15067

Negotiation and Competitive
Decision Making
Before You Leave Class Today!

Pick Up
Confidential Information for

SALT HARBOR: Brims versus
Easterly
Identify
your negotiating partner

2
Next Class
DEBRIEF
Street Streaker & Alpert-Raiffa
Experiment
NEGOTIATE
Salt Harbor
In class matchups
3
Course Objective
Improve your ability to achieve
your negotiating objectives in a
responsible fashion.
Todays Themes
HOW WE LEARN
PREPARATION
SPLIT THE PIE!
Distributive Bargaining Principles
COGNITIVE BIASES
Anchoring affects negotiation outcomes

A first controlled feedback experiment
Negotiation is a Core
Competency!
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
How We Will Learn

Practice
Calibrated Feedback and Results Analysis
To avoid self-reinforcing ineffectiveness
Outcome Based Evaluation
Seeing how others See You!
8
Barriers to Effective
Negotiation
Thompson Ch. 1 Pages 6-7
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
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
Thompson Page 7 cites Billet et al MGT SCIENCE (2008)
10
Myths
All negotiations are fixed sum
Good Negotiators are born
You need to be either tough or soft
Experience is a great teacher
11
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
12
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.
13
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 9801-156
14
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 9801-156

15
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
16
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)
17
VI Balanced Concerns Negotiations

Stakes of Engagement
Aerospace Investments
VI. Many Party Negotiations

Teams: Eureka vs Flagship Renegotiate
Welsh Water Mgt-Union Negotiation
18
SCORING & GRADING
19
Scoring
Winemaster
Outcomes =>Net Gain:
$750 K
Overall Class Statistics

Average Net Gain:
$650 K
Standard Deviation of
Net Gain:
$1,200 K
Z-Scores
ZWinemaster=
($750 $650)
$1200
HomeBase
$1,200 K
$1,100 K
$1,600 K
= .083
ZHomebase=
= .0625
20
Preparation Survey
A Best Effort response will receive a

+0.25 Z-score increment
21
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
22
How Well Do You Think You

Did?
0-25
Announced
Percentile
COUNTS OF ANNOUNCED VS ACTUAL

Actual Percentile
0-25th
26-50th
51-75th
76-100th
2
0
1
3
26-50
51-75
10
75-100
4
7
0
7
2
7
28
23
Negotiation Dance Records

Record the sequence of offers made by you
and counter-offers made by your
counterpart:
Amstore versus Nelson
Aerospace Investment
Enter record using the online survey

You will receive +0.25 Z-score points for
entry
24
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
25
Distributive Bargaining
Principles and Key Ideas
26
Outcome
Who received which tangible goods?
Net Gains
Yours
Your Negotiating Counterparts
See-Saw or Tug of War outcome

27
Key Power Source
BATNA =
Best Alternative to No Agreement
28
Other Sources of Power in

Negotiation
Authority
Chain of Command
Moral
Relational
Friends, Family, Tribe
Ability to Reward
Ability to Punish
Knowledge
29
Distributive Bargaining
Principles
Target Point=>What do I want?
Your preferred settlement, taking into account
limits imposed by the interests of your
counterpart
30
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
31
Bargaining Zone--the region between

parties reservation points
Positive when parties reservation points
overlap
Doesnt exist when there is no overlap
32
Bargaining Surplus
Amount of overlap produced by reservation
points
Measures the size of the bargaining zone
33
Buyers Bargaining Range
Settlement
Sellers
Surplus
Buyers
Surplus
Bargaining Zone
Buyers Seller
Target Reservation
Price
Sellers
Target
Buyer
Reservation
Price
Sellers Bargaining Range
Bargaining Zone = Zone of Possible Agreement

or ZOPA
34
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
35
Prepare,Prepare,Prepare!
Determine your BATNA
Improve your BATNA if possible
Think through tactics in advance
36
Understand the interests of your

negotiating counterpart(s)
Self-evident in formal zero-sum and nonzero 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
37
ANCHORING
People make estimates by starting from

an initial value and adjusting to provide a
final answer.
Adjustments are typically insufficient
38
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.
39
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.
40
In Global Catastrophic Risks, eds.

Nick Bostrom and Milan Cirkovic
Eliezer Yudkowsky
Singularity Institute for Artificial Intelligence
Palo Alto, CA
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.
41
Alpert-Raiffa
Experiment
A learn by doing controlled
feedback exercise
42
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?
43
Alpert-Raiffa Experiment
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
44
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
45
Announced 50-50 Interval

(1)
COUNT
1
True Value
(2)
True Value
0
1
(3)
True Value
46
Outcomes
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!

47
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
48
First Offers as Anchors

Does making the first offer lead to a
better outcome for you?
Translation: Does anchoring work?
Hint: Think interactively!
49
Subjective Values In
Negotiation
Affective = Feelings and opinions about:
The Objective Outcome

The Process
Myself
My Negotiating Counterpart
Fairness
Empathy
Her outcome
50
Negotiating Sale of the Street

Streaker
Some Big Questions!
51
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 OpenCourseWare
http://ocw.mit.edu
15.067 Competitive Decision-Making and Negotiation

Spring 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
Who Should Make the First

Offer?
What Should it be?
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
3
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
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
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
6
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.
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.
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.
John Rutledge in Forbes
walk away from a deal, any deal,

rather than violate your principles to win
it.
15
Ethics in Negotiation
Reitz, Wall & Love
Kelly School of Business
Indiana University
16
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
17
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
18
What is Permissible?
19
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.
20
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.
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
22
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
23
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.
24
When is it Legal to Lie in

Negotiations?
G.R. Shell
Sloan Mgt Review Spring 1991
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
26
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
27
U.S. Court of Appeals for the

Seventh District
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.
28
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)
29
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)
30
Negotiating with Liars

Adler in Summer 2007 Sloan Mgt Review
Prepare!
Background checks
Anticipate scenarios
Commit to high standards
31
Ask same question differently

Summarize and demand Yes or No
answers
Ask questions to which you know the
answer
Take notes
Establish contingent agreements
32
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.
MIT OpenCourseWare
http://ocw.mit.edu

Spring 2011
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
Prisoners Dilemmas
F
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-ParetoOptimal)
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

B
C
C
(8, 8)
DC
(10, 1/2)
DC
(1/2, 10)
(1,1)
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
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)
(1/2, 10)
(8,8)
(1,1)
(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.

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

Simulation of evolution
Computer tournament
Round Robin (14 entries)
2nd round (62 entries)
WHAT HAPPENED?
TIT FOR TAT

DOMINATED!
Dont rock the boat!
C follows CCC
Be provocable! D follows CCD
Forget & forgive!
C after DCC
Accept a rut!
D after DDD
(1985)
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!
Holdup
Repeated Prisoners Dilemma and
Monopoly Power
From Repeated Interaction
By Adam Brandenburger
HBS 9-793-116 (1992)
Brandenburger op. cit
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.
27
Holdup Tree
Payoffs
Split the Pie
Invest
$1
B
Grab the Pie
A
Dont
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
29
As BEST STRATEGY:
Begin by investing every time
If B ever takes this whole pie, refuse to
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 w
1 w
3
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

1 wn 1
1
3 wn 1
1 w
1 w
1
2
or
3
or
w
1 w
3
The same as Take the Whole Pie!

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 microprocessor, 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
33
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
34
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
35
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.
36
Oil Price Game

Analysis of Payoff Table
& Instructions
Price Charged by
BATIA
$30
$20
$10
A: $2
A: $2
$30 A: $11
B: $11
B: $18
B: $15
A: $8
A: $3
ALBA $20 A: $18
B: $2
B: $8
B: $15
A: $15
A: $5
$10 A: $15
B: $2
B: $3
B: $5
Iterative Dominance
For Alba $ 20 preferred to $30
For Batia $20 preferred to $30
$20 Dominates $30
Price Charged by
BATIA
$30
$20
$10
$30 A: $11
A: $2
A: $2
B: $11
B: $18
B: $15
ALBA $20 A: $18
A: $8
A: $3
B: $2
B: $8
B: $15
$10 A: $15
A: $15
A: $5
B: $2
B: $3
B: $5
Now, for Alba, $10 is preferred to $20

Now, for Batia $10 is preferred to $20
$10 Dominates $20
Price Charged by
BATIA
$30
$20
$10
$30 A: $11
A: $2
A: $2
B: $11
B: $18
B: $15
ALBA $20 A: $18
A: $8
A: $3
B: $2
B: $8
B: $15
$10 A: $15
A: $15
A: $5
B: $2
B: $3
B: $5
MIT OpenCourseWare
http://ocw.mit.edu

Spring 2011
Lecture 4
Debrief Oil Price Game
Intro to Integrative Bargaining
Negotiate Nelson versus Amstore
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
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
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
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 TAXONOMY- Thompson Table 6-2
TRUST
Personal
Business
Deterrence
Based
Lack of Trust
Prenuptial
Surveillance
Knowledge
Based
Sympathy
for the other
Theory X
Threats,
Threats,sanctions punishments,
sanctions
punishments
Surveillance
Understand,
Assessment of
clients needs
appreciate
Customerpartners
driven
focus
Identificatio True empathy

for the other
n
Based
Embedded
Empathy
Theory Y
Employees fit in Develop
corporate culture, social identity
share values
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 III: Pareto

Optimal Agreement
Level II: Better for BOTH than some

other feasible negotiable agreements
Level I: Agreement exceeds BATNAs or RPs
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) winwin 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
MIT OpenCourseWare
http://ocw.mit.edu

Spring 2011
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
Negotiation via Technology

Whats new about negotiation in
the Networked Internet Age?
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
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.
5
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
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
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.
11
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
12
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 !
13
IT Effects on Negotiation
Outcomes (Thompson Exhibit 12-3)
E-Negotiation
vs. Face-to-face
Impasse Rates
Integrative
Behavior
Enhanced vs. Not

Enhanced E-Negotiaton
Brief personal disclosure
over email reduces
impasse rate
More multi-issue
offers
Brief prior telephone call

improves joint outcomes
14
E-Negotiation
vs. Face-to-face
Expanding
The Pie
Mixed Results
Pie Slicing
Computer mediated leads to

more equal pie slices than
face-to-face
15
E-Negotiation
vs. Face-to-face
Distributive
Behaviors
Trust
Less rapport
& Rapport
Enhanced vs. Not

Enhanced E-Negotiaton
Negotiators concerned
about group reputation use

more aggressive strategies
that lead to worse outcomes
than negotiators focused on
their own reputation
Brief prior telephone call
increases cooperation &

relationship quality
16
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
17
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
18
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
19
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
20
. 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) 21
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
22
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
23
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
Contingent Contracts
Bets Against the Future!
27
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.
28
Gordons
Assessment
Expected Value to Gordon = $20
29
Your Assessment
Expected Value to You = $60
30
Differences of Opinion Can

Create Ex Ante Joint Gains
Differences in Valuation
Diagnosing Deceit
Reducing Risk
Motivating Performance
Bypassing Biases
Leveling the Playing Field
31
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
32
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
33
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

34
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
35
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
36
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
37
Jessie Jumpshot
Restrictions & Instructions
38
Restrictions
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
39
MIT OpenCourseWare
http://ocw.mit.edu

Spring 2011
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
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
1
J
2
J
3 4 5 6 7
M M M M J
8 9 10 11 12 13 14 15 16 17 18 19 20
M M J M M M M J M J M J M
Number of Contracts = 220 = 1,048,576
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.
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
Items
Janet & Marty

Must divide
20 Items
Janet
Marty
1.5
1.5
14
30
0..5
10
11
12
0.5
0.5
13
25
18
14
0.5
15
10
16
4.5
17
0.5
18
19
0.5
20
0.5
100
100
Each allocates
100 points
among 20 items
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
WHY?
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.
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
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.
13
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
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.
17
17
15
18
11
3
16
2
13
5
12
6
4
9
14
1
19
8
7
20
10
JANET
0
3
13
21
28
36
40.5
42
67
76
76.5
78.5
80
80.5
81
82
82.5
96.5
99.5
100
100
MARTY
100
99.5
94.5
90.5
86.5
81.5
78.5
77.5
59.5
52.5
52
49
46
45
44
42
41
11
3
1
0
EXTREME EFFICIENT CONTRACTS

