotiations?

G.R. Shell

Sloan Mgt Review Spring 1991

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It is a mistake to assume that certain forms of deceptive conduct are legal

and that ethical sensibilities alone

should govern negotiating behavior.

Business negotiation law is infused with the norms of ethical business

conduct.

Unethical bargaining practices are often either illegal or become so after

brought to light. Sloan Mgt Review Spring 1991

27

When ethically acceptable conduct such as lying about reservation price

appears to run foul of legal definitions,

the law adjusts and refuses to penalize

it.

an ethical sensibility, far from being a luxury in business negotiations, may be a negotiators best counselor.

Sloan Management Review Spring 1991

28

In a business transaction both sides presumably try to get the best deal. That is the essence of bargaining and the free marketNo legal rule bounds the run of business interest. So one cannot characterize self-interest as bad faith

No particular demand in negotiations could be termed dishonest, even if it seemed outrageous to the other party.

The proper recourse is to walk away from the bargaining table, not sue for bad faith in negotiation.

U.S. Court of Appeals for the

Seventh District

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FRAUD!

when the speaker makes a knowing misrepresentation of a material fact on which the victim reasonably relies and which causes damages.

A car dealer resets the odometer

The seller of a business lies about business debts

A home seller fails to disclose termite infestation

Ken Lay just prior to Enrons demise

Prosser and Keaton on The Law of Torts (1984)

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Lying About Reservation Price

Lies about reservation price are so prevalent in bargaining that many professional negotiators do not consider such misstatements to be lies Shell (1991)

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Negotiating with Liars Adler in Summer 2007 Sloan Mgt Review

Prepare!

Background checks

Anticipate scenarios

Commit to high standards

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Ask same question differently

Summarize and demand Yes or No answers

Ask questions to which you know the answer

Take notes

Establish contingent agreements

Salt Harbor Negotiation Guidelines

All numbers are to be taken as FACT. You cannot modify or change them

If plus or minus x% appears beside a numberIGNORE the range statement and adopt the mid-point as a CERTAINTY

EQUIVALENT.

Your Obligation: KEEP CONFIDENTIAL INFORMATION CONFIDENTIAL.

Do not show your confidential information to your negotiating counterpart before, during or after the negotiation

Enter your results in the online survey as soon as you have completed your negotiation.

Lecture 3

Salt Harbor, Prisoners Dilemmas & Oil Price Game

Debrief Salt Harbor

Overview of Prisoners Dilemma Situations

The first PD example

Analysis of static game

Iterative Prisoners Dilemma

Holdup (if time)

Oil Price Game

Hard Hat or Soft Hat?

What Should it be?

Which is Better?

Black Hat/White Hat: Few early concessions, followed by increasingly larger concessions

White Hat/Black Hat: Generous early concessions, followed by increasingly smaller concessions

Hilty and Carnevale found that BH/WH is more effective

F

Prisoners Dilemmas

ADAM SMITH

(The Wealth of the Nations, 1776)

An individual who intends only his own gain, is, as

it were, led by an invisible hand to promote the

public interest.

(1, 3) (5, 4)

(4, 1) (6, 8)

Prisoners Dilemma

A striking example of how

individual rationality and group

rationality may diverge

The Drosophila of the

social sciences

The Prisoners Dilemma

An important class of non-strictly

competitive situations where the best

outcome results when the players refrain

from trying to maximize his/her own

payoff.

Each player has a dominant strategy and the use of these dominant strategies leads to a bad outcome (i.e., Non-Pareto-Optimal)

TWO SUSPECTS ARE TAKEN INTO CUSTODY AND SEPARATED. THE DISTRICT

ATTORNEY IS CERTAIN THAT THEY ARE GUILTY OF A SPECIFIC CRIME, BUT HE

DOES NOT HAVE ADEQUATE EVIDENCE TO CONVICT THEM AT A TRIAL.

HE POINTS OUT TO EACH PRISONER THAT EACH HAS TWO ALTERNATIVES:

TO CONFESS TO THE CRIME THE POLICE ARE SURE THEY HAVE DONE, OR NOT

TO CONFESS.

IF THEY BOTH DO NOT CONFESS, THEN THE DISTRICT ATTORNEY STATES

HE WILL BOOK THEM ON SOME VERY MINOR PUNISHMENT.

IF THEY BOTH CONFESS THEY WILL BE PROSECUTED, BUT HE WILL

RECOMMEND LESS THAN THE MOST SEVERE SENTENCE.

BUT IF ONE CONFESSES AND THE OTHER DOES NOT, THEN THE CONFESSOR

WILL RECEIVE LENIENT TREATMENT FOR TURNING STATE'S EVIDENCE

WHEREAS THE LATTER WILL GET "THE BOOK" SLAPPED AT HIM.

Prisoners Dilemma Problem Statement

Two suspects:

A

B

Two Alternatives:

Confess => C

Dont Confess => DC

Prisoners Dilemma Payoff Table

This is a non-zero sum game

No matter what A does, B comes out ahead confessing.

No matter what B does, A comes out ahead confessing.

For A, strategy C dominates DC strategy

For B, strategy C dominates DC strategy

If each prisoner chooses his/her dominant strategy, they both lose.

Both players would be better off if neither confess

(8, 8) (1/2, 10)

(10, 1/2) (1,1)

C

DC

C DC

A

B

Pareto Optimality

An outcome that is not dominated by any other outcome is called

Pareto optimal.

Pareto optimal strategy pairs are (DC,DC) (DC,C) and (C,DC)

(1,1)

(1/2, 10)

(8,8)

(10, 1/2)

What if Prisoners Could Communicate?

Prisoners might choose strategy (DC,DC).

This, however, is not an equilibrium pair, since A and B can each do better by making a unilateral change of choice.

There is incentive to defect, but if both defect, then we are back where we started from.

Pre-choice communication cannot help in solving the dilemma unless there is some binding force (legal, moral, etc.) that holds the players to their agreement.

Prisoners and Paradoxes

It is rational for each player to confess.

There is no strategy that is best in all circumstances.

Problems such as this confuse our notion(s) of

rationality.

Collective or group rationality vs. individual rationality

Forces us to resort to Extra-rational or Meta-rational

notions (e.g., trust, conscience, etc.)

Applying the Prisoners Dilemma

Economists use Prisoners Dilemma-type problems in analyzing

market structures and competitive strategy.

PD-type problems are common in the real world.

PD creates price rigidity in oligopolistic markets.

Firms may be reluctant to change prices for fear of setting off a price war.

