Negotiations.

Cognitive Issues

Nonrational escalation of conflict

• USA’s Major League Baseball in the 1990s: Decades of animosity between team owners and players– Players’ strike destroyed the 1994 season– Approximately $1 billion lost by owners and

players in that year– Baseball’s position as America’s national

pastime was tarnished for years

Why were both parties so irrational?

• Bazerman: both parties were focused almost exclusively on beating the other side.

• They escalated their commitment to their initial course of action.

• Had inappropriate objectives.

Four years later. Basketball

• NBA team owners learned nothing from their baseball colleagues’ mistakes.

• A strike and a lockout cost owners over $1 billion and the players more than $500 million in lost salaries.

***

Other examples: labour strikes, legal battles, territorial disputes…

Mechanism1. Initial public statements

2. Commitment to ips leads to nonrational refusal to consider concessions.

3. Negotiators believe that they “have invested too much to quit”.

4. Further: both sides incur losses as a result of a lack of agreement (lost wages, lost profits)

5. Commitments harden, willingness to change the position weakens

• The public announcement of one’s position increases one’s tendency to escalate nonrationally. Once the general public (or one’s constituency) becomes aware of the commitment, it becomes difficult to retreat from the previously announced position.

• However, a firmly set public position is typically perceived as necessary to build constituency support and allegiance.

• Therefore, what is best for the constituency (поддръжниците) is not necessarily what the constituency rewards!

Strategic advice

A negotiator should avoid inducing bold, firm statements from an opponent, lest one’s adversary later feels trapped in a corner.

Negotiator overconfidence (too much confidence in own assessments)

The case of Matt Harrington• In 2004, Matt, 22 years old, was a baseball player in a

team from the Central Baseball League, paid $800 per month.

• In 2000, at 18, Matt was pictured in USA Today as probably the best, and certainly the most promising, player in the Major League. His agent demanded a $4.95 million first year bonus for Matt.

• In 2000 a team counteroffered: $4.9 million for 8 years; then $5.3 million for 8 years; finally $4 million for only 2 years.

• Such figures were typical for a player of Matt’s position (7th) in the relevant ranking. However, they were rejected by Matt, his family, and agent as insulting.

Matt…• …could not play for a major-league team that

year (2000), or for any of the high-level minor-league teams. Had to go for a lesser team.

• In 2001, with a new agent, they both turned down an offer of $1.25 million with a $300,000 signing bonus. Meanwhile his rank dropped to 58th.

• In 2002 his rank went down to 374th. He was offered but refused less than $100,000.

• In sum: four years of failed negotiations.

• A good negotiator must know when it is time to say yes.

• Matt’s BATNA was risky at best, terrible at worst.

• Yet even with professional negotiators representing Matt, his overconfidence destroyed a tremendous amount of potential.

• Overconfidence that the other side will give you what you want can be a devastating negotiating error.

• Negotiators tend to be overconfident that their position will prevail if they do not “give in”.

• In lab studies with 50:50 chance of a final offer being accepted, the average individual predicts 68% for his offer being accepted.

• Overconfidence is most likely to occur when a party’s knowledge is limited.

• Often the inclination is, “When in doubt, be overconfident.”

Negotiators should seek objective value assessments from a neutral party, realizing that this neutral assessment is likely to be closer to the other party’s position than the negotiator might have intuitively predicted.

Self-serving bias in negotiations

Self-serving bias in negotiations (defining what is fair in ways favouring oneself)

• In negotiations, when both parties sincerely claim to want an outcome that is fair to both sides, their differing notions of fairness can lead to impasse.

• When judges and arbiters are involved, participants in experiments consistently believe that the formers’ perceptions of fair judgments would match their own.

Possible mechanism of the self-serving bias

• An experiment: Participants were presented with 8 arguments favouring their side in the dispute, and 8 arguments favouring the other side. They were asked to rate the importance of these 16 arguments as perceived by a neutral third party.

• There was a strong tendency to view own side arguments as more important and convincing.

• Therefore the bias operates by interpretation which distorts the evidence.

Anchoring in negotiations• Anchoring: People tend to be overly affected by

an initial anchor, without realizing this effect.• Real estate brokers claim to be able to assess

the value of a house to within 5% of the true or appraised value. They also claim not to be influenced by any available list price. In an experiment with students as a control group it turned out that both experts and students were strongly affected by the list price. Only the students admitted it…

Subtle shifts in information may affect the anchoring in negotiations• Variants of the order of possible agreements

affect the negotiated outcome.– Possible prices can be listed as $1,000 $800, $600,

$400, $200, $0.– Alternative order: $0, $200, $400, $600, $800,

$1,000.

• In experiments, in the first case a higher price is agreed on average.

• The first offer is positively correlated with the outcome.

Should you or the other side make the first offer?

• The first offer anchors the negotiation.• Negotiators with good alternatives are

more likely to make the first offer than are those with poor alternatives.

• Low-power negotiators are less likely to make the first offer than high-power negotiators.

• More extreme offers lead to better deals for those making the ofer. However, such offers increase the risk of an impasse.

• The first offers have a strong effect when great ambiguity exists.

• If the other side has a good sense of the bargaining zone, or knows what the item is worth to them, your first offer will have little importance.

• When your opponent lacks information, he/she may make inferences about the value of the object based on your first offer.

Ideally, an effective first offer is reasonable, but also close to your preferred end of the bargaining zone.

How can you protect yourself from first offers benefitting your opponent?

• Focus on your own alternatives.

• Focus on your own objectives.

***

• To negotiate effectively, you need to know what you want, know where you are going, and pick the best route to get there.

Vividness in negotiations

• People overweight vivid or prestigious attributes of the alternatives.

• At the same time, people underweight issues which would strongly affect their professional and personal satisfaction.

• E.g. MBA graduates take jobs with prestigious firms, but switch jobs in the next 1-2 years.