100
90
80
70
MARTY
Add'l
Items
to Janet
60
50
40
30
20
10
0
0
20
40
60
80
100
JANET
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
ci1 is the point value of item i to party 1;
ci 2 is the point value of item i to party 2
zij 1 if item i goes to party j and equals 0 otherwise
n
Si cij zij , total points to party i
i 1
20
Max Min { S1 , S 2 }
subject to
n
S1 zi1 ci1 and S 2 zi 2 ci 2

i 1
i 1
Linear Constraints on the zij s
For example , zi1 1 zi 2 and
sum of all zij s equals the number n of items
TRANSLATION TO AN LP PROBLEM
Define a new variable and then find
Max such that
S1 zi1ci1 and S 2 zi 2ci 2 plus

i
i
and to Linear Constraints on the zij s
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
40
30
30
50
40
30
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
A
B
C
D
1
$10,000
2,000
500
800
2
$4,000
1,000
1,500
2,000
3
$7,000
4,000
2,000
1,000
33
Side Payments?
Player
1
Allocated Worth
to:
A
10,000
2,000
B&C
6,000
Side
Total
Payments
34
Naive
Player
1
Allocated Worth
to:
A
10,000
2,000
B&C
6,000
Side
Total
Payments
-4,000
6,000
+4,000
6,000
Sum = 18,000/3 = 6000
6000
35
NAIVE
Accounts only for item value assigned by

person who values that item the most
36
Steinhaus
Player
1
Allocated Worth
to:
A
10,000
2,000
B&C
6,000
Sum =18,000
Side
Total
Payments
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
1
4,433
Share of
Excess
2,022
Total
6,455
2,833
2,022
4,855
4,667
2.022
6,689
Sum of 1/3 of each item = 11,033

Pareto Optimal Sum
= 18,000
EXCESS = 6,067
39
Steinhaus
Player
1
Allocated Worth
to:
A
10,000
Side
Total
Payments
-3,544
6,455
2,000
+2,855
4,855
B&C
6,000
+689
6,689
18,000
18,000
40
Vickery Auction
High Bidder Wins at 2nd Highest Price

Player
1
Allocated Worth
to:
A
10,000
2,000
B&C
6,000
Side
Total
Payments
41
Vickery Auction Side Payments

Child
1
Auction
Payment
7,000
Share of
Receipts
3,833
Side
Payment
-3,167
1,000
3,833
+2,833
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
NAIVE
Side
Total
Payment
STEINHAUS
Side
Total
Payment
-4,000 6,000 -3,545
VICKERY
Side
Payment
Total
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
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
x A contract or negotiation alternative
X { x1 ,...., x N }, Set of all possible alternatives
UY ( x ) Utility to you of alternative x
U M ( x ) Utility to me of alternative x
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
Nash Arbitration Scheme

UY Utility of " No Deal" The Status Quo for you.
U M Utility of " No Deal" The Status Quo for me.
X The set of all feasible agreements
Solution is x* X satisfying
MaxxX [ UY ( x ) UY ] [ U M ( x ) U M ]
53
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
Artist Selda Gund

This allocation is described in the paragraphs below Table 1 in the Rothman Art Collection
case
($1,000)
Item
1
2
3
4
5
6
7
8
9
10
11
12
13
II
Fair Market
Description
Value
Brown Bear
$10
Lion
$9
Pig
$8
Monkey
$6
Polar Bear
$6
Rabbit
$6
Turtle
$6
Robin
$2
Small Bear
$2
Swallow
$9
Turkey
$3
Dog
$2
Cat
$1
Rank
Lorin
2
1
12
13
5
9
10
8
7
3
6
4
11
Paul
2
6
8
7
9
12
11
13
3
10
5
4
1
Lorin ranks Lion 1, Paul 6: - Lion to

Lorin
Allocation
Lorin
Paul
0
1
1
0
0
1
0
1
1
0
1
0
0
1
0
1
0
1
1
0
1
0
1
0
0
1
Market Value to Each:
III
Paul ranks Cat 1, Lorin 11: Assign Cat to Paul

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
Assign Polar Bear, Rabbit, Swallow, Turkey, & Dog to Lorin
($1,000)
Market Values Fair Market

Lorin
Paul
Value
$0
$10
$10
$9
$0
$9
$0
$8
$8
$0
$6
$6
$6
$0
$6
$6
$0
$6
$0
$6
$6
$0
$2
$2
$0
$2
$2
$9
$0
$9
$3
$0
$3
$2
$0
$2
$0
$1
$1
$35
$35
Lorin gets his 1st,3rd, 4th,5th,6th and 9th ranked painting 5 of

Paul gets his 1st,2nd,3rd,7th,8th,11th and 13th ranked painting
$70
top 6
5 of top 8
60
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
MIT OpenCourseWare
http://ocw.mit.edu

Spring 2011
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
POWER
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
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
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
6
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)
Curhan et al SVI Factor Structure
Instrumental
0.87
0.65
Global
Subjective
Value
Self
0.86
0.91
Process
0.88
Relationship
Rapport
Structural Equation System

Y Global Subjective Value
X1 Instrument al
X 2 Self
X 3 Process
X 4 Relationship
Z Rapport
Y 0.86 Z 0.87 X1 0.65 X 2

Z
0.91X3 0.88 X 4
Recursive Structure
X1
1.0 .86 Y .87 .65 0 0 X 2

1.0 Z 0 0 .91 .88 X 3
X
4
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
Perceived
Importance
Of Future
Relationships
Situational Matrix
Perceived Conflict over Stakes
HIGH
Balanced Concerns
LOW
Relationships
HIGH
(Business Partnership,
diplomacy, prenuptial)
(Friendship, Work
Team)
LOW
Transactions
(Divorce, House Sale,
Market Transaction,
Financial Negotiation)
Tacit Coordination
(Driving, Airplane Seating)
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
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
16
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. cit)
17
Dont Reject: ReframeChange the

Game
Redirect attention away from positions towards

identifying interests, fair standards, inventing
creative options
Ask for advice
1979 Salt II arms control treatyGromyko
versus Biden
18
Dont Push: Build them a golden bridge

Build your opponent a Golden Bridge to retreat across Zun
Tsu
Ask for and build on their ideas
Help them back away without loss of face

Help write their victory speech
The Cuban missile crisis: John Kennedy and Khruschev
19
A distanced view of close things

Miyamoto Musashi
1584-1645
STAKES OF ENGAGEMENT
A Dual Concerns Negotiation
21
BATNAS & OUTCOMES

BATNA for marriage to take place->Minimum
points stated in case
One or both parties dont meet his/her minimum
BUT there is agreement on division of goods:
No marriage but each gets
Objective + Process points
No agreement on division of goods:

No marriage and each party gets his/her
Objective + Process Points
22
Stakes
of Engagement
Stakes
of Engagement
Read General Instructions as background
Study Confidential Information and prepare
Counterpart Evaluation Form:
DO NOT OPEN IT until your negotiation is
concluded
Then open it, fill it out and give it to your
counterpart
Results Due tonight at 9 pm

Each team member must submit results
No late submissions will be accepted
MIT OpenCourseWare
http://ocw.mit.edu

Spring 2011
Lecture 8
Debrief Stakes of Engagement
Did you get married?
Alphexo vs Betton
Instructions and Commentary on tactics
Themes
Balancing objective outcomes and
subjective values
How dual concerns change negotiating

tactics
Enhancing Trust
1
Reminders
Negotiate Alphexo-Betonn in teams of two:
Two Alphexo negotiators and two Betonn negotiators
negotiate together
EVERY negotiator fills out the survey
1. YES, there will be two (hopefully) identical entries for
each role in each Alphexo-Betonn negotiation
2. Keep a hardcopy of your results for reference
PICK UP Confidential Information for Winemaster.com
Two negotiators for Winemaster, two for Homebase
Stakes of
Engagement
Difficulties
The couples ability to confront difficult
demands cooperatively (the must haves)
is reflected in the Process Evaluations
Those who do not take an interest in their
partners needs often end up with a low
Grand Total Score =>
in spite of having claimed an impressive share
of tangible items!
Affective (Process) Attributes

Respect
Trustworthiness
Understanding of the others needs

Openness to future negotiations
General fondness
Lessons
Here 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
Alphexo vs. Betonn

Instructions
Creating Value in
Joint Venture Negotiations
Issues
Name:
- or - or something else
Investment Split:
% to Alphexo, % to Betonn
Venture Location:
Alphexo or Betonn
Facilities Charge:
Paid to one or the other
Can be dropped altogether!
Profit Sharing:
Alphexo % share; Betonn % share
Venture Leadership:
Ralph from Alphexo or Beth from Betonn?
Residual IP Rights:
To Alphexo or to Betonn?
Issue Clarifications
Joint gains on IP rights go in entirety to
one party or the other
IF a Facilities Charge is agreed upon:
Goes to one party only
Paid by the JV => Reduces JV profits to be
shared
Sales restrictions impact:

On JV sales AND
On Individual Company sales
Facilities Charge
Current Deal: $10M Facility Charge to
Betonn
Can you both do better?
Alternatives
1. The Facilities Charges comes directly off
of JV sales, reducing the amount to be
shared by the two parties
2. The current deal, pay Betonn $10M for
facilities charges is clearly open for
renegotiation
3. Look carefully at alternatives that might
help to improve both Betonn and Alphexos
position on this issue
Other Questions
Can Alphexo acquire Betonns -gate?
NO! You will do a Joint Venture!
Joint leadership? NO! One or the other!
BATNAS = Current Sales with no
Joint Venture
MIT OpenCourseWare
http://ocw.mit.edu

Spring 2011
Lecture 9
Alphexo vs. Betonn Debrief
WineMaster.com vs. HomeBase.com

Instructions & Guidelines
Pick up Confidential Information for your

role in Aerospace Investment
VC Aerovent Capital is considering a $100MM

investment in a startup Earth Escape
1
Themes
Alphexo vs. Betton Tension between local &
Global Value Claiming Tactics:
Slice & Dice individual gains?
Accumulate & divide all at once?
Mix the two?
Winemaster vs. Homebase

Probability Tree BATNAS
Logrolling Again
2
Alphexo vs. Betonn

Creating Value in
Joint Venture Negotiations
Issues
Name:
- or - or something else
Investment Split:
% to Alphexo, % to Betonn
Venture Location:
Alphexo or Betonn
Facilities Charge:
Paid to Alphexo ; Paid to Betonn
4
Profit Sharing:
Alphexo share; Betonn share
Venture Leadership:
Ralph from Alphexo or Beth from Betonn
Residual IP Rights:
To Alphexo or to Betonn
Negotiators Dilemma
Openness opens one up to exploitation
If you act tough and strongly claim value,
you lead your counterpart to do the same to
protect herself
Individual moves to claim value tend to
drive out moves to create it
This dynamic leads to:
Poor Agreements
Soured Relationships
Conflict Escalation
Creating Value Requires

Learning
About tradeoffs among individual costs to
Alphexo and Betonn and JV sales gain
Where JV sales gain is greater than the
direct costs to Alphexo and to Betonn of
relaxing sales restrictions
Arbitrage
Differences in costs and benefits often lead
to a trade that benefits both partiessuch a
trade is an arbitrage
Creating value requires a relentless focus
on expanding the TOTAL PIE
IF an alternative deal increases total profit
at the expense of one party, both sides gain
if it is adopted and individual loser(s) are
compensated with a side payment
8
All other options are dominated; i.e.not

Pareto optimal.
Dominated options leave money on the
table.
Winemaster.com
10
Background
Winemaster.com a successful online vendor
of mid-range wines located in Rhode Island
is negotiating with Homebase.com to sell
the company
Elimination of direct shipment laws means
Winemaster can broaden its customer base to
the national market
But your competitors can go after Rhode
Island!
11
Issues
Winemaster gets how many Homebase shares?
4.5 million outstanding
0.5 authorized but unissued
Value of Homebase shares?

For this transaction, $50/share seems right
Use $50 share value ignore uncertainties
12
What is Winemaster.com worth?
There are some typical benchmarks, but cash

flow valuation is out of the question!
Vesting: when does Winemaster receive

title to Homebase shares?
Homebase believes it takes two years to get its

online wine project under way
They want to retain Winemaster personnel
Winemaster wants to get title as quickly as
possible
13
Board Seat
A good way for them to monitor Winemasters

investment
Lawsuit
Who should assume all of this liability? Why?

Can both parties do better?
14
BATNAS
Each party faces an uncertain BATNA
You are Expected Value Maximizers
Create a probability tree of your No
Agreement alternatives
Homebase: Compute the Expected Cost
of an alternative acquisition
Winemaster: Compute the Expected Sale
Value to an alternative firm
15
MIT OpenCourseWare
http://ocw.mit.edu

Spring 2011
Lecture 10
Debrief Winemaster vs. Homebase
Negotiate Aerospace Investment
A Balanced Concerns Negotiation
Instructions and Clarifications
Pick up confidential information for

Flagship vs. Eureka
Three individual roles for a team
Two teams
1
Todays Themes
Tactics for dealing with difficult negotiators
Balanced Concerns
Detection of Subtle Opportunities for Value
Creation
2
STONEWALLING
TO STONEWALL
Means to refuse to cooperate, especially in
supplying information
(Wikipedia)
What Tactics Do Negotiation Gurus

Recommend?
The basic wedge is:
reframe the other sides position in
terms of interests, options and standards
while also dealing with their tactics
the stone walls, attacks and tricks
All Quotes are from William Urys Getting Past NO
Bantam Books 2007
Go Around Stone Walls

Your opponent says take it or leave it! ,
takes an extreme position or sets a rigid
deadline
Ignore it
Reinterpret it as an aspiration
Test it
William Urys Getting Past NO Bantam Books 2007
Deflect Attacks
Your opponent threatens, insults or blames
you for something that has gone wrong
Ignore itpretend you didnt hear it
Reinterpret itReframe an attack on you as
an attack on the problem
From You and Me to We
6
Reframe Rules of the Game

If stonewalling, tricks and attacks continue
Recast the negotiation as a negotiation
about the negotiation!
Redirect a discussion of substance to a
discussion of the rules of the game
Let them know you know what they are
doing!
7
Winemaster.com
Winemaster.com a successful online vendor
of mid-range wines located in Rhode Island
is negotiating with Homebase.com to sell
the company
Elimination of direct shipment laws means
Winemaster can broaden its customer base to
the national market
But your competitors can go after Rhode
Island!
8
Winemaster.com
Issues
How many shares of Homebase.com will
Winemaster get?
4.5 million outstanding
0.5 authorized but unissued
What is the value of Homebase shares?