Price leadership as a way around the PD.

Iterative Prisoners Dilemma

Removes the static nature of the problem.

Allows players to:

Develop reputations

Study competitors behavior

When Individuals Meet Often:

Axelrod

Strategy: A rule that determines the probability of cooperate or

defect as a function of history of interaction.

WHAT STRATEGIES ARE:

Initially viable?

Robust?

Stable?

One Possible Strategy: Tit for Tat

Tit for Tat:

First move is to cooperate.

Thereafter, mimic the last move of opponent.

Infinite vs. Finite Trials:

In the infinite case, it always pays to cooperate.

Cooperative behavior is profitable in expected value

terms, but depends upon the time horizon in

question.

Why Does Tit for Tat Work?

Because it is nice (!)

Zero-sum myopia, i.e., score envy

Quick to anger, quick to forgive

Value of provocability

Value of clear and consistent strategies

Axelrods Genetic Algorithm (1985) Simulation of evolution

Computer tournament

Round Robin (14 entries)

2nd round (62 entries)

WHAT HAPPENED?

Dont rock the boat! C follows CCC

Be provocable! D follows CCD

Forget & forgive! C after DCC

Accept a rut! D after DDD

TIT FOR TAT

DOMINATED!

Distinguishing Best and Strategic Practices

Keith Allred (2000)

Moves to claim value tend to block moves aimed at

creating value

Claiming is competitive and assertive

The downside of pursuing a cooperative strategy

aimed creating value is that it often exposes you to

exploitation

Best versus Strategic Practices

BEST PRACTICES:

Those that work well irrespective of what your

negotiating counterparts do

STRATEGIC PRACTICES:

Practices that work well in particular situations

with some counterpart responses and poorly in

other situations with other responses

In a formal game-theoretic framework, equilibrium strategies are often, but not always Best Practice

Stud Poker bluffing strategies

Prisoners Dilemma games are an example of cases where equilibrium strategy choice may not be a Best Practice

Dominance leads to poor outcomes for both parties

Holdup!

Brandenburger op. cit

Holdup

Repeated Prisoners Dilemma and

Monopoly Power

From Repeated Interaction

By Adam Brandenburger

HBS 9-793-116 (1992)

Brandenburger op. cit. 27

Holdup

Investor A must first decide whether or not to

make an investment of $1

If made, $3 (gross) of economic value is

created.

B then decides how to divide the $3

Divide the NET pie of $2 equally: then each gets

$1

Grab the $3 so A is $1 out of pocket

Brandenburger op. cit.

Holdup Tree

Split the Pie

Grab the Pie

Dont

B

A

Invest

$1

Payoffs

1 1

1 3

0 0

What is likely if the game is played once?

Ad infinitum?


Time Value of Money

Suppose that future payoffs are discounted for

the time value of money

r is the discount rate

w = 1/(1+r) is the discount factor

A constant stream of $1 per time period then has

a present value of 1/(1-w) = 1/r


As BEST STRATEGY:

Begin by investing every time

If B ever takes this whole pie, refuse to I

invest thereafter.

Split the pie yields

$1(1 + w + w2 + . . . ) = $1/(1-w)

Take the whole pie once and get nothing after yields $3.

A jointly beneficial outcome is sustainable if

1 2

3 or 1 3

ww


What happens if B splits the pie n times, then grabs?

A gets

$1 (1 + w + w2 + . . . + wn) 1 wn+1 The game stops at n + 1.

B gets $1 (1 + w + w2 + . . . + wn) + 3 wn+1

This strategy pays for B

The same as Take the Whole Pie!

111 13

1 11 2

or 3 or 1 3

nnw w

w w

ww


Ways Around This Dilemma

Coca Cola facilitated investment in bottling plants by

awarding bottlers fixed-price contracts for

concentrate

A computer is designed around a specific micro-

processor, adoption of a new chip may be

jeopardized by a computer manufacturers fears of

being held up

Intel licensed a new design to a second company (up to

intro of 80386 micro-processor


Holdup: Factors that Facilitate Cooperation

Size of pie

The greater the value to be divided, the greater the

incentive to play tough BUT future losses from

non-cooperation are also greater!

Discount factor (factor not rate):

A higher discount factor w=1/(1+r) means future

losses from non-cooperation loom larger


Frequency of interaction:

More frequent interaction is equivalent to a

larger discount factor

Maintenance of an exclusive relationship

between buyer and seller can increase

interaction frequency, an argument for dealing

only with a few longer term suppliers, for

example.

Break down a large transaction into smaller

ones to achieve more frequent interaction


Observation lags:

If choices are observed with a time lag, future

losses from non-cooperation are delayed,

making cooperation harder!

Noise:

Noisy signals make it harder to distinguish

tough from cooperative behavior, inhibiting

cooperation.

Oil Price Game

Analysis of Payoff Table

& Instructions

Price Charged by BATIA

$30 $20 $10 $30 A: $11

B: $11 A: $2 B: $18

A: $2 B: $15

ALBA $20 A: $18 B: $2

A: $8 B: $8

A: $3 B: $15

$10 A: $15 B: $2

A: $15 B: $3

A: $5 B: $5

Iterative Dominance For Alba $ 20 preferred to $30

For Batia $20 preferred to $30

$20 Dominates $30


$30 $20 $10 $30 A: $11

B: $11 A: $2 B: $18

A: $2 B: $15

ALBA $20 A: $18 B: $2

A: $8

B: $8

A: $3

B: $15

$10 A: $15 B: $2

A: $15

B: $3

A: $5

B: $5

Now, for Alba, $10 is preferred to $20

Now, for Batia $10 is preferred to $20

$10 Dominates $20


$30 $20 $10 $30 A: $11

B: $11 A: $2 B: $18

A: $2 B: $15

ALBA $20 A: $18 B: $2

A: $8 B: $8

A: $3 B: $15

$10 A: $15 B: $2

A: $15 B: $3

A: $5

B: $5

Lecture 4

Debrief Oil Price Game

Intro to Integrative Bargaining

Negotiate Nelson versus Amstore

1

Nelson vs. Amstore Forms Please fill in your responses to:

The KUHLMAN AND MARSHELLO MOTIVATIONAL STYLE ASSESSMENT FORM

and the

- Amstore vs. Nelson RECORD FORM

2

Pick up confidential information for your role in the Jessie Jumpshot negotiation Jessie Jumpshot

Boston Sharks Manager

Jessies Agent

We will negotiate in the next class meeting

3

TODAYs THEMES Oil Price Game

The central role of TRUST!

Win-Win! What it is, What it is NOT

Power & Persuasion

Key Information Interests versus Positions

Negotiation tactics=> Relative Importance

Indifferent packages 4

Oil Price Game

Trust in Negotiation

Rendering oneself vulnerable with the expectation that your counterpart will not take undue advantage and will reciprocate with an offer that benefits both of you.

TRUST Personal Business Embedded

Deterrence

Based

Lack of Trust

Prenuptial

Surveillance

Theory X

Threats,sanctions

punishments

Surveillance

Threats, punishments,

sanctions

Knowledge

Based

Sympathy

for the other

Assessment of clients needs

Customer-driven

focus

Understand,

appreciate

partners

Identificatio

n

Based

True empathy for the other

Theory Y

Employees fit in

corporate culture,

share values

Empathy

Develop

social identity

TRUST TAXONOMY- Thompson Table 6-2

7

How does Mistrust Arise? Breach or defection

Miscommunication

Dispositional Attribution

Calling into question another persons intentions or character as a device for

attributing cause to an incident or behavior

Thompson Ch. 6

Reciprocity

we feel obligated to return in kind what others have offered or given to us.

Thompson Ch. 6 p. 134

Reciprocity My concessions met with concessions on

your part

I share information expecting that you will too

What I say is truthful and subject to validation

10

Reputation

Negotiators act much tougher when dealing with someone who has the

reputation of being a liar

Tough or manipulative tactics are most often used in a defensive fashion with liars

and tough negotiators

Or in an opportunistic fashion with creampuffs

Thompson Ch. 6 p 141

Building Trust

TRANSFORM personal conflict to task conflict

AGREE on common goal, shared vision CAPITALIZE on network connections FIND shared problems, shared enemies FOCUS on the future!

12

Repairing Broken Trust Thompson Ch. 6 Box 6-2

Suggest Personal Meeting

Focus on Positive Relationship

Apologize

Let other side vent

Dont get defensive 13

Ask for clarifying information

Test your understanding of the other side

Discuss ways to avoid future problems

Get feedback with relationship checkup

14

Win-Win!

Expanding the Pie to be cut

15

What is Win Win?

It is NOT: Compromise

Even Split

Feeling Good

Building a relationship

16

Win Win

A negotiation in which

ALL creative opportunities are surfaced and exploited

NO resources or payoffs available to negotiating parties are left on the table

17

Win-Win Potential

Do parties have different Valuations across issues? Probability beliefs? Risk Preferences? Time Preferences?

18

Pyramid Model

Level I: Agreement exceeds BATNAs or RPs

Level II: Better for BOTH than some other feasible negotiable agreements

Level III: Pareto Optimal Agreement

19

Is Level 3 Easy?

Sounds easy but Hundred of negotiation simulations with executives reveals that:

Fewer than 25% reach Pareto Optimal agreements

Approximately 50% of those who do, do so by chance!

This data is based on executives performance in negotiation simulations that involve (integrative) win-win potential Thompson p73

20

Strategies That Dont Really Work

Commitment to a Win-Win Deal No guarantee

False sense of security

Compromise

Agreeing to equal concessions or splitting the difference can block expanding the pie

Focus is then on slicing not expanding the pie

21

Focus on Long term Relationships Absolutely key in some settings

BUT this does not directly translate into Win-Win in a current negotiation

It does often smooth the path

Cooperative Orientation Nice BUT

Dont let this detract from focus on eliciting/sharing the right information at the right time

Pruitt and Carnevale (1993) Dual Concern Concern for both other party & own interests

22

What DOES Work?

23

While SHARING information

Police yourself against the illusion of transparency

You believe you reveal more than you really are

You believe others have access to information about you that they dont

Avoid Haggling

Avoid haggling over a single issuea tug of war!

This lures you into compromise agreements

24

Positions vs Interests

Distinguish Positions from Interests or Priorities

Position = Stated Demand Interests = Relative Priorities of issues

25

Make Multiple Offers Simultaneously

Devise multiple issue offers

Structure these offers so that they are of equal value to you!

Make them all at one time

26

Why? Avoids sequential split the pie bargaining

Often works with an uncooperative counterpart

Helps avoid substantiation: Arguments in favor of ones position or

against your counterpart that interfere with Win-Win

27

Gains better information

Allows parties to exchange information and unilaterally deduce counterparts true interests and where joint gains lie

More persuasive

Signals priorities more effectively

28

Overcomes concession aversion

If your counterpart perceives that she has more choicesas opposed to only oneshe may be more likely to comply

29

Contingency Contracts Create Value by Building on Differences in:

Valuations

Probabilities

Time preferences

Risk attitudes

Contingency Contracts must be: Enforceable

Clear, measurable and readily evaluated

30

CLAIMING

Do not forget about CLAIMING!

Just expanding the pie is not an effective strategy

You must also be prepared to claim

31

Metamorphosis

Old Fashioned negotiator

Flower Child negotiator

Enlightened negotiator

32

Opening Gambits and Useful Tactics

33

Which do you Prefer and Why?

First Gambit: Open by asking for a lot on issues that are

important to you

Hold the fort! Dont give in

Dont immediately reveal the relative importance of issues to you

Modify the pot with issues that are not very important to you to keep the negotiation going

But do this slowly 34

Second Gambit: Introduce less important issues first and offer

early concessions on these issues as a lever to:

Try to discover the relative importance of issues to your counterpart before establishing a public position on issues that are important to you

Give some, not all information on which issues are really important to you

Then insist on a fair deal on your important issues

35

Developing a Negotiation Style

Thompson Chapter 5

Nice Discussion!

36

Does Style = Tough vs Soft? TOUGH

Unflinching, makes high, concedes little, holds out until the very end, and often rejects offers within the bargaining zone

SOFT Offers too many concessions, reveals his or

her reservation point, and is so concerned that the other party feels good about the negotiation that he or she gives away too much of the bargaining pie.

Thompson Ch. 5 pp. 96-97

37

MOTIVATIONAL STYLES

A Broad Taxonomy

See Thompson Ch. 5 pp 99

38

INDIVIDUALISTIC Her /His Objective

= SELF-INTEREST

View of others

= They are also SELF-INTERESTED

Situations that trigger this orientation

= external incentives to

MAXIMIZE OWN GAINS

39

COMPETITIVE Her /His Objective

= VICTORY!