For this transaction, $50/share seems right
10
What is Winemaster.com worth?
There are some typical benchmarks, but cash

flow valuation is out of the question
Vesting: when would Winemaster receive

title to Homebase shares?
Homebase believes it takes two years to get its

online wine project under way
They want to retain Winemaster personnel
Winemaster wants to get title as quickly as
possible
11
Board Seat
Does Winemaster get a board seat?

A good way to monitor Winemasters
investment
Lawsuit
A Newport customer who got seriously ill

brought suit claiming the wine was
contaminated in Winemasters possession
He seeks $1 million for medical expenses plus
pain and suffering
Homebase has been informed of the existence
of the lawsuit so is aware of this liability
12
Risk Aversion, Exploding Offers, etc

Risk Aversion
Decreases Winemasters BATNA
Exploding offers
Decrease Winemasters BATNA
Prolonging the deal until other buyers

make up their minds
Increases Winemasters BATNA:
Winemaster might reasonably walk away from
an offer from Homebase if they can wait to see
if As offer is definite!
13
Analysis Sequence
Compute share spread current deal allows
Step by step improvements of current deal:
Vesting
Board Seat
Liability
At each stage compute the largest number

of shares that Winemaster can get and the
least number of shares that Homebase can
give while respecting BATNAS
14
Aerospace Investment
A Balanced Concerns Negotiation
15
Aerospace Instructions
You must abide by the scoring restrictions
You cannot interpolate
Do not look at your Process Evaluation

form until the negotiation is completed
At the end of negotiation, fill out your
Process Evaluation form and hand it to her
16
Aerospace Instructions
There are levels of certain issues that are
deal-breakers for one party or the other.
This means what it says! NO DEAL
17
An Aerospace Themes
Creating Value within apparently distributive
issues
What seems fair a priori may not be
18
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Spring 2011
Lecture 11
Debrief Aerospace Investment
Negotiate Flagship vs Eureka
Instructions and Guidelines
Reminders
Flagship Eureka Results: Due tonight at
9 pm
Pick up Confidential Info for Welsh Water
-Keep a hardcopy of your results for

reference
Email Negotiation (CP Hong Kong):
Deadline
Todays Themes
Creating value within apparently distributive
issues
When is this possible?
How?
Totality of Your Interests

Balancing objective outcome and relationship
interests
Negotiating within and between teams
When You are Tempted to Deceive

Adapted from Smart Alternatives to Lying in Negotiation, by
Deepak Malhotra (associate professor, Harvard Business
School), first published in the Negotiation newsletter
Do you have other offers that you are considering?
Is your cost budget accurate?
In each of these stories, the negotiator eliminates the temptation
to lie by reshaping facts prior to the bargaining session. Theres
a deeper point here: the temptation to lie often indicates that
reality doesnt match our desires. One course of action is to
misrepresent reality to others (and even to ourselves). A better
optionone that resolves both the ethical and strategic
dilemmas of lyingis to adapt reality to our desires and make
the truth easier to tell.
4
Where are Aerospace Value

Creating Opportunities?
Equity %
Dividends
Vesting
Negotiating in Teams
Team Effectiveness
Teams can be very effective at
exploiting integrative potential.but
do they necessarily outperform their
solo counterparts?
Team Efficacy Effect

Do teams outperform their solo counterparts?
Not necessarily!
Yet both teams and solo players believe that
teams have an advantage
Solos are, in general, better off negotiating with a

team than another solo player
Solo earns less than the team, but jointly available gains
are, more often than not, greater in a team-solo
negotiation than in a solo-solo negotiation
Thompson 3rd Ed. Ch. 9 p 246
Morgan and Tindale 2000: At least one

team at the table greatly increases
incidence of integrative agreement
OConnor, Carnevale (2007): Negotiators
exchange much more information when
teams are negotiating
Information exchange leads to greater
accuracy about parties interests,
promoting integrative agreement
Ref: Thompson Ch 9 p 245
9
Team Halo Effect

Holding constant the nature of the failure, teams
tend not to be blamed for their failures as much
as do individuals,
Naquin & Tynan (2003)
Teams simply are given a lot of credit for their

successes but are not blamed for their failures
people have an easier time imagining how and
individual might have done something better than
imagining how a team might have done something
better
Thompson Ch. 9 p 246
10
Multiparty Negotiations
CHALLENGES
Coalition Formation
Difficulty formulating
tradeoffs
Communications
Breakdowns
Biased interpretation
Multiple audiences
STRATEGIES
Manage information
Ask Who has it?
Brainstorm
Systematize proposals
Equalize participation
Stay at the table
Avoid equal shares
bias
11
Flagship Airways - Background

Flagships original $1 Billion order = 10 Jumbo + 30 Mid-sized
Flagships revenue decrease prompts them to:
* Cancel Jumbos, expand only Mid-Size
* Now need 90, not 130 engines
Mid-Size Skyline engines:

* Eureka to provide JX5 and new C-323 under development
* C-323 LT Turbine more efficient than the AT Turbine
* Sweetner - $150M in free kits for aging Firebirds
12
Restructuring the Agreement

1. How much will Flagship spend?
2. On which engines?
3. New total $ value of Firebird fleet upgrade?
4. What constitutes the engine kits to be

included in that upgrade?
13
Flagship vs Eureka Roles

Eureka
Stiles, Gen. Mgr
Flagship
Gordon, VP Engineering
Delling, VP Finance
Langton, VP Finance
Aitcheson, VP Prod Dev
Ross, VP Maintenance
14
To be successful, you, Gordon (V.P. Engineering Flagship), and you, Stiles (G.M. Engineering - Eureka)
must
1) Listen carefully to the concerns of your team-mates

2) Find out what they would like in the restructured
agreement.
3) Find out what they need to know to be precise about
what options they can accept.
4) Show that you understand their concerns
15
Your Team Number

EUREKA
FLAGSHIP
Your Role as
Pat Stiles Lou Atchison Alex Delling
Sam Gordon Lorin Ross Marty Langton
Circle the agreement reached for each issue and enter the ranking for your role in the blank. Enter your score opposite it.
1) How much will Flagship prefer to spend on the reduced purchase? (Original = $1 billion)
Ranking
Score
1) $850 million
2) $800 million
3) $750 million
4) $700 million
5) $650 million
2) Which engines will Flagship purchase?
1) JX5 engines only
2) Half each of JX5 and C-323s
3) C-323 engines only
3) What will be the new total dollar value of the upgrade to the Firebird fleet engines?
1)
2)
3)
4)
$150 million
$120 million
$100 million
$ 80 million
4) What parts will be included in the Firebird upgrade?
1)
2)
3)
4)
Full kit
Fan, frames and compressor
Fan and turbine
Frames and compressor
Total score for your role
16
Consensus
A Team Leader CANNOT impose a deal by
herself!
Stiles MUST have the approval of his
teammates, Aitcheson and Delling, to seal a
deal with Flagship
Gordon MUST have the approval of his
teammates, Langton and Ross, to seal a deal
with Eureka
17
Scoring Flagship
Your score is 16 minus the sum of your ranks for
the particular agreement negotiated by the
teams.
If your team agrees to an alternative that is, for
you, unacceptable, deduct twice the number of
alternatives available for that issue.
If teams do not agree, each individual gets a score
equal to 16 minus the rank score assigned to
unacceptable: 1610688 = 16
18
Scoring of Barely Accept

If your team agrees to an alternative that you
can barely accept, assign a rank score equal
to the number of possible options for that
issue.
Examples follow
19
Scoring of Barely Accept

# of Options
for an issue
Rank assigned to
Barely Accept
5
20
Options
A
B
C
D
E
Example
Unacceptable
1
3
Barely Acceptable
2
There are five options.

Barely Acceptable = Rank of 5
21
Example
Issues resolved as follows:
Flagships expenditure on reduced purchase at
$700 ranks 3rd for you
Flagship purchases half of each JX5 and
C-323s ranks 2nd for you
Firebird Upgrade chosen ranks barely
acceptable for you
Parts included in the Firebird upgrade chosen
ranks 4th for you
22
Upgrade has four possible resolutions, so

Barely Acceptable is assigned a rank score
of 4.
Your score is 163244 = 3
If it had happened that the Upgrade
alternative agreed upon had been
unacceptable to you, your score would be
163284 = 1.
23
Team Leaders
Each Team Leaders score will be equally
weighted between:
The sum TOTAL of individual team member
SCOREs
The team leaders individual score
24
Team Leader Score

Gordons Score = G
Langtons Score = L
Rosss Score
= R
Gordons Score = (G+L+R)/2 + G/2
= (L+R)/2 + G
25
CLARIFICATIONS
Upgrade costs are different and distinct from
dual maintenance costs.
Upgrade saves on fuel costs, not necessarily on
maintenance.
$ Value of an Upgrade shown on CI sheet

is for 100% Firebird Fleet upgrade
All 100 planes are upgraded
26
CLARIFICATIONS
Kit 4 consists of frames and
compressor [correction for Delling].
For a cost range use the mid-point as

a certainty equivalent
27
Issues to be Resolved
Fuel Savings:
C 323=>7% or 3%?
Firebird upgrade fuel savings?
Total $ Value of Firebird engine upgrades

Individual Kit value?
Per Cent of Firebird fleet upgraded?
Less than 100 % of Firebirds Upgraded =>

Generates Potential Costs
Incident, dual maintenance & grounding costs
28
Firebird Upgrade Issues

Langton: Only 100% upgrade of the
Firebird fleet enables Flagship avoid
incident, dual maintenance and grounding
costs
If you do not upgrade 100%, then dual
maintenance costs depend proportionately
on the fraction of Firebirds not upgraded
29
What Do Langton & Others

Need to Learn & From Whom?
30
Who has What Information?

Firebird kit breakdown information?
Savings target?
Correct details on dual maintenance costs?
31
Flagships Savings Target

The CEO of Flagship has told Langton that he
must meet a savings target
Langton has accurate information about
potential savings from some sources but not
all
32
Communication Breakdowns
Biased interpretation
People often hear what they want to hear when
receiving messages, especially ambiguous ones
They interpret neutral information as favorable..
and ignore or misinterpret information that
contradicts their position.
33
Managing Time
Observations suggest that negotiating groups
severely mismanage their time!
Groups often begin with distributive bargaining
over an issue and then transition into integrative
mode.
Not systematic. Doesnt create value
Misused valuable time
34
Systematic Proposal Making

Allow for some points of agreement, even if
only on process
Allow caucusing when at a roadblock
To assure that team members are still aligned
To share thoughts about conflicting information
and where to get what is needed
35
What to Avoid
The equal shares bias
Groups tend to this norm
Problematic because there is no universally
fair method of allocation
Sequential bargaining on individual issues

The Agreement Bias
A focus on reaching common ground to the
detriment of exploring options that create joint
gain
36
Self Evident LESSONS
The success of external negotiations depends on the

outcome of internal negotiations.
Trust expedites and improves the negotiation

outcome.
Unanticipated mutual interests can help unlock a

stalled negotiation.
37
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Spring 2011
Final Lecture
Debrief Welsh Water

PostscriptWhat REALLY happened?
Debrief Email Negotiation

Subjective Evaluations
Negotiating a Job Offer
The Exploding Offer!
Preparation and Tactics
Wrap-up
THEMES
Welsh Water
CoalitionsPerceived or Real?
What REALLY happened?
Email Negotiation
When well done, outcomes mimic face to face
negotiation!
Subjective Evaluations
How others see you!