View of others

= They are COMPETITIVE


= GROUP COMPETITION:

Interpersonal Comparisons are Salient

40

COOPERATIVE Her /His Objective

= JOINT WELFARE

View of others

= SOME COOPERATIVE, SOME

COMPETITIVE, SOME

INDIVIDUALISTIC


= Social Identity & External Goals

41

Thumbnail Summary

INDIVIDUALISTIC Maximize ones own gain. Indifferent to how

much ones counterpart gets

COMPETITIVE Beat the other side by maximizing the

difference between ones own profits and those of your counterpart

COOPERATIVE Seeks to minimize outcome differences

Thompson Ch. 5 page -99-

42

Assess YOUR Style!

Motivational Style Assessment Test

Kuhlman & Marshello (1975) J RES PERSONALITY Vol. 9 240-251

Cited in Thompson Ch 5 Exhibit 5-4 p 100

43

Nelson Contracting

Issues and Comments

44

Issues to Negotiate

Price

Design Type

Targeted Completion Time

Installation

45

Objectives

Maximize your payoff as measured in points

Do so in a fashion that engenders respect from your negotiating partner

Does she want to negotiate again with you?

46

Relative Importance

How do you discover the importance of an issue to you relative to all others?

How do you discover the importance of an issue to your negotiating counterpart

relative to all others?

47

Experiment with Multiple Offers

Discover counterparts ordinal ordering of preferences by putting two or more offers

on the table

Structure these offers so that you are indifferent among them!

48

Lecture 5

Present Motivational Style Assessments Discuss Negotiating via Technology

Debrief Nelson Contracting

Negotiate Jessie Jumpshot

1

Lecture 5 Themes

Where did the Internet Age Come From? What works? What Doesnt ? Good Practices?

Nelson Contracting Logrolling = Multiple Simultaneous Offers

Measuring Relative Importance

Outcome Efficiency =>Efficient Frontier

Contingent Contracts Betting Against the Future

Jessie Jumpshot Instructions

2

3

Negotiation via Technology

Whats new about negotiation in the Networked Internet Age?

4

New Technology 1878 First level effect:

Direct, intended effectefficiency

Telephone as a replacement for the telegraph

In 1878 Pittsburgh telephone directly had 12 pages all for businesses

Telegraph companies emphasized the telephone as a ...recognized instrument for business purposes

Sproul and Keisler Connections: New ways of working in the networked organization MIT Press 1991

5

New Technology and the Law of Unintended Consequences

Second Level Effects -> social systems are affected by new technologies:

1920s-> Bell System emphasized the social character of the telephone: Friendships path often follows the trail of the telephone wire.

Today the telephone, internet and web are accepted as an automatic core of social and

organizational communication

Technology changes social arrangements in unintended ways! Twitter,YouTube, Facebook

etc.

6

Best practices carry over to this medium

Good interpersonal communication skills are as or more important when it

is more difficult to judge a counterparts interests because of the absence of

face to face social cues

Wellens (1989) Psychological Distancing Model

Face to Face Kinetic, Visual, Paralinguistic, Linguistic

Two-Way TV Visual, Paralinguistic, Linguistic Telephone Paralinguistic, Linguistic Computer Linguistic

7

Paralinguistic

Refers to the non-verbal elements of communication used to modify meaning

and convey emotion

Pitch

Tone

Volume

intonation

8

E-mail Biases-Thompson Ch. 12

Temporal Synchrony Bias Negotiators behave as if they are

communicating synchronously but are not

Much turn taking, back and forth dancing, schmoozing facilitates trust and rapport

Less of it in email negotiations

Burned Bridges Bias Politeness rituals are missing

Threats, demands, ultimatums are more frequent

9

Squeaky Wheel Bias Counter-normal social behavior more likely

More focus on the task content and less on etiquette

Flaming much more likely

Sinister Attribution Bias E-communicators (and Bloggers!) have a

greater tendency to attribute diabolical

intentions or malevolent motives (Kramer (1995))

10

11

Information Technology, Negotiating Power and Risk

POWER! The weak get strong Traditional status cues are missing

Status cues are harder to read

The absence of cues causes people to respond more openly and less hesitatingly

PARANOIA! Uncertainty increases paranoia. Along with a decline in social posturing and

sycophancy comes a decline in politeness and

concern for others feelings. Bluntness emerges.

12

Negotiation in the Technological Age

Who dominates a discussion? Member status is an excellent predictor of

who dominates in a face to face group

discussion

Status cues are amazingly superficial--who sits where, dress, facial expressions

High status people tend to talk more than low status

13

Email & Text Messaging-- Great Equalizers!

Static and dynamic cues about status

are minimized

Group dynamics can change dramatically:

In risky choice situations, groups that meet face to face are generally risk averse for gain choices and risk prone for choices

that involve losses Groups that decide risky choices by email

are more often risk prone !

IT Effects on Negotiation Outcomes (Thompson Exhibit 12-3)

E-Negotiation Enhanced vs. Not

vs. Face-to-face Enhanced E-Negotiaton

Impasse Rates Brief personal disclosure

over email reduces

impasse rate

Integrative More multi-issue Brief prior telephone call

Behavior offers improves joint outcomes

14

E-Negotiation

vs. Face-to-face

Expanding Mixed Results

The Pie

Pie Slicing Computer mediated leads to

more equal pie slices than

face-to-face

15

E-Negotiation Enhanced vs. Not

vs. Face-to-face Enhanced E-Negotiaton

Distributive Negotiators concerned

Behaviors about group reputation use more aggressive strategies

that lead to worse outcomes

than negotiators focused on

their own reputation

Trust Less rapport Brief prior telephone call

& Rapport increases cooperation &

relationship quality

16

17

Keys to Successful e-mail/text IM Negotiation

Make your message concise and clear! Dont overestimate other peoples ability to

understand your message

It is hard enough in face-to-face negotiation

Fit your message on a single screen Screen loading (long messages) annoy us A greater number of small exchanges is preferable

Permits rectification of misunderstandings: you can rectify misperceptions quickly

18

Keys to Success (contd)

Watch your Temper!

Face-to-face groups have behavioral norms that inhibit flaming

The absence of social context creates a feeling of anonymity

People react to one another with less politeness, empathy and inhibition if they cannot sense the others social presence

19

Flaming To speak incessantly and/or rabidly on some

relatively uninteresting subject or with a

patently ridiculous attitude

To attempt to denigrate others character, intelligence and grammar

Be careful!

Its easy to send a message that is misunderstood: Humor doesnt always work

20

Keys to Success (contd)

If possible, deliver bad news or negative feedback face-to-face Ambiguity, doubt and uncertainty afflict e-mail

exchanges

Often, frustration arises.

Frustration may seemingly be offset by an attempt to control by issuing threats

21

. e-mail negotiations often move at an unpredictable pace, since people can respond (or not respond) when they like. In group negotiations, those

who check their e-mail most frequently can end up controlling the

discussion. Those who never have a chance to contribute may choose not

to abide by the agreement, to the detriment of the group.

When facing an important e-mail negotiation with someone youve never met, do whatever you can to meet in person beforehandor, if that isnt possible, talk on the phonewith the goal of building rapport. In her research, professor Janice Nadler of Northwestern University found that

when pairs of participants engaged in a short, informal phone call prior to

negotiating the hypothetical sale of a car, they were four times more likely

to reach agreement than pairs who didnt have the chance to schmooze in advance. Even a little friendly banter at the start of an e-mail message can

help negotiators work together more creatively.

Set ground rules for your e-mail negotiations. If consensus is a worthy goal for your group, you might agree to wait 24 or 48 hours for everyone to have

time to weigh in on a decision. When finalizing an agreement, arrange a

conference call or a face-to-face meeting to make sure everyone is on

board. In the Program on Negotiation Newsletter The Negotiation Insider November 9, 2010 Adding Value to e-Negotiation (web access)

22

Effective Email & Text Messaging Strategies

MBA course at Northwestern

Approximately 50% of pairs reached the Pareto efficient frontier. This group

used:

Multiple offers of the same value in a single message

Invited suggestions to decrease hostility and encourage mutual exploration

Shared information about priorities Thompson and Kurzberg Information technology and the negotiator

Northwestern working paper

23

What went wrong? Groups that did not do as well:

Indulged in offer avoidance: wrote long paragraphs with sweeping general

statements that did not contain crisp clear

offers

Let past issues resurface

Loaded the screen with irrelevant information

Made accusations of lying, misrepresentation

Short fuse: Take it or leave it not supported by a good BATNA

Nelson Contracting

Logrolling, Relative Importance & Dealing Off the Top!

24

Wikipedia on Logrolling

A practice common in the US Congress in which two or more legislators agree for

each to trade his vote on one bill he cares

little about in exchange for the others vote on a bill that is personally much more

important to him.

Logrolling is especially common when the

legislators are relatively free of control by

their national party leaders and are trying

to secure votes for 25

bills that will concentrate sizable benefits on their own home districts while

spreading most of the costs out over

taxpayers in the rest of the country. Local

projects such as Federally funded dams,

bridges, highways, housing projects, VA

hospitals, job training centers, military

bases and the like are often pushed

through by logrolling.

See Pork Barrel Legislation, Appropriation Bill

26

27

Contingent Contracts

Bets Against the Future!

28

What is a Contingent Contract?

I believe that the odds are 6 to 4 that the Red Sox will finish ahead of the Yankees

in the American League East this season

You say Gordon, you are nuts! The Yankees will dominate the Red Sox.

The odds that the Red Sox will finish

ahead of the Yankees are only 2 to 8.

29

Gordons Assessment

Expected Value to Gordon = $20

30

Your Assessment

Expected Value to You = $60

31

Differences of Opinion Can Create Ex Ante Joint Gains

Differences in Valuation

Diagnosing Deceit

Reducing Risk

Motivating Performance

Bypassing Biases

Leveling the Playing Field

32

Bypassing Biases: Over-confidence

SIC Europe and CED formed a US joint venture

Market each others product in Europe & US?

According to SIC ,CEDs announcement of what it can sell in US is, Much too optimistic!.

According to CED ,SICs announcement of what it can sell in Europe is, Much too optimistic!.

See Bazerman HBR Sept Oct 1999

SIC+CED Contingent Contract

Key per cent ownership on 1st year sales

IF both hit targets or both undersell, each gets

IF one side under-sells & the other hits target, under-seller forfeits a fraction of

equity See Bazerman HBR Sept Oct 1999

33

34

Information AsymmetryLeveling the Playing Field

L-TEK Case Audio Division owns a magnetic technology best

commercialized by its Magnets Division

The two are negotiating technology transfer terms

Magnets has deep market info; claims annual profits of $14-15 M.

Audio Division is enamored with its technology but lacking magnet marketing info, claims $40 M

Magnet discloses its information

Audio suspects Magnet has skewed announced profits downward

Arguments and a long delay ensue See Bazerman HBR Sept Oct 1999

35

Solving the Dispute

Magnets pays an initial sum for the technology; e.g. $5 M

Magnets gets profits up to $15 M

Audio is credited with 50 % of profits above $20 M

IF $40 M happens

Audio gets $5 M + $10 M = $15 M.

If Audio believes its forecast, this looks fair


36

Put Your Money Where Your Mouth Is!

Uncovering deceit! Your counterpart claims that it is almost

certain that the profits of the company you are

negotiating to buy from him will be At least $10 M.

At $10 M profit both agree the company is worth $18 M.

You reply, OK. If profits are at or above $10 M we will pay you a bonus of $1 M. If not, you

reduce the purchase price of $18 M by $5 M See Bazerman HBR Sept Oct 1999

37

Reducing Risk Catalogue Retailing

Long lead times for retail goods

Consumer demand patterns may shift dramatically between catalogue entry of product and arrival at consumers homes.

Retailer agrees to purchase N units

Producer delivers a fraction f of N prior to catalogue mailing; 1-f is backup

After an agreed on time period for observing sales, retailer has option on the remaining (1-f)N

Option is at an agreed on price

If retailer cancels remainder, she pays an agreed on penalty to the manufacturer


Jessie Jumpshot

Restrictions & Instructions

38

39

Jessie and the Sharks each have an opinion about the size of merchandizing profits if the Sharks win the title and if they lose the title:

The case numbers are to be regarded as FIXED.

You negotiate salary, bonus, merchandizing profits only

No other Side Payments are allowed. No negative salaries, bonus or merchandizing profits

Restrictions

Lecture 6

Reminder Pick up confidential info for Stakes of

Engagement from the Black Folder Box

Debrief Jessie Jumpshot

Fair Division

Rothman Art Collection

1

Themes

Creating value by exploiting differences in Probabilities

Values

How to construct an efficient frontier

What is Fair?