What to do to improve success
Thinking on your feet The Exploding Offer
Welsh Water
Postscript
What REALLY Happened?
Partnership 1
Under leadership of Brian Charles, Welsh
negotiated an approach to bargaining with
the unions
This and the subsequent agreement is called
Partnership 1
Union Recognition
Management was extremely nervous about
its ability to bring NUPE into an agreement
as it represented major disruptive potential
They began informal discussion with other
unions about de-certification
Issue came to a head when a particularly
hard-line officer of NUPE was assigned
This was the final straw
5
The Dawn Raid

The history with this individual precipitated a
dawn raid one Friday morning, when NUPE
was formally informed it had been de-recognized
NUPE screamed Bloody Murder and called for
worker solidarity from the other unions
Welsh stood firm: several NUPE shop stewards
were persuaded to accept attractive early
retirement and severance packages.
This cleared the air for further negotiations
Annual Pay Increase

A CPI linked increase represented a
dilemma to the union:
Unions conceived to wrest larger and larger

increases in profit shares to workers
CPI linked increases acknowledges this is not
an objective
Minimum annual increase = CPI for two

years subject to a market position
modification
7
Market Position Guarantee

Welsh workers paid on average at 75th
percentile in SW region of the UK
Welsh guaranteed that they would stay at
the 75th percentile:
If position decreased annual compensation

would exceed the CPI to compensate
If position increased Welsh entitled to
clawback annual increases of less than CPI
until wages stabilized
8
The Unions were excited about this, as it

was a generous offer
In order to guarantee neutrality, the Cardiff
Business School was commissioned to
study comparative organizations, to
maintain an updated account of pay levels
and to make recommendations of annual
increases within an agreed-upon list of skill
levels
9
Single Status Pay Scales

Welsh proposed one in place of three pay scales
(unskilled, skilled, clerical and office)
Tended to discriminate against lower skill
levels
Largely the product of redundant historical
negotiations
One level viewed by all as more equitable and
easier to manage under the new pay formula and
market monitoring system
Higher paid workers were empathetic
10
Profit Sharing
Workers allowed to vote a percentage of
each years annual increase into a profit
sharing scheme that would yield dividends
linked to profitability
Reduced cash handovers from Welsh
Gave workers a profit share motive
Great skepticism by Unions

BUT five years later it was wildly popular!
7-8% Dividend is well above the CPI
11
Scheduled Work Time

Reduced from 38 to 37 hours just when
Welsh needed to increase productivity
The Partnership philosophy gave
management some flexibility:
Move from traditional 9-5 day to an annual
average of 37 hours per week
Workers in turn got a guaranteed average 37
hours per week salary plus some overtime
12
Initial cynicism: seen as a means to keep

wages down and eliminate some overtime
But it offered personal scheduling
flexibility: e.g. a 4-day weekend every two
weeks.
Resistance was initially too great to adopt it
outright:
Local depots and units had the right to choose
the system for a year
Ultimately it also became wildly popular!
13
Job Security
Much discussion!
Managing Director Brian Charles said:
We had never had a compulsory layoff, and we
thought that we could keep to that, especially since
it met so much to the unionsso we say We
guarantee you a jobbut we dont guarantee that
it will be the same job. We may need to put you
elsewhere in order to match the organizations
needs.
14
Partnership 2
Partnership 1 was a success and the Unions
re-ratified the agreement with some minor
refinements in pay increase and evaluation
systems.
15
If you do not negotiate what you want in that

brief window between your receipt of a job
offer and your acceptance of it, you may never
get it.*
*Thompson p 378
Preparation
Sounds corny but.preparation is essential
To codify your preferences among alternative
job choices
Construct a Hierarchy of Objectives
Use it to rank order alternatives
Best description of how to do it: Chapter 2 of
Keeney & Raiffa Decisions with Multiple Objectives
(1976)
Rank Job
Alternatives
Maximize
Outside work
Life Style
Hours per
Week Free
Time
City Quality
Neighborhood
Housing
Maximize
Financial
Rewards
Maximize Work
Environment
Quality
Good social
networking
opportunities
Work Related
Travel
# Trips per
Month
Travel
Destinations
Promotion
Track
Training &
Personal
Development
Boss & cohorts
Salary & Bonus
Future
Trajectory
Minimize Living
Costs
Current
The Exploding Offer

In our experience, firms usually do not rescind
exploding offers once they have made
them*
How should Julie respond?
*Thompson p 381
What should Julie do?

Establish her BATNA!
Other job offers?
Identify key attributes of other offers for reasoned
comparison
What are the Companys Interests?

Is the team project time dependent?
Does this give Julie negotiating leverage?
Their BATNA?
Can she translate the deadline into a

negotiating advantage?
Evaluate Options
What are strengths and weakness of:
Accept the offer before 9 AM tomorrow?
Postpone the decision?
Tactics
Get other offers and try to start a bidding war?
Response to This is our standard MBA offer?
Assume that everything is negotiable!
What to Ask For!
Extra Vacation Days

Flexible Scheduling
Telecommuting
Delay Job Start Date
Personal Days
Parental Leave
Increased Family
Benefits
Supplemental insurance
Increased job training
Gym Membership
Concierge services
Dry Cleaning services
Tuition re-imbursment
Adoption Assistance
Thompson A4-3 (p 378) from Brandon E. (2006) Negotiating for Job Perks
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Spring 2011
Assignment #1
As preparation for participating in the Street Streaker negotiation, to be done in our first class,
READ:
The first two chapters (38 pages) of Thompson:
Chapter 1: Negotiation: The Mind and the Heart,
Chapter 2: Preparation: What to Do Before Negotiation,
Also read Anchoring and First Offers in Negotiation (HBS 9-895-070) and Wheeling and Dealing:
The Zirconia GT (HBS 9-895-013). Anchoring and First Offers in Negotiation highlights the
important role that (psychological) anchoring plays in influencing your negotiation counterparts
perception of what is acceptable to you. Wheeling and Dealing: The Zirconia GT case is an amusing
illustration of tactics employed by car salespeople to squeeze as much money out of you as possible.
We revisit the advice offered in Chapter 2 often, especially once we begin integrative or mixed motive
bargaining (Assignments 5 and beyond).
You will do Street Streaker in class as a warm-up distributive bargaining case. You have another
shot at distributive bargaining with the Salt Harbor case.
Questions to think about:
1. How much, if at all, do you think an increase of $1000 in the Sellers opening demand
influences the settlement price?
2. How much, if at all, do you think a decrease of $1000 in the Buyers opening offer influences
the settlement price?
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Spring 2011
Assignment #2
You will negotiate the Salt Harbor case in class with a counterpart that will be chosen to negotiate with
you. You will be assigned a role as either the Regional Manager for Brims, a fast-growing chain of
coffee shops or as the owner of the Easterly, a successful bed and breakfast inn located in the
picturesque seaside village of Salt Harbor.
We will hand out in class confidential information for your role. You are not allowed to share this
information with your negotiating counterpart. It is for your eyes and your eyes only!
Your negotiation should last no more than 40 minutes.
PREPARATION: for the negotiation,
READ: Chapter 3 Distributive Negotiation: Slicing the Pie
Thompson offers good advice about strategy at the bargaining table, answers the most commonly asked
questions about how to proceed at the bargaining table and suggests principles underlying the idea of
fairness that frame discussion in the rest of her book.
The conclusion to the chapter crisply summarizes principal points such as the following:
Nothing can substitute for the power of a strong BATNA.
There are sensible strategies for coping with outrageous offers.
A negotiator who is well versed in the psychology of fairness is at a pie-slicing advantage.
READ: The abridged version, HBS case 1-391-298, of Is Business Bluffing Ethical? by A.Z. Carr.
This 1968 article elicited reader emotions ranging from shock, rage to enthusiastic support!
As counterpoint, also read, When Is It Legal to Lie in Negotiations? by G. Richard Shell. The thrust
of Shells message is that . . . conscience may be your best guide. In Negotiating with Liars Robert
Adler points out that Lying is a central aspect of human behavior. Negotiators need to learn about
every tool that will protect their interests.
PRIOR TO CLASS: Answer the Salt Harbor Preparation Survey.
Questions to Think About:
Study Table 2-1 in Thompson, p. 39. In particular, how do you answer her Self-Assessment questions
and Assessment of the Other Party questions within the framework of the Salt Harbor negotiation?
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Spring 2011
Oil Price Game Instructions

1. The class will be divided into pairs of teams. Each pair of teams plays an independent game.
One team will represent Alba, the other Batia.
2. You will be allowed time to review the case and to caucus with your team in order to decide
on a team strategy.
3. YOUR TEAM SHOULD NOT COMMUNICATE WITH ANY COUNTERPART OF
YOUR OPPOSING TEAM EXCEPT WHEN AND IN THE MANNER INSTRUCTED.
4. There will be 8 rounds of decision-making. A choice of price is to be made at each round.
5. Profit will be cumulative throughout the game.
6. There is a time limit of 3 minutes for bids. Within the three minutes, your team must reach
a confidential pricing decision for the month, write its price on a piece of paper, hand it to an
instructor and record it in your team records.
7.
If one team fails to hand in a bid within the time limit, their bid will remain the same as the
previous round. If a team fails to bid in the first round, their bid will be automatically set at
20.
8. In each round, teams set prices simultaneously; you do not discover the other teams bid until
after your own bid has been set. You must negotiate round by round. You cannot agree on a
settlement now for all future rounds.
QUESTIONS TO THINK ABOUT
Goals/Strategies
What is your teams goal? What is your strategy?
What strategy do you think the opposing team will adopt?
Communication
What message do you think you sent to the other team, when for example you bid 20?
What message did you think you get when you receive a bid of 20?
Group Decision Making
Do you believe that all members of your team agree on every choice?
If they do not, how will you accommodate dissent?
What rule or guidelines would you recommend for facilitating wise and efficient group decision
making?
Trust
What role does trust play in this negotiation?
If it is absent, can you do as well as if it is present?
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Spring 2011
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)
1
Prisoners Dilemma
A striking example of how individual
rationality and group rationality may
diverge.
Peace has her victories no less renowned than war

- In a letter from John Milton to Lord General Cromwell
Prisoners Dilemma:
The Drosophila of the social sciences
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.

4
The Prisoners Dilemma

The PD is an important class of nonstrictly 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-ParetoOptimal)
5
Prisoners Dilemma Problem Statement

Two suspects:
A
B
Two Alternatives:
Confess
=> C
Dont Confess => DC
Prisoners Dilemma Payoff Table

B
C
C
(8, 8)
DC
(10, 1/2)
DC
(1/2, 10)
(1,1)
Some observations:
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.
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)
(1/2, 10)
(8,8)
(1,1)
(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.
9
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.)
10
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.
11

Removes the static nature of the problem.
Allows players to:
Develop reputations
Study competitors behavior
12
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?
13
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.
14
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
15
Axelrods Genetic Algorithm (1985)

Simulation of evolution
Computer tournament
Round Robin (14 entries)
2nd round (62 entries)
WHAT HAPPENED?
TIT FOR TAT

DOMINATED!
Dont rock the boat!

Be provocable!
Forget & forgive!
Accept a rut!
C follows CCC
D follows CCD
C after DCC
D after DDD
16
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Jessie Jumpshot
Creating Value with Contingent
Contracts
BATNAS and Reservation

Prices
Jessie must get a TOTAL DEAL in
expected monetary value at or in excess of
alternative deal worth $2.1 M
Salary
Merchandising
Bonus
Sharks must pay in expected value no more

than $3.0 M .
2
Jessie Gets $2.5M Salary

Jessies net gain 0.95 x $400K = $380K
Sharks net gain = $500K
Issues
Jessies Salary S in 106 or M dollars
Bonus to Jessie B in 106 or M dollars
Jessies fraction of Merchandising Profits
(in 106 dollars) if the Sharks win the title:
Either a fixed fraction X or.
4
Contingent Contract Variables

Y,Z
Jessie and the Sharks can agree that:

The Sharks will pay Jessie a fraction Y of
merchandising profits if they win the title
If they do not, Jesse gets a fraction Z
merchandising profits)
Bonus
Bonus can be treated in a similar fashion:
Jessie gets B+ if they win the championship,
B- if they do not with B+ > B- .
Constraints
The Sharks will pay at most $10 M in bonus:
0 B+ 10.0
The fractions Y and Z may be different but

both lie between 0 and 1.0:
0 Y, Z 1.0
7
Jessies View of Bonus =>B+

0.6
Win
Title
$B
0.4
Dont
Win
$0
= B and B- = 0
Expected Value of this contract is:

(0.6 $B) + (0.4 $0) = 0.6 $B
8
Sharks View of Bonus

0.1
Win
Title
Pay Jessie $ B
0.9
Dont
Win
Pay Jessie $0
Expected Cost of this contract is:

(0.1 $B) + (0.4 $0) = 0.1 $B
Exploiting Differences in
Probabilities
Each added BONUS dollar that the Sharks pay Jessie
is worth 60 cents in expected value to Jessie at an
expected cost of 10 cents to the Sharks
Differences in probabilities leverage is 6 to 1!

Compare this to salarys leverage of 0.95 to 1
Big opportunity to create value for both Jessie

and the Sharks
10
Bonus
In principle, the Sharks could pay a
maximum bonus to Jessie if they win the
title:
at an expected cost to the Sharks of $1 M
For expected revenue to Jessie of $ 6 M
Under what circumstances might the Sharks

do this?
11
Jessies View of Merchandising Profits

0.6
Win
Title
0.4
Dont
Win
$10
$5
Contingent
Receive $10 Y
Receive $5 Z
Jessies Expected Value of this contract is:

(0.6 $10 Y) + (0.4 $5 Z)= ($6 Y) + ($2 Z)
IF Y = Z = X, the expected value is = $8.0 X
12
Sharks View of Merchandising Profits

0.1
Win
Title
$12
0.9
Dont
Win
$2
Contingent
Pay $12 Y
Pay $2 Z
The Sharks Expected Cost of this contract is:

(0.1 $12 Y) + (0.9 $2 Z)
= ($1.2 Y) + ($1.8 Z)
IF Y = Z = X, the expected value is $3.0 X
13
Tradeoff Structure
Jessie must get
0.60B + 6.0Y +2.0Z +0.95S 2.1
Sharks will pay
0.10B + 1.2Y + 1.8Z + S 3.0
14
Best to Jessie
Maximize
Subject to:
0.60B + 6.0Y +2.0Z +0.95S

B 10.0
0 Y, Z 1.0
And cost to Sharks is exactly $3.0 M:

0.10B + 1.2Y + 1.8Z + S = 3.0
15
Best for Sharks

Minimize
0.10B + 1.2Y + 1.8Z + S
Subject to:
B 10.0
0 Y, Z 1.0
and Expected Revenue to Jessie is exactly $2.1M :
0.60B + 6.0Y + 2.0Z + 0.95S = 2.1

16
No Salary!
Efficient Frontier with No Salary Paid
to Jessie
17
DEALING OFF THE TOP!

Start with a the best deal possible for the
Sharks
Look first for the issue where Jessie gets the
most value in return for the Sharks incurring
the least cost
Allocate as much as possible to Jessie while
respecting constraints
18
Ratios
Bonus: Jessie gets $6 for each $1 paid by
the Sharks
Merchandising: if the Sharks win the title,
Jessie gets $6 for each $1.2 paid by the
Sharks
Merchandising: if the Sharks dont win the
title Jessie gets $2 for each $1.8 paid by the
Sharks
Salary: Jessie gets $0.95 for each $1 the
Sharks pay in salary
19
Overall Best for Sharks

Exploit 6 to 1 leverage on Bonus first:
Jessie gets $3.5 M in Bonus for Expected
Revenue of 0.60 $3.5M = $2.1M
Jessies Net Gain = $2.1M -$2.1M=$0
Sharks Expected Cost 0.10 $ 3.5 M = $350K
Sharks Net Gain = $3.0M -$350K = $2.65 M
The agent gets nothing!
20
12
Net Gains--No Salary
Jessies Net Gain
10
8
6
4
2
$2.5 Salary Only
0
0
1
2
Sharks Net Gain
(0,2.65)
21
Dealing Off the Top

Exploit 6 to 1 leverage on Bonus
Give Jessie the max bonus subject to constraints
Jessie gets $10 in Bonus for Expected Revenue of

0.60 $10M = $6
Jessies Net Gain = $6 -$2.1=$3.9
Sharks Expected Cost is 0.10 $10 = $1
Sharks Net Gain = $3 -$1 = $2.00
Net Gains--No Salary + Bonus
12
Jessies Net Gain
10
8
6
(3.9 , 2.0)
4
2
(0, 2.65)
1
2
Sharks Net Gain
23
Dealing Off the Top

Exploit 6 to 1.2 leverage on Merchandising
Profits if They Win the Title:
Give Jessie the max subject to constraints
Set Y= 1.0. Jessie gets 0.60 $10 = $6
Jessies Net Gain = $6 + $6 -$2.1=$9.9
Sharks Expected Cost is 0.10 $12 = $1.2

Sharks Net Gain = $3 - $1 - $1.2 = $0.80
Net Gains: No Salary+Bonus+MPY

12
(10.79,0)
(9.9 , 0.8)
Jessies Net Gain
10
8
6
(3.9 , 2.0)
4
2
(0, 2.65)
1
2
Sharks Net Gain
25
Dealing Off the Top

Exploit 2 to 1.8 leverage on Merchandising
Profits if They Dont win the Title:
Give Jessie the max subject to constraints

Set Z= 0.444. Jessie gets Expected Revenue increment
0.444 0.40 x $5M = $0.888
Jessies Expected Revenue =$6+$6+$0.888 =$12.888
Jessies Net Gain = $12.888 -$2.1=$10.79

Sharks MP Cost is 0.444 x 0.9 $2 = $0.80
Sharks Net Gain = $3 - $1 - $1.2 - $0.80 = $0
Net Gains-No Salary+Bonus +MPYZ

12
(10.79,0)
(9.9 , 0.8)
Jessies Net Gain
10
8
6
(3.9 , 2.0)
4
2
(0, 2.65)
Sharks Net Gain
27
Jessie Get $1M Salary

Agent gets $50K
28
Sharks Best if $1M Salary

Min Expected Revenue to Jessie is $2.1 :
Agent now takes 5% or $ 50K
Sharks must give her $1.15 more to ensure
Jessie net gain of $0
The Sharks minimize expected cost by

choosing B = $1.15/0.60 = $1.92
Expected Cost to Sharks:
$1 + (0.10 $1.92) = $1.192
Sharks Net Gain = $1.808
29
Dealing Off the Top

Increase Bonus from $1.92M to $10M:
Jessies net gain increases by 0.60 x 8.08M =
$4.85M to $4.85M
Sharks net gain decreases by 0.10 x $8.08M
=$808K to $1M
Increase Merchandising Share Y:

Max that Sharks will pay is 0.10 x $12M x Y =
$1M or Y = 0.833
Reduces Sharks net gain to $0.
Yields Jessie 0.60 x 0.833 x $10 = $4.998M
Jessies net gain is $9.848
30
12
Net Gains $1M Salary+ Bonus + MP if Win
10
0.0 , 9.848
Jessie Net Gain
8
6
1.00, 4.85
4
2
0
0
1.848 , 0
2
Sharks Net Gain
31
Best for Sharks

Minimize
0.10B + 1.2Y + 1.8Z + S
Subject to:
B 10.0
0 Y, Z 1.0
and Expected Revenue to Jessie is exactly $2.1M :
0.60B + 6.0Y + 2.0Z + 0.95S = 2.1

32
Jessie Gets $2M in Salary

Agent gets $100K
33
Sharks Best if $2M Salary

Min Expected Revenue to Jessie is $2.1 :
Agent takes 5% or $100K Jessie gets $1.9
Sharks must give her $0.200 more to ensure
Jessie net gain of $0
The Sharks minimize expected cost by

choosing B = $0.20/0.60 = $0.333
Expected Cost to Sharks:
$2 Salary +(0.10 $0.333) = $2.033
Sharks Net Gain = $ 0.967
34
Dealing Off the Top

Increase Bonus from $0.333 until Sharks
reach $0 net gain:
Sharks net gain is reduced to $0 with bonus of
B = $10.
Jessies total revenue is $2 - $0.100+ (0.6 x $10)
= $7.9
Jessies net gain increases from $0 to
$7.9 - $2.1 = $5.8
Sharks net gain is now
$3 - $2 - $1 = $0
35
Net Gains--Salary $2M+ Bonus
12
Jessie's Net Gain
10
(5.80 , 0)
$2.5 M Salary Only

0.50 , 0.38
(0 , 0.967)
2
Sharks' Net Gain
36
Jessie Gets $2.5M Salary

Jessies net gain 0.95 x $400K = $380K
Sharks net gain = $500K
Large salary restricts flexibility
Best to Jessie is to give her a bonus of
$0.5/.1=$5 at cost of $0.50
Creates 0.6 x $5 = $3 in value for Jessie
37
12
Net Gains--Salary $2M Plus Bonus
Jessie's Net Gain
10
(5.680 , 0)
(0 , 0.967)
2
Sharks' Net Gain
38
Net Gains Indexed by Salary
Jessie's Net Gain
12
10
No Salary
$1M Salary
6
$2M Salary
4
$25M Salary Only

0
Sharks' Net Gain
39
* Principal-Agent issue: The agent and Jessie are

not perfectly aligned. The agent will push for as
large a salary deal as possible because she only
collects on salary. This is the reason that most
principal-agent agreements in the sports arena say
"Whenever derived and from whatever source".
* The agent can use Jessie as the "final authority" in

wheeling and dealing
* Synergies: The relative leverage of Bonus is
greater than that of any other issue. This drives the
deal to bonus in place of salary and squeezes out
the agent.
40
Net Gains Indexed by Salary
12
Jessie's Net Gain
10
$1M Salary
No Salary
$2M Salary
2
$2.5M Salary Only
0
0
Sharks' Net Gain

Student Data
41
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Jessie Jumpshot
Instructions
JESSIE JUMPSHOT
Jessie and her agent will meet prior to
negotiating with the Sharks GM to plan strategy
Jessies agent negotiates directly with the
Sharks GM and reports back to her
Jessie negotiates indirectly with the Sharks

GM through her agent.
Jessie can accept what the agent negotiates or
instruct the agent to go back to the bargaining
table
2
Important!
Jessie and her agent MUST JOINTLY
AGREE on any settlement
Jessie cannot unilaterally reach agreement
with the Sharks GM
All parties are Expected Value Maximizers

The expected value of a lottery or gamble is a
certainty equivalent for that gamble
3
Reservation Points
The Sharks GM:
You have an absolute maximum dollar amount that
you will NOT exceed in your negotiations with Jessie
This includes payments from all sources
Jessie Jumpshot:
You have an absolute minimum dollar amount that
the Sharks must exceed in order to accept an offer
from them
Add up payments or revenue from all sources
4
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Assignment #8
READ:
Six Habits of Merely Effective Negotiators by J. Sebenius, Harvard Business School Publishing
Corporation.
PREPARE:
The Alphexo Corporation and Betonn Corporation have an opportunity to create a profitable IT-industry
joint venture. Formation and terms of the deal are now on the table. Technical people from both firms
conceptualized the - gate, a specialized component marketable to telecom, network and internet
architecture firms. Alphexo currently produced an -gate and Betonn currently produces a -gate.
You will play the role of the lead negotiator for either Alphexo or Betonn. Prior to negotiation you will
receive confidential information that outlines acceptable terms for your side.
This negotiation takes place in class. You have 1 1/2 hours to negotiate the deal. Immediately on
concluding the negotiation, submit your results on the web.
1. What are the similarities and differences between this negotiation and Nelson Contracting?
PRIOR TO CLASS: Respond before class to the Preparation Survey for your role as either Alphexo or
as Betonn. EACH team member must respond to get credit for the survey.
Confidential information for WineMaster.com will be handed out in class. Three WineMaster partners
comprise the WineMaster negotiating team. The HomeBase team is comprised of HomeBase
executives.
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Assignment #9
The three founders of WineMaster.com are in the thick of negotiations with a senior management team
from HomeBase.com for sale of the company. The issues on the table are:
The number of shares that the sellers owners will get from the acquirer
The vesting scheme for the shares
Whether or not the sellers get a seat on HomeBase.coms board
Who owns the lawsuit pending against WineMaster.comstill to be determined
You will be assigned either a role as a founder of WineMaster.com or as a member of HomeBase.coms