How do divide up indivisible goods gracefully

2

3

Jessie Jumpshot

Creating Value with Contingent Contracts

Raiffas Full Open Truthful Exchange or How to Calculate

Contracts that are Un-dominated From Lectures on Negotiation

By Howard Raiffa

(1996)

4

The Problem

Janet and Marty must divide 20 items

Contexts: Dividing an estate

Dividing a partnership

Getting a divorce

5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 J J M M M M J M M J M M M M J M J M J M

Number of Contracts = 220 = 1,048,576

6

Full Open Truthful Exchange

Parties trust each other and are willing to exchange truthful information about their preferences for a list of items.

They must decide how to divide them.

7

First Steps

List all items

Each party allocates points measuring the desirability of each item

For ease of interpretation: Each possesses 100 points to allocate

Points are non-zero and sum to 100

8

Items Janet Marty

1 1 2

2 1.5 1

3 8 5

4 1.5 3

5 9 7

6 2 3

7 3 8

8 14 30

9 0..5 1

10 0 1

11 7 4

12 0.5 0.5

13 25 18

14 0.5 1

15 10 5

16 4.5 3

17 3 0.5

18 8 4

19 0.5 1

20 0.5 2

Janet & Marty Must divide 20 Items

Each allocates 100 points among 20 items

100 100 9

Objective

Find all un-dominated allocations or contracts An allocation is un-dominated if there does not

exist an allocation preferred by both parties

Un-dominated allocations are called efficient or Pareto Optimal after the economist Vilfredo Pareto.

10

Pareto efficient allocations or contracts separate the wheat from the chaff: Separates contracts for which both can do better

from those for which it is not possible to improve both parties payoffs.

Shows where value can be created! Enables parties to focus on claiming value

once we identify all agreements that are not dominated.

WHY?

11

Steps

Compute the ratio of scores for Janet and Marty: if Janet assigns 8 points to item 3 and Marty assigns 5 points, the ratio is 8/5 = 1.60.

12

13

Figure removed due to copyright restrictions. See Figure 26 from Raiffa, Howard. Lectures on Negotiation Analysis, Program on Negotiation at the Harvard Law School, 1998.

Sort the list with the largest ratio for Janet/ Marty at the top and the smallest at the bottom: Ratios in column 4

14

Begin by allocating all items to Marty, so Janet has a score of 0 and Marty a score of 100.

The largest ratio, say, 6 means that for each point increment we add to Janet for the item at the top of the list, we only decrease Martys score by 1/6: Allocating item 17 to Janet gets her 3 points

and reduces Martys points by only .5

15

Extreme Efficient Contracts

If we continue down the list in this fashion, we generate a set of extreme efficient contracts!

Plot the extreme efficient contracts. You are now on your way to deciding what

constitutes a fair division of items. No one of these allocations (contracts) are dominated.

16

17

Figure removed due to copyright restrictions. See Figure 27 from Raiffa, Howard. Lectures on Negotiation Analysis, Program on Negotiation at the Harvard Law School, 1998.

EXTREME EFFICIENT CONTRACTS

0

10

20

30

40

50

60

70

80

90

100

0 20 40 60 80 100

JANET

MA

RT

Y

Add'l

Items

to Janet JANET MARTY

0 100

17 3 99.5

15 13 94.5

18 21 90.5

11 28 86.5

3 36 81.5

16 40.5 78.5

2 42 77.5

13 67 59.5

5 76 52.5

12 76.5 52

6 78.5 49

4 80 46

9 80.5 45

14 81 44

1 82 42

19 82.5 41

8 96.5 11

7 99.5 3

20 100 1

10 100 0

18

Extreme Efficient Contracts that Maximize

the Minimum that a Party Gets

If party 1 gets S1 and party 2 gets S2 finding Max Min {S1 , S2} is clearly not a linear problem! Finding the set of efficient contracts that

maximize the minimum any one party gets can be turned into a simple linear programming problem by a clever trick 19

Formulation

n

i

ipartytopointstotalijzijciS

otherwiseequalsandjpartytogoesiitemifijz

partytoiitemofvaluepointtheisic

partytoiitemofvaluepointtheisic

1,

01

22

;11

20

sijztheonsConstraintLineartoand

plus2ic

i2iz2Sand1ic

i1iz1S

thatsuchMax

findthenandvariablenewaDefine

itemsofnnumbertheequalssijzallofsum

and2iz11iz,exampleFor

sijztheonsConstraintLinear

n

1i2ic2iz2Sand

n

1i1ic1iz1S

tosubject

}2S,1S{MinMax

PROBLEMLPANTONTRANSLATIO

21

Fair Division Schemes

Nave, Steinhaus, Vickery

22

Fair Division Problem

An Estate consisting of four indivisible items are to be shared equally by three children

Each child assigns a monetary worth to each item

23

What is FAIR? (Brahms & Taylor 1999)

Proportionality

Envy Freeness

Equitability

Efficiency

24

Proportionality

If division is among N persons, each THINKS he/she is getting at least 1/N

25

Envy Freeness

No party is willing to give up the portion it receives in exchange for someone elses share For two parties, this = Proportionality

For more than two parties, Envy Freeness is STRONGER than Proportionality

Someone may still be getting more than you!

Envy Freeness is Proportional but not conversely

26

Equitability

Each party THINKSaccording to her/his individual preferences--that she/he received the same fraction of total value

Coupled with envy-freeness, each of two parties

would think that both exceed 50% of value, in their preference terms, by the same amount

27

Efficiency

There is no other allocation that is better for one party without being worse for one or more other parties.

28

Impossibility Theorem (Brahms & Taylor)

NO allocation scheme ALWAYS satisfies

Equitability

Envy Freeness

Efficiency

29

(Rijnierse and Potters in Brahms & Taylor)

Items Ann Ben Carol A 40 30 30 B 50 40 30 C 10 30 40

30

40-40-40 is both Efficient and Equitable

However, it is not Envy Free! Ann envies Ben for getting B which is worth 50

points to her

Allocating B to Ann and A to Ben (Carol still gets C) is Efficient but is neither Equitable nor Envy Free

Each now gets a different number of points

Ben now envies Ann

31

Dividing Indivisible Goods

Estate Planning

32

Monetary Worth To Children

Individuals

Items 1 2 3

A $10,000 $4,000 $7,000

B 2,000 1,000 4,000

C 500 1,500 2,000

D 800 2,000 1,000 33

Side Payments?