negotiating team. The two teams of three each will try to negotiate a deal that benefits both sides; i.e.
creates joint gains for both teams over and above each teams BATNA.
Confidential information for WineMaster.com is identical for all three founders. The founders can, of
course, share all WineMaster.com confidential information and decide collectively how to negotiate.
Similarly, confidential information for HomeBase.com is identical for all members of the
HomeBase.com team and the HomeBase.com team may share it and prepare together. However,
Winemaster negotiators may not share written confidential information with HomeBase negotiators.
As you, WineMaster.com, prepare for this next round of negotiations, you recognize that it is critical that
you sort out precisely what your BATNA (Best Alternative to No Agreement with HomeBase.com) is.
The HomeBase.com team faces the same issue.
Members of the WineMaster.com will share equally in joint gains generated by a successful negotiation.
Members of the HomeBase.com team will share equally in joint gains generated by a successful
negotiation.
Roles will be assigned and confidential information handed out in the class prior to this negotiation. The
negotiation will unfold in class.
PRIOR TO CLASS: Respond before class to the Preparation Survey for your role in the
Winemaster.com vs. Homebase.com negotiation. EACH member of Homebases negotiating team and
EACH Winemaster partner must respond to get credit for the survey.
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Assignment #10
You are about to negotiate the terms of a potential $100 million investment by a venture capital firm
Aerovent Capital in a startup company Earth Escape. How well you do depends not only on the
financial terms that you negotiate but also on the quality of the relationship you develop with your
potential business partner during the course of this negotiation. Just as in The Stakes of Engagement
negotiation, this is a balanced concerns negotiation.
REREAD:
In a balanced concerns negotiation, emotions and emotional intelligence are highlighted. They take on
more importance when both relational perceptions and objective terms determine the outcome of a
negotiation than in an integrative bargaining negotiation in which outcomes depend solely on objective
outcomes. Read Leigh Thompsons Chapter 5 discussion of emotions and emotional intelligence.
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Assignment #11
READ:
Thompsons discussion of Team Negotiation (Chapter 9, pp. 230-234) and Intergroup Negotiation
(Chapter 9, pp. 235-240).
Flagship Airways is a multi-issue negotiation between two teams of three persons each. Negotiators for
Eureka are:
P. Stiles, General Manager of Commercial Engine Operations
L. Atchison, VP of Product Development
A. Delling, VP of Finance.
Negotiators for Flagship are:
S. Gordon, VP of Engineering
L. Ross, VP of Maintenance
M. Langton, VP of Finance.
Read General Information.
PREPARE:
In addition to studying Confidential Information for your role in the negotiation between teams, you
must also keep in mind that you will meet with members of your team prior to the negotiation between
teams in order to establish a Flagship position at the negotiating table.
PRIOR TO CLASS: Respond before class to the Preparation Survey for your role in the Eureka vs.
Flagship negotiation. EACH member of each team Gordon, Ross and Langton for Flagship and Stiles,
Atchison and Delling for Eureka must respond to get credit for the survey.
DO:
Each team will meet for 15-20 minutes prior to the Eureka-Flagship negotiation. In this meeting you will
share concerns, data and objectives. In particular, you want to ensure that everyone on your team
understands what data is available, where and from whom.
The negotiation will last for no more than 1.5 hours.
1. To: S. Gordon and P. Stiles. How do you plan to lead in the negotiation?
2. Is caucusing useful? Effective? What effects on the other side does caucusing have?
3. Reflect on long term vs. short term relations. How do you achieve good short term results
without jeopardizing long term relationships?
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Assignment #12
READ and PREPARE:
Welsh Water (A): General Information and Confidential Instructions for [your role] as preparation
for this four party negotiation among:
Michael Harrington, Lead Negotiator for Welsh Water, (B) Case
Chris Smith, Lead Negotiator for NALGO, (C) case
Sam Johnson, Lead Negotiator for SWAB, (D) case
and
Pat Cooper, Lead Negotiator for NUPE, (E) case.
General information follows these assignment instructions in the reader.
You have 1 1/2 hours maximum to reach agreement. If no agreement is reached at the end of this time,
then each party will receive the payoff associated with a strike by two or more unions. You will be
briefed in class how to proceed with this negotiation.
Submit your results on the web immediately after concluding negotiations.
PRIOR TO CLASS: Respond before class to the Preparation Survey for your role in the Welsh Water
negotiation. EACH person in each rolePat Cooper for NUPE, Sam Johnson for SWAB, Chris Smith
for NALGO and Michael Harrington for Welsh Water, must respond to get credit for the survey.
1.
What coalitions or sub-coalitions might form in the course of this negotiation? Are they real or
just apparent?
2.
Harrington and the unions can employ sequencing tactics. That is, who should talk to whom and
in what order? How might you employ sequencing tactics to enhance your negotiating outcome?
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1. Email address:
2. First name:
3. Last name:
4. MIT ID
MIT ID
5. 1a. For the 1998 season, the median annual salary of a Boston Red Sox player was $1,000,000. What
was the median salary of a Red Sox player for the 2008 season?
Assess a 0.25 FRACTILE for the median salary of a Red Sox player for the 2008 season. Entry Format
= 1000000 for $1,000,000
Red Sox 0.25: $
6. 1b. For the 1998 season, the median annual salary of a Boston Red Sox player was $1,000,000. What
was the median salary of a Red Sox player for the 2008 season?
Assess a 0.75 FRACTILE for the median salary of a Red Sox player for the 2008 season. Entry Format
= 1000000 for $1,000,000
Red Sox 0.75: $
7. 2a. The market price per thousand cubic feet (MCF) of natural gas in the US on June 13, 2008 was
$12.97. The price per MCF has fallen substantially. Assess probabilities for the US price per MCF as of
October 19, 2010.
Assess a 0.25 FRACTILE of US price per MCF as of October 19, 2010. Entry Format= 12.97 for $12.97
MCF 0.25: $
8. 2b. The market price per thousand cubic feet (MCF) of natural gas in the US on June 13, 2008 was
$12.97. The price per MCF has fallen substantially. Assess probabilities for the US price per MCF on
October 19, 2010.
Assess a 0.75 FRACTILE for the OCtober 19, 2010 price per MCF. Entry Format= 12.97 for $12.97
MCF 0.75: $
9. 3a. The IMF has studied the behavior of US government debt as a function of various economic growth
scenarios. One such scenario is "Slow growth" or roughly 2% growth per year. Assess the IMP
projection of percent increase in US national debt over the next five years for the "slow growth"
scenario.
Assess a 0.25 FRACTILE for percent growth in US debt. Entry Format= 10 for 10%.
Increase in Federal Deficit 0.25:
10. 3b. The IMF has studied the behavior of US Government debt as a function of various economic
growth scenarios. One such scenario is "Slow growth", about 2% per year. Assess the IMF's projection
of percent increase in US national debt over the next five years for the "slow growth scenario".
Assess a 0.75 FRACTILE for the percent increase in US national debt. Entry Format= 10 for 10%.
Increase in Federal Deficit 0.75:
11. 4a. What is the probability that an earthquake of Richter scale magnitude 6.7 or larger will strike Los
Angeles within the next 30 years?
Richter 6 Mercalli Intensity VIII
Everyone runs outdoors. Moderate to major damage. Minor damage to specially designed buildings.
Chimneys and walls collapse.
Richter 7 Mercalli Intensity IX
All buildings suffer major damage. Ground cracks, pipes break, foundations shift.
Richter 7 Mercalli Intensity X
Major damage. Structures destroyed. Ground is badly cracked. Landslides occur.
Assess a 0.25 fractile of the probability that an earthquake of Richter scale magnitude of 6.7 or larger
will strike Los Angeles within the next 30 years. Entry Format = 25 for 25%
Richter 0.25:
12. 4b. What is the probability that an earthquake of Richter scale magnitude 6.7 or larger will strike Los
Angeles within the next 30 years?
Assess a 0.75 fractile of the probability that an earthquake of Richter scale magnitude of 6.7 or larger
will strike Los Angeles within the next 30 years. Entry Format = 25 for 25%
Richter 0.75:
13. 5a. INTRADE Prediction Markets has a web site where you can bet modest amounts of money on a
wide variety of future events--political, economic, sports,....It serves as a "market maker" for betting
odds on future events.
Assess a 0.25 fractile of the INTRADE probability announced on Wednesday October 20, 2010 that the
Democratic Party candidate will win the US Presidency in 2012.
Entry Format: Enter 0.50 for .50 probability
Democratic Parity candidate Probability 0.25:
14. 5b.INTRADE Prediction Markets has a web site where you can bet modest amounts of money on a
Assess a 0.75 fractile of the INTRADE probability announced on Wednesday October 20, 2010 that the
Democratic Party candidate for President will win in 2012.
Entry Format: 0.50 for 0.50 probability
Democratic Party Candidate Probability 0.75:
15. 6a. How many countries are members of the United Nations?
Assess a 0.75 fractile of the number U.N. member countries. Entry Format: 75
UN Countries 0.75:
16. 6b. How many countries are members of the United Nations?
Assess a 0.25 fractile of the number U.N. member countries. Entry Format: 75
UN Countries 0.25:
17. 7a. How many foreign (non-US citizens) students attended MIT during the 2007 academic year?
Assess a 0.75 fractile of the number of non-US citizen students at MIT during the 2007 academic year.
Entry Format: 1000 = 1,000
Non US Citizen 0.75:
18. 7b. How many foreign (non-US citizens) students attended MIT during the 2007 academic year.
Assess a 0.25 fractile of the number of non-US citizen students at MIT during the 2007 academic year.
Entry Format: 1000 = 1,000
Non US Citizen 0.25:
19. 8a. On October 10, 2008, the number of shared traded on the NYSE reached an all time high.
Assess a 0.75 fractile for the number of shares (in billions) traded on October 10, 2008.
Entry format: 1.2 for 1.2 billion
Number of Shares Traded:
20. 8b. On October 10, 2008, the number of shared traded on the NYSE reached an all time high.
Assess a 0.25 fractile for the number of shares traded (in billions) on October 10, 2008.
Entry format: 1.2 for 1.2 billion
Number of Shares
21. 9a. Assess a 0.25 fractile for the current world populatin in billions. Please express your answer in
billions.
Entry format: 10.0 for 10.0 billion people
World Pop 0.25:
billion
22. 9b. Assess a 0.75 fractile for the current world population in billions. Please express your answer in
billions.
Entry format: 10.0 for 10.0 billion people
World Pop 0.75
23. 10a. Assess a 0.25 fractile for the number of Olumpic size swimming pools all the gold ever mined on
Earth would fill.
Entry format: 5 for 5 pools (Answer with an integer number, no decimals).
Number of Swimming Pools 0.25
24. 10b. Assess the number of Olympic size swimming pools that all of the gold ever mined on earth would
fill.
Entry format: 5 for 5 pools (Answer with an integer number, no decimals).
Number of Swimming Pools 0.75:
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BASE SURVEY
1. Your email address:
2. First name:
3. Last name:
4. MIT ID
5. Which party are you?

Buyer
Seller
6. Name of your negotiating counterpart:
7. What is your TARGET PRICE at the outset? Entry Format: 1000 for $1000.
Target Price $
8. What is your WALKAWAY PRICE (BATNA)? Entry Format: 1000 for $1,000.
BATNA $
9. Did you want to make the first offer?
Yes
No
10. Who made the first offer?

Buyer
Seller
11. What was the first offer? Entry Format: 1000 for $1,000
First Offer $
12. What was the immediate counteroffer? Entry Format: 1000 for $1,000
Immediate Counteroffer $
13. Did you reach agreement?
Yes
No
14. A ROUND is defined to be an offer plus a counter-offer. How many rounds did you and your partner
negotiate?
Number of Rounds
15. If you reached agreement what is the SETTLEMENT PRICE? Entry Format: 1000 for $1,000
Settlement Price $
16. How well do you think you did RELATIVE TO CLASSMATES WHO PLAYED THE SAME ROLE?
0 to 25th Percentile
26th to 50th Percentile
51st to 75th Percentile
17.
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Subjective Evaluation Survey

Please answer the following set of questions for each negotiation counterpart. Comment boxes are
available for each question to provide additional feedback.
1. Your first name
2. Your last name
3. Your MIT ID
4. Negotiation counterpart name
5. Did your counterpart treat you fairly?

Not at all
Only marginally
Marginally
To a large degree
Perfectly
6. Did you counterpart(s) consider your interests when proposing solutions to reach an agreement?
Not at all
Only marginally
Marginally
To a large degree
Perfectly
7. How would you rank your counterpart in terms of "tough" vs. "soft"?
Extremely tough
Marginally tough
Neither tough nor soft
Marginally soft
Extremely soft
8. What kind of "overall" impression did your counterpart(s) make on you?

Extremely negative
Negative
Neither positive nor negative
Positive
Extremely positive
9. Did this negotiation engender trust in your counterpart(s)?

Not at all
Only marginally
Moderately
To a large degree
Perfectly
10. Did this negotiation enhance the possibility of a future relationship with your counterpart(s)?
Not at all
Only marginally
Moderately
To a large degree
Perfectly
11. Would you want to have this person as your business partner?
Definitely not
Possibly
Yes
12. If you were considering whether or not to join a firm, and you found out that this person worked there,
would that make you more or less likely to join?
Less Likely to join
Makes no difference
More Likely to join
13. If your friend asked your advice about whether to engage in a business transaction with this person,
would you recommend doing so?
I would strongly recommend against it
I would recommend against it
I would state that I am indifferent
I would endorse it
I would strongly endorse it
14. Provide a short description of your counterpart's negotiating style.
15. If you were asked by your counterpart, what advice about how to improve her/his negotiating style
would you give?
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BASE SURVEY
2. First name:
3. Last name:
4. MIT ID
MIT ID
6. What is your role?

Easterly: Salt Harbor Owner
Brim's Manager
7. Do you want to make the first offer?

Definitely yes
Probably yes
Don't care
Probably no
Definitely no
8. What is your WALKAWAY PRICE (BATNA)? the information in the case, what is the absolute most you
will pay for the land? That is, if Easterly were to insist on one dollar less than that amount, you would
reluctantly abandon negotiations and pursue other alternatives. Entry Format 100000 for $100,000
Walkaway Price $
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BASE SURVEY
2. First name:
3. Last name:
4. MIT ID
MIT ID
6. What is your role?

Easterly: Salt Harbor Owner
Brim's Manager
7. Do you want to make the first offer?

Definitely yes
Probably yes
Don't care
Probably no
Definitely no
8. What is your WALKAWAY PRICE (BATNA)? Given the information in the case, what is the absolute
most you will pay for the land? That is, if Brims were to insist on one dollar more than that amount, you
would reluctantly abandon negotiations and pursue your legal challenge in court. Entry Format 100000
for $100,000
Walkaway Price $
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1. Your first name
2. Your last name
3. Your MIT ID

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft

Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
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BASE SURVEY
2. First name:
3. Last name:
4. MIT ID
MIT ID
5. Team number (Top right corner of Confidential Information)

Team Number
7. What was your role?

Salt Harbor Owner
Brim's Manager
8. What is your TARGET PRICE at the outset? Entry Format example 100000 for $100,000.
Target Price $
9. What is your WALKAWAY PRICE (BATNA)? Entry Format 100000 for $100,000.
Walkaway Price $
10. Did you want to make the first offer?
Yes
No
11. What was the first offer? Entry Format: 100000 for $100,000
First Offer $
12. By Whom?
Salt Harbor Owner
Brim's Manager
13. What was the immediate counteroffer? Entry Format: 100000 for $100,000
Immediate Counteroffer $

Yes
No
15. A ROUND is defined to be an offer plus a counter-offer. How many rounds did you and your partner
negotiate?
Number of Rounds
16. If you reached agreement what is the SETTLEMENT PRICE? Entry Format: 100000 for $100,000
Settlement Price $
0 to 25th Percentile (worst quartile)
76th to 100th Percentile (best quartile)
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Alpert-Raiffa Experiment #2 Spring 2010

1. Email address:
2. First name:
3. Last name:
4. MIT ID
MIT ID
5. 1a. What is the areas of the United States including Alaska in millions of square miles?
Assess a 0.25 FRACTILE of US Area in Millions of Square Miles. Entry Format = 2 for 2 Million Square
Miles
US Area 0.25:
Millions of Square Miles
6. 1b. What is the area of the United States including Alaska in Millions of Square Miles?
Assess a 0.75 FRACTILE of US area in Millions of Square Miles. Entry Format = 10 for 10
US Area 0.75:
Millions of Square Miles
7. 2a. What percentage of 5th graders in LA are reading at grade level according to a recent District of LA
Education report card?
Assess a 0.25 FRACTILE of this percentage. Entry Format = 10 for 10%
Reading Level 0.25:
8. 2b. What percentage of 5th graders in LA are reading at grade level according to a recent District of LA
Education report card?
Assess a 0.75 FRACTILE of this percentage. Entry Format = 10 for 10%
Reading Level 0.75:
9. 3a. INTRADE Prediction Markets has a web site where you can bet modest amounts of money on a
Assess a 0.25 fractile of the INTRADE probability (as of Friday) that Democrats will retain a majority in
the US Senate after next Tuesday's election.
Democratic Senate Majority 0.25:
10. 3b. INTRADE Prediction Markets has a web site where you can bet modest amounts of money on a
Assess a 0.75 fractile of the INTRADE probability (as of Friday) that Democrats will retain a majority in
the US Senate after next Tuesday's election.
Democratic Senate Majority 0.75:
11. 4a. According to a recent WSJ study average starting pay of engineering major college graduates in
their first full time jobs out of college is currently about $56,000. What is the average starting pay of
English majors in their first full time jobs out of college?
Assess a 0.25 fractile for English major average starting salaries.
Entry Format: Enter 20,000 for $20,000
English Major Starting Salary $
12. 4b. According to a recent WSJ study average starting pay of engineering major college graduates in
their first full time jobs out of college is currently about $56,000. What is the average starting pay of
English majors in their first full time jobs out of college?
Assess a 0.75 fractile for English major starting salaries.
Entry Format: Enter 20,000 for $20,000
English Major Starting Salary $
13. 5a. What is the circumference of the Earth (in miles)?

Assess a 0.25 fractile of the circumference of the Earth.
Entry Format: Enter 1000 for 1,000 miles
Earth's Circumference 0.25:
14. 5b. What is the circumference of the Earth (in miles)?

Assess a 0.75 fractile of the circumference of the Earth.
Entry Format: Enter 1000 for 1,000 miles
Earth's Circumference 0.75:
15. 6a. What is the distance from Jupiter to the sun (in millions of miles)?
Assess a 0.75 fractile of the distance from Jupiter to the sun.
Entry Format: 75.00 = 75 million miles
Jupiter 0.75:
16. 6b. What is the distance from Jupiter to the sun (in millions of miles)?
Assess a 0.25 fractile of the distance from Jupiter to the sun.
Entry Format: 75.00 = 75 million miles
Jupiter 0.25:
17. 7a. What percent of the US population currently resides in cities and suburbs?
Assess a 0.75 fractile of this percentage.
Entry Format: 10 = 10%
Petroleum 0.75:
18. 7b. What percent of the US population currently resides in cities and suburbs?
Assess a 0.25 fractile of this percentage.
Entry Format: 10 = 10%
Petroleum 0.25:
19. 8a. According to the January 1, 2009 Oil and Gas Journal report, what is the number of proved oil
reserves in North America (Canada & US) in billions of barrels?
Assess a 0.75 fractile for the number of billions of barrels of proved oil reserves.
Entry format: 10 for 10 billion barrels
Oil Reserves 0.75:
20. 8b. According to the January 1, 2009 Oil and Gas Journal report, what is the number of proved oil
reserves in North America (Canada & US) in billions of barrels?
Assess a 0.25 fractile for the number of billions of barrels of proved oil reserves.
Entry format: 10 for 10 billion barrels
Oil Reserves 0.25:
21. 9a. There is an emerging concensus among US government and non-government experts on the total
number of barrels of oil released into the ocean by the damaged Macondo well in the Gulf of Mexico
before it was plugged.
Assess a 0.25 fractile for the number of barrels of oil released
Entry format: 1,000,000 for one million barrels
Barrels of Oil Released 0.25:
22. 9b. There is an emerging concensus of US government an non-government experts on the total
number of barrels of oil released in the ocean by the damaged Macondo well in the Gulf of Mexico
before it was successfully plugged.
Assess a 0.75 fractile for the total number of barrels of oil released.
Entry format: 1,000,000 for one million barrels
Oil Released 0.75
23. 10a. The most expensive office-building deal in US history took place recently. How big was this deal?
Assess a 0.25 fractile for the US' biggest office-building deal in billions of dollars.
Entry format: 1.0 for One Billion dollars
Office Deal $ in Billions 0.25
24. 10b. The most expensive office-building deal in US history took place recently. How big was this deal?
Assess a 0.75 fractile for the US' biggest office-building deal in billions of dollars.
Entry format: 1.0 for One Billion dollars
Office Deal $ In Billions 0.75:
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BASE SURVEY
1. Email address:
2. First name:
3. Last name:
4. MIT ID:
5. Team number:
6. Team Role:
Alba

Batia

7. Enter your teamates' names:
8. Enter names of Counterpart team members with whom you negotiated:
9. Your price for round 1. Entry Format: 10 for $10

Your 1
10. Your counterpart's price for round 1. Entry Format 10 for $10
Counterpart 1
11. Your price for round 2.

Your 2

12. Your counterpart's price for Round 2:

Counterpart 2

13. Your price for round 3:

Your 3


Counterpart 3

15. Your price for Round 4:

Your 4


Counterpart 4


Your 5


Counterpart 5


Your 6


Counterpart 6


Your 7


Counterpart 7


Your 8

Counterpart 8
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BASE SURVEY
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
6. What role will you play?

Nelson
Amstore
7. If you are Nelson Contracting: Josh White

Construct two proposals that you would be indifferent to if the other party (Amstore: Charles Logic)
accepted either one. Payoffs can be equal or +/- one point.
If you are Amstore: Charles Logic
Construct two proposals that you would be indifferent to if the other party (Nelson: Josh White) accepted
either one. Payoffs can be equal or +/- one point.
8. For Proposal #1, enter the contract price:
$10.0
$10.5
$11.0
$11.5
$12.0
9. For Proposal #1 enter a Design Type:
Basic
Enhanced
10. For Proposal #1 Enter a Targeted Completion Time:
20
21
22
23
24
25
26
11. For Proposal #1, who will do the Installation?
Amstore
Nelson
12. Proposal #1: Enter the total of all valuation points that you generated on the four issues (Price, Design,
Targeted Completion Time, Installation):
(Entry format: 20)
13. For Proposal #2, enter the contract price:
$10.0
$11.5
$11.0
$11.5
$12.0
14. For Proposal #2 enter a Design Type:
Basic
Enhanced
15. For Proposal #2 Enter a Targeted Completion Time:
20
21
22
23
24
25
26
16. For Proposal #2, who will do the Installation?
Amstore
Nelson
17. Proposal #2: Enter the total of all valuation points that you generated on the four issues (Price, Design,
Targeted Completion Time, Installation):
(Entry format: 20)
18. What would be the first question you would ask your counterparty?
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2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
6. Name(s) of your negotiation counterparty:
7. What role did you play?

Nelson
Amstore

Yes
No

9. If you reached agreement, enter the contract price that you agreed upon:
$10.0
$10.5
$11.0
$11.5
$12.0
No agreement
10. If you reached agreement, enter the number of valuation points that your agreed upon Price yielded:
(Entry example: 20)
11. If you reached agreement, which Design Type did you agree to?
Basic
Enhanced
No agreement
12. If you reached agreement, how many valuation points did this Design Type yield to you?
(Entry example: 20)
13. If you reached agreement, Targeted Completion Time is how many months after Start?
20
21
22
23
24
25
26
No agreement
14. If you reached agreement, how many valuation points did this Targeted Completion Time yield for you?
(Entry example: 20)
15. If you reached agreement, who will do the Installation?
Amstore
Nelson
No agreement
16. If you reached agreement, how many valuation points did this Installation decision yield for you?
(Entry example: 20)
17. If you reached agreement, enter the total of all valuation points that you generated on the four issues
(Price, Design, Targeted Completion Time, Installation):
(Entry format: 20)
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1. Your first name
2. Your last name
3. Your MIT ID

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft

Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
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BASE SURVEY
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
6. What role will you play?

Jessie Jumpshot
Jumpshot's Agent
Boston Sharks

7. What is your BATNA? Please answer in millions.
BATNA: $
million
8. Write an equation for the expected value of the Jessie's championship-based Bonus ($B). Hint: Use a
simple decision tree to calculate the expected value of Jessie's bonus. Use the variable "$B" in your
equation.
9. Write an equation for the expected value of the merchandising profits ($M). Hint: Use a simple decision
tree to calculate the expected value of the merchandising profits based on the probability that the
Sharks win the championship. Use the variable "$M" in your equation.
10. Write an equation for the value of the total deal to YOU. Please remember to include +/- salary ($S) +/bonus ($B) + merchandising profits ($M) +/- less any other costs, including commissions to the agent
($A).
11. Develop 2 proposals that you are indifferent to i.e. the expected value of both deals are equal. For both
proposals, the expected value should be greater than your BATNA.
Proposal #1: +/- Salary +/- Bonus + Merchandising Profits +/- Agent Commission
Proposal #2: +/- Salary +/- Bonus + Merchandising Profits +/- Agent Commission

List the values for S, B, M, A for both proposals and calculate the expected value of each proposal.

12. What would be the first question you would ask each of your counterparties?
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BASE SURVEY
2. First name:
3. Last name:
4. MIT ID
MIT ID
5. Team number (Top right corner of Confidential Information)
Team Number
6. Names of your negotiating counterparts:
7. What was your role?

Jessie Jumpshot
Agent for Jessie Jumpshot
Boston Sharks

8. How was the final deal negotiated? Sometimes, players decide to negotiate directly with their team
(exclude their agent). Other times, agents are given full autonomy and discretion to develop a deal for
their client player. In other cases, agents are required to get their clients final approval before signing a
deal.
What was your team's overall negotiating strategy?
Approval by Jessie required before signing deal
Negotiated directly without Agent

Full Autonomy
9. What is your BATNA?

Please answer in millions. Entry Format 1.0 for $1.0 million.

BATNA $
million

10. Did your team reach agreement?

Yes

No
11. What is Jessie Jumpshot's Salary?

Entry Format in millions: 1.0 for $1.0 million
Salary $
million
12. What is Jessie Jumpshot's Bonus if the Sharks WIN the Championship?
Bonus Win $
million
13. What is Jessie Jumpshot's Bonus if the Sharks DO NOT WIN the Championship?
Bonus Lose $
million
14. What is Jessie Jumpshot's share of the merchandising profits if the Sharks WIN the championship?
Entry Format: 99 for 99%
Merchandising Profit Share Win
15. What is Jessie Jumpshot's share of the merchandising profits if the Sharks DO NOT WIN the
championship?
Entry Format: 99 for 99%
Merchandising Profit Share Lose

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1. Your first name
2. Your last name
3. Your MIT ID
Counterpart # 1
4. Negotiation counterpart name #1

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft

Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
Counterpart #2

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
Counterpart #3 (only applicable if you negotiated against 2 Boston Sharks managers)


Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
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BASE SURVEY
USE THIS SURVEY ONLY IF YOUR ROLE IS JACQUES PARKER. (If your role is Marlene, please go
back and click on the link for the Marlene survey.)
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
Construct two prenuptial proposals that you would be indifferent to based on TANGIBLE POINTS ONLY
(same points awarded). Please note that in the actual negotiation, you will also be evaluated based on your
behavior and treatment towards your partner (PROCESS POINTS).
6. For Proposal #1: Who receives the Car?
Marlene

Jacques
7. For Proposal #1: Who claimed the Apartment?