Player Allocated

to:

Worth Side

Payments

Total

1

A 10,000

2 D 2,000

3 B & C 6,000

34

Naive

Player Allocated

to:

Worth Side

Payments

Total

1

A 10,000 -4,000 6,000

2 D 2,000 +4,000 6,000

3 B & C 6,000 6000

Sum = 18,000/3 = 6000 35

NAIVE

Accounts only for item value assigned by person who values that item the most

36

Steinhaus

Player Allocated

to:

Worth Side

Payments

Total

1

A 10,000

2 D 2,000

3 B & C 6,000

Sum =18,000 37

Imagined Disagreement Point Each gets 1/3 of each item (at his/her evaluation) Items 1 2 3 A $10,000 $4,000 $7,000 B 2,000 1,000 4,000 C 500 1,500 2,000 D 800 2,000 1,000 $4,333 $2,833 $4,667 Sum of 1/3 Values = $11,033

38

Allocation of Excess Initially each gets 1/3 of each item (at his/her evaluation)

Child Disagreement

Payoff

Share of

Excess

Total

1

4,433 2,022 6,455

2 2,833 2,022 4,855

3 4,667 2.022 6,689

Sum of 1/3 of each item = 11,033 Pareto Optimal Sum = 18,000

EXCESS = 6,067 39

18,000

Steinhaus

Player Allocated

to:

Worth Side

Payments

Total

1

A 10,000 -3,544 6,455

2 D 2,000 +2,855 4,855

3 B & C 6,000 +689 6,689

0 18,000 40

Vickery Auction High Bidder Wins at 2nd Highest Price

Player Allocated

to:

Worth Side

Payments

Total

1

A 10,000

2 D 2,000

3 B & C 6,000

41

Vickery Auction Side Payments

Child

Auction

Payment

Share of

Receipts

Side

Payment

1

7,000 3,833 -3,167

2 1,000 3,833 +2,833

3 3,500 3,833 +333

Sum =11,500 1/3 of 11,500 to Each 42

Vickery Auction

Engenders HONESTY!

Does not pay to distort values assigned to individual items

43

1

-4,000

6,000

-3,545

6,455

-3,147

6,833

2

+4000

6,000

+2,855

4,855

+2,833

4,833

3

0

6,000

+689

6,689

+333

6,333

Side Payment

Side Payment

Side Payment

Total Total Total

NAIVE STEINHAUS VICKERY

44

PROBLEM!

None of these schemes DIRECTLY take into account individual (artistic) preferences of participantsonly monetary values

45

Nash-Raiffa Arbitration Scheme

Informal Summary

46

Nash Theorem

xx

xx

xxX

x

ealternativofmetoUtility)(MU

ealternativofyoutoUtility)(YU

esalternativpossibleallof Set},N,....,1{

ealternativnnegotiatioorcontractA

47

Assumptions

Utility Invariance: If two versions of the same bargaining problem

differ only in units (scale) and origins of participants utility functions then arbitrated solutions are related by the same utility transformations

48

Pareto Optimality: Given an arbitrated solution, there exists no other

arbitrated solution for which both parties are better off

49

Symmetry If an abstract version of the game places

participants in completely symmetric roles, the arbitrated value will give them equal utility payoffs

50

Independence of Irrelevant Alternatives Suppose two games have the same status quo

(BATNA) points and that the trading possibilities of one are included in the other.

If the arbitrated solution of the game with the larger set of alternatives is a feasible trade in the game with the smaller set of alternatives then it is also the arbitrated solution of the latter.

51

Nash-Raiffa Theorem

The allocation scheme that satisfies the four assumptions stated is unique.

The unique solution is found as follows:

52

]MU)(MU[]YU)(YU[Max

satisfying*isSolution

agreementsfeasibleallofsetThe

.meforQuoStatusThe"DealNo"ofUtilityMU

.youforQuoStatusThe"DealNo"ofUtilityYU

xxXx

Xx

X

53

Nash Arbitration Scheme

Fair Division of An Art Collection

The Rothman Art Collection

54

Agreed Upon Objectives

Equal Fair Market Value

Honest revelation of preferences

Allow for emotional meaning attached to items

Avoid strategic thinking

Avoid post-decisional regret

Take into account complementarity and substitutability

55

Protocol 1) Explain the process

2) Compose a list

3) Split list into manageable size categories

4) Present a few categories at once. Ask

parties to state their preferences in any way that is comfortable:

Encourage them to star important items, rank items, give opinions about trade-offs

56

5) Follow up statements about preferences.

Ask questions in a way that provides information without encouraging misrepresentation.

6) Keep all information presented to you strictly confidential.

57

7) Construct a preliminary allocation in which items are distributed such that: All parties do about equally well on their own subjective scales and Fair market values of the participants allocations are roughly equal

58

Key to Success: Differences in Relative Preferences

Give each brother more than he expected while treating each equally in $ allocated.

A random division by flipping a coin doesnt necessarily yield equal value: One brother receives 1st, 3rd, 5th, 7th

The other receives 2nd, 4th, 6th, 8th,.

If Lorin goes first he gets $39K and Paul gets $31K.

59

60

Artist Selda Gund

This allocation is described in the paragraphs below Table 1 in the Rothman Art Collection

case

($1,000) ($1,000)

Fair Market

Rank Allocation Market Values Fair Market

Item Description Value Lorin Paul Lorin Paul Lorin Paul Value

1 Brown Bear $10 2 2 0 1 $0 $10 $10

2 Lion $9 1 6 1 0 $9 $0 $9

3 Pig $8 12 8 0 1 $0 $8 $8

4 Monkey $6 13 7 0 1 $0 $6 $6

5 Polar Bear $6 5 9 1 0 $6 $0 $6

6 Rabbit $6 9 12 1 0 $6 $0 $6

7 Turtle $6 10 11 0 1 $0 $6 $6

8 Robin $2 8 13 0 1 $0 $2 $2

9 Small Bear $2 7 3 0 1 $0 $2 $2

10 Swallow $9 3 10 1 0 $9 $0 $9

11 Turkey $3 6 5 1 0 $3 $0 $3

12 Dog $2 4 4 1 0 $2 $0 $2

13 Cat $1 11 1 0 1 $0 $1 $1

I

Lorin ranks Lion 1, Paul 6: - Lion to Lorin Market Value to Each: $35 $35 $70

II Paul ranks Cat 1, Lorin 11: Assign Cat to Paul

III

Paul states that he likes Cat and Brown Bear much more than the other 11

paintings .Give Paul Brown Bear

IV Assign Pig, Monkey, Turtle, Robin & Small Bear to Paul

V Assign Polar Bear, Rabbit, Swallow, Turkey, & Dog to Lorin

Lorin gets his 1st,3rd, 4th,5th,6th and 9th ranked painting

Paul gets his 1st,2nd,3rd,7th,8th,11th and 13th ranked painting

5 of top 6

5 of top 8

Typical Problems

Items are really discrete and opinions may be lumpy.

Both may have similar rankings of preferences.

Confusing signals: Paul ranked all items in a group but starred some of them. Some starred items were ranked below unstarred items.

61

A star next to an item low in ranking signals that it was worth, to the evaluator, far more than its associated fair market value.

Complementarity: One brother may insist that a block of painting not be split up while the other wont accept that the entire block go to one party.

62

Diffusing Attention from a Single Painting

Ask for comparisons of four or five groups of paintings with the disputed painting among some of these groups.

63

Strategic Misrepresentation

This system is predicated on each brother having complete information about his own preferences, but only probabilistic information about the other brother.

With only an impressionistic understanding of the other brothers preferences, distorting your own to gain advantage MAY BACKFIRE!

64

The Potential for Strategic Misrepresentation Limits the Usefulness of

Joint Fact Finding

Mediators often ask parties to discuss issues face to face to attain convergence of beliefs.

A skilled analyst can exploit this to her advantage, because she will learn about the preferences of her counterpart.

This would destroy differences in preferences which we use to generate joint gains.

65

Sense of Loss

Even when a brother received more than he expected, he wasnt overly enthusiastic.

Emotional attachment engendered a sense of what was lost.

Reduce expectations with this was an extremely difficult category to dividebut we did the best we could

66

Gaining Closure

Get the brothers to sign off on the first half of the estate before moving on.

This will smooth discussion of the second half if the brothers are pleased with allocations on the first half.

67

Concerns about Finality

Suggest at the outset that we might meet in a year to discuss trades, a Post-Settlement Settlement.

68

Lecture 7

POWER

Introduction to Stakes of Engagement

1

THEMES The Rashomon nature of POWER in negotiation

Epic 1950 Film by famed Director Akira Kurosawa about multiple versions of the truth

Subjective value in mixed motive bargaining

Balancing subjective value and objective outcomes Complementary or substitutable?

2

3

POWER

4

POWER in Negotiation More than just a good BATNA

Having one doesnt mean much if you are not prepared to way away from a poor deal

A manifestation of complex situational factors

Power can be turned upside down! Owe the bank $10,000 and you have a problem.

Owe the bank $10,000,000 and the bank has a problem

From Micheal Wheeler Negotiation Analysis:An Introduction HBS 2000 p 10

5

Strength can be weakness and weakness can be strength Teheran 1979->Carter administration

negotiations with Revolutionary Guards, religious leaders,.

The Iranians could threaten the United States knowing that its demands would be rationally considered; by contrast, the United States was constantly frustrated by not knowing where to aim its efforts.

Micheal Wheeler Negotiation Analysis:An Introduction HBS 2000 p 11

6

ON CONFLICT Conflict is inevitable, but combat is

optional. -- Max Lucade

Speak when you are angry and you will make the best speech you will ever regret. -- Ambrose Bierce

Don't wrestle a pig in a mud hole. You both get all dirty, and the pig enjoys it. ----Anonymous

The Roles of Subjective Value in Negotiation

Curhan, Elfenbein & Xu (2006)

Subjective Value Inventory (SVI)

A research instrument used to measure feelings and perceptions concerning the instrumental outcome, the process, the self, and the relationship in negotiations.

Curhan, Eifenbein & Xu Journal of Personality & Social Psychology 91, 493-512 (2006)

Global Subjective

Value

Rapport

Instrumental

Self

Process

Relationship

Curhan et al SVI Factor Structure

0.87

0.65

0.86 0.91

0.88

Structural Equation System

RapportZ

ipRelationshX

ProcessX

SelfX

alInstrumentX

ValueSubjectiveGlobalY

4

3

2

1

XXZ

XXZY

43

21

880910

650870860

..

...

Recursive Structure

4

3

2

1

88

0

91

0

0

65

0

87

010

8601

XX

XX

..

..

Z

Y

.

..

Motivation Subjective value is A good in itself

O. Henrys The Gift of the Magi: One dollar and eighty-seven cents. That was all. And sixty cents in pennies

It is a judgmental guide to performance

We often judge how well we did based on how we feel about the negotiation

It is a predictor of future objective value It establishes reputation and social capital

Curhan, Elfenbein & Xu Op. Cit.

Rationale

In many negotiation situations you MUST: Assess the relative importance of objective

stakes and relationships in planning negotiation strategy

Assess perceived disagreement over objective stakes against the importance of a future relationship

Both objective and subjective outcomes are affected by how the relationship evolves during negotiations

Situational Matrix

Balanced Concerns

(Business Partnership,

diplomacy, prenuptial)

Relationships

(Friendship, Work

Team)

Transactions

(Divorce, House Sale,

Market Transaction,

Financial Negotiation)

Tacit Coordination

(Driving, Airplane Seating)

Perceived Conflict over Stakes

HIGH LOW

Perceived Importance Of Future Relationships

HIGH

LOW

G. R. Shell: Bargaining for Advantage: Negotiation Strategies for Reasonable People. NYC Penguin Books 1999

Reciprocity Code of Conduct Norms Individuals owe one another

because of what has been previously given to them

Be trustworthy and reliable

You have no right to ask of others what you cannot be yourself

Be fair to those who are fair to you This sustains most productive bargaining relations

Let others KNOW when you think they treated you

unfairly! Unfair treatment, left unnoticed or unrequited breeds

exploitationfollowed by resentment and collapse of the negotiation

From Shell & Nicholas E. Sabin 2005 PON

16

Dealing with Difficult People

Diplomacy is the art of letting someone have your way

Daniel Vare, Italian Diplomat The fellow who says he'll meet you halfway usually

thinks he's standing on the dividing line Orlando A. Battista

William Urys Getting Past NO! William Ury, Bantam Books (1993) Paperback

17

Urys Strategic Advice Dont React: Go to the balcony

O. Henry again: The Ransom of Red Chief It looked like a good thingwhen this kidnapping idea

struck usduring, as Bill expressed it, a moment of temporary mental apparition; but we didnt find that out until later.

Gentlemen, I hereby make you a counter-proposition, which I am inclined to think you will accept. You bring Johnny home and pay me two hundred and fifty dollars in cash and I agree to take him off your hands. You had better come at night, for the neighbors believe he is lost, and I couldnt be responsible for what they would do to anybody they saw bringing him back.

Very respectfully, Ebenezer Dorset

Getting Past NO (Op

15067

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