Marlene

Jacques
For Proposal #1: You must claim Jacques' artwork, otherwise no marriage is possible. Assume that you
claim your artwork. (8 points)
8. For Proposal #1: Who claimed the Portrait of Marlene?
Marlene

Jacques
9. For Proposal #1: What fraction of the joint checking account did you, Jacques, claim?
100% claimed

80% or more claimed
60% or more claimed
40% or more claimed
20% or more claimed
Less than 20% claimed

10. For Proposal #1: What percent of the $1 million inheritance did you, Jacques, claim?
100% claimed
90% or more claimed

80% or more claimed

70% or more claimed

60% or more claimed

50% or more claimed

40% of more claimed

30% or more claimed

20% or more claimed

10% or more claimed

less than 10% claimed

11. For Proposal #1: What percent of the California real estated did you, Jacques, claim?
80% or more claimed
40% or more claimed
100% claimed

60% or more claimed
20% or more claimed
12. For Proposal #1: Who claimed the Dog?

Marlene
Jacques
13. For Proposal #1: Who claimed the furniture?
Marlene
Jacques
For Proposal #1: You must claim 100% of the gallery, otherwise no marriage is possible. Assume that you
claim the gallery. (11 points)
14. For Proposal #1: *TOTAL POINTS FOR TANGIBLE ITEMS: Sum the points that you received for your
share of each of the ten tangible items in play and enter this sum below:
NOW PLEASE CONSTRUCT PROPOSAL#2

Marlene
Jacques


Marlene
Jacques

For Proposal #2: You must claim Jacques' artwork, otherwise no marriage is possible. Assume that you
claim your artwork. (8 points)
17. For Proposal #2: Who claimed the Portrait of Marlene?
Marlene
Jacques

18. For Proposal #2: What fraction of the joint checking account did you, Jacques, claim?
100% claimed
80% or more claimed

60% or more claimed

40% or more claimed

20% or more claimed


19. For Proposal #2: What percent of the $1 million inheritance did you, Jacques, claim?
100% claimed
90% or more claimed

80% or more claimed

70% or more claimed

60% or more claimed

50% or more claimed

40% of more claimed

30% or more claimed

20% or more claimed

10% or more claimed


20. For Proposal #2: What percent of the California real estated did you, Jacques, claim?
100% claimed
40% or more claimed

20% or more claimed

60% or more claimed

80% or more claimed


21. For Proposal #2: Who claimed the Dog?
Marlene
Jacques

22. For Proposal #2: Who claimed the furniture?
Marlene
Jacques

For Proposal #2: You must claim 100% of the gallery, otherwise no marriage is possible. Assume that you
claim the gallery. (11 points)
23. For Proposal #2: *TOTAL POINTS FOR TANGIBLE ITEMS: Sum the points that you received for your
24. List one potential question you might ask Marlene to determine how much she values the apartment.
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BASE SURVEY
USE THIS SURVEY ONLY IF YOUR ROLE IS MARLENE MAYBERRY. (If your role is Jacques, please go
back and click on the link for the Jacques survey.)
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
Construct two prenuptial proposals that you would be indifferent to based on TANGIBLE POINTS ONLY
Marlene

Jacques

Marlene

Jacques
8. For Proposal #1: Who claimed Jacques artwork?

Marlene

Jacques
For Proposal #1: You must receive the portrait of yourself, otherwise no marriage happens. Assume you
receive the portrait (18 points).
9. For Proposal #1: What fraction of the joint checking account did you, Marlene, claim?
100% claimed

75% or more claimed
50% or more claimed
25% or more claimed
10% or more claimed

10. For Proposal #1, What percent of the $1 million inheritance did you, Marlene, claim?
100% claimed
90% or more claimed

80% or more claimed

70% or more claimed

60% or more claimed

50% or more claimed


11. For Proposal #1, what percent of the California real estate did you, Marlene, claim?
100% claimed

50% or more claimed
25% or more claimed
10% or more claimed
12. For Proposal #1, who claimed the Dog?

Marlene
Jacques
13. For Proposal #1, Who claimed the furniture?
Marlene
Jacques
14. For Proposal #1, What percent of the Gallery did you, Marlene, claim?
100% claimed
51% or more claimed

25% or more claimed


15. For Proposal #1, *TOTAL POINTS FOR TANGIBLE ITEMS: Sum the points that you received for your
PLEASE CONSTRUCT PROPOSAL #2

Marlene
Jacques


Marlene
Jacques

18. For Proposal #2: Who claimed Jacques artwork?
Marlene
Jacques

For Proposal #2: You must receive the portrait of yourself, otherwise no marriage happens. Assume you
receive the portrait (18 points).
19. For Proposal #2: What fraction of the joint checking account did you, Marlene, claim?
100% claimed
75% or more claimed

50% or more claimed

25% or more claimed

10% or more claimed


20. For Proposal #2, What percent of the $1 million inheritance did you, Marlene, claim?
100% claimed
90% or more claimed

80% or more claimed

70% or more claimed

60% or more claimed

50% or more claimed


21. For Proposal #2, what percent of the California real estate did you, Marlene, claim?
100% claimed
50% or more claimed

25% or more claimed

10% or more claimed


22. For Proposal #2, who claimed the Dog?
Marlene
Jacques

23. For Proposal #2, Who claimed the furniture?
Marlene
Jacques

24. For Proposal #2, What percent of the Gallery did you, Marlene, claim?
100% claimed
51% or more claimed

25% or more claimed


25. For Proposal #2, *TOTAL POINTS FOR TANGIBLE ITEMS: Sum the points that you received for your
26. List one potential question you might ask Jacques to find out how much he values the dog.
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Spring 2011
BASE SURVEY
USE THIS SURVEY ONLY IF YOUR ROLE IS JACQUES PARKER. (If your role is Marlene, please go
back and click on the link for the Marlene survey.)
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
7. No marriage takes place unless (a) Marlene gets your portait of her and (b) You, Jacques, get 100%
ownership of BOTH the gallery and your artwork.
Did you and Marlene arrive at a prenuptial agreement that meets both of these requirements?
Yes
No

8. Who claimed Jacques' portrait of Marlene?
Marlene

Jacques
Neither claimed it
9. Who claimed the car?

Marlene

Jacques
Neither
10. Who claimed the apartment?

Marlene
Jacques
Neither
11. Who claimed (your) Jacques' Artwork?
100% to you, Jacques

Marlene gets a fraction of Jacques' artwork

12. What fraction of the joint checking account did you, Jacques, claim?
100% claimed
80% or more claimed
60% or more claimed
40% or more claimed
20% or more claimed
13. What percent of the $1 million inheritance did you, Jacques, claim?
100% claimed
90% or more claimed
80% or more claimed
70% or more claimed
60% or more claimed
50% or more claimed
40% of more claimed
30% or more claimed
20% or more claimed
10% or more claimed
14. What percent of the California real estated did you, Jacques, claim?
100% claimed
80% or more claimed
60% or more claimed
40% or more claimed
20% or more claimed
15. Who claimed the Dog?
Marlene
Jacques
Neither
16. Who claimed the furniture?
Marlene
Jacques
Neither
17. What percent of the Gallery did you, Jacques, claim?

100% claimed
less than 100% claimed by Jacques
18. *TOTAL POINTS FOR TANGIBLE ITEMS: Sum the points that you received for your share of each of
the ten tangible items in play and enter this sum below:
THIS SECTION IS FOR PROCESS POINTS (FOLDED PIECE OF PAPER):

19. JACQUES EVALUATION OF MARLENE:
The following five questions bear on your personal evaluation of Marlene as seen through the lense of
this negotiation. Each possible response to a question is assigned a point value. Point range from 0 to
5.
The first question is about attribute RESPECT: How much do you, Jacques, believe Marlene

RESPECTS you?

No respect whatsoever - > 0
Very little respect - > 1
Not quite enough respect - > 2

Sufficient respect - > 3
Very respectful - > 4
She deeply respects me - > 5

20. JACQUES EVALUATION OF MARLENE: Trustworthiness
How much do you, Jacques, trust Marlene?
I do not trust her at all - > 0
She is hiding a lot- > 1
I do not fully trust her - > 2
have no reason not to trust her - > 3
She is very trustworthy- > 4

I would trust her with anything- > 5
21. JACQUES EVALUATION OF MARLENE: Understanding of Others. How interested was Marlene in
understanding your needs?
She only cared about her own needs - > 0
She only seemed interested in my needs as a front- > 1
She considered my needs when convenient for herself - > 2

She was fairly interested in understanding my needs - > 3

She often attempted to understand my needs - > 4
She was greatly concerned with my needs - > 5

22. JACQUES" EVALUATION OF MARLENE: Openness to Future Negotiations.
How open would you be to future negotiations with Marlene?
I never want to negotiate with her again! - > 0

Only if it could not be avoided- > 1

I'd prefer not to negotiate with her - > 2

I don't mind negotiating with her - > 3
I enjoyed negotiating with her - > 4
I would love to negotiate with her all the time! - > 5
23. JACQUES' EVALUATION of MARLENE: General Fondness.

How fond of Marlene are you at this point?
I really hate her! - > 0

I dislike her - > 1

Indifferent - > 2
We got along well - > 3

I really enjoyed negotiating with her - > 4
She's the greatest! - > 5
24. *PROCESS OUTCOME TOTAL: Sum the process points you assigned to Marlene in questions 19

through 23 and enter the results here:

25. TOTAL PROCESS POINTS AWARDED BY JACQUES TO MARLENE: Multiply the PROCESS
OUTCOME TOTAL shown in question 24 above by the numerical factor assigned to you for this
purpose (4) and enter the result below
26. MARLENE'S EVALUATION OF JACQUES:

Use the sheet your partner gave you to fill this in with their evaluation of Jacques as seen through the
lense of this negotiation. Each possible response to a question is assigned a point value. Point range
from 0 to 5.
The first question is about the attribute RESPECT: How much does Marlene believe Jacques
RESPECTS her?

He deeply respects me - > 5
27. MARLENE'S EVALUATION OF JACQUES: Trustworthiness

How much does Marlene trust Jacques?
I do not trust him at all - > 0

He is hiding a lot - > 1

I do not fully trust him - > 2

I have no reason not to trust him - > 3
He is very trustworthy - > 4
I would trust him with anything - > 5

28. MARLENE'S EVALUATION OF JACQUES: Understanding of others
How interested was Jacques in understanding Marlene's needs?
He only cared about his own needs - > 0
He seemed interested in my needs as a front - > 1
He considered my needs when convenient for himself - > 2

He was fairly interested in understanding my needs - > 3
He often attempted to understand my needs - > 4

He was great concerned with my needs - > 5

29. MARLENE'S EVALUATION OF JACQUES: Openness to Future Negotiations.

How open would Marlene be to future negotiations with Jacques?
I never want to negotiate with him again! - > 0
Only if it could not be avoided - > 1

I'd prefer not to negotiate with him - > 2
I don't mind negotiating with him - > 3

I enjoyed negotiating with him - > 4

I would love to negotiate with him all the time - > 5

30. MARLENE'S EVALUATION OF JACQUES: General Fondness.
How fond of Jacques is Marlene at this point?
I really hate him! - > 0
I dislike him - > 1
Indifferent - > 2
we got along really well - > 3
I really enjoyed negotiating with him - > 4

He's the greatest! - > 5

31. PROCESS OUTCOME TOTAL: Sum the process points Marlene assigned to YOU in questions 26

through 30 and enter the results here::

32. TOTAL PROCESS POINTS AWARDED BY MARLENE TO JACQUES: Multiply the PROCESS
purpose (5) and enter the result below.

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Spring 2011
BASE SURVEY
USE THIS SURVEY ONLY IF YOUR ROLE IS MARLENE MAYBERRY. (If your role is Jacques, please go
back and click on the link for the Jacques survey.)
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
7. No marriage takes place unless (a) Jacques' portrait of you, Marlene, is claimed by you and (b) You,
Marlene, get AT LEAST 50% of the $1 Million inheritance. Did you and Jacques arrive at a prenuptial
agreement that meets both of these requirements?
Yes
No

8. Who claimed Jacques' portrait of Marlene?
Marlene

Jacques
Neither claimed it
9. Who claimed the car?

Marlene

Jacques
Neither
10. Who claimed the apartment?

Marlene
Jacques

Neither
11. Who claimed Jacques' Artwork?

Marlene

Jacques
Neither
12. What fraction of the joint checking account did you, Marlene, claim?
100% claimed
75% or more claimed

50% or more claimed

25% or more claimed

10% or more claimed


13. What percent of the $1 million inheritance did you, Marlene claim?
100% claimed
90% or more claimed

80% or more claimed

70% or more claimed

60% or more claimed

50% or more claimed

Less than 50% claimed -- NO MARRIAGE
14. What percent of the California real estated did you, Marlene, claim?
100% claimed
50% or more claimed

25% or more claimed

10% or more claimed


15. Who claimed the Dog?
Marlene
Jacques

Neither
16. Who claimed the furniture?

Marlene
Jacques

Neither
17. What percent of the Gallery did you, Marlene, claim?
100% claimed
51% or more claimed

25% or more Claimed


18. Enter the sum of all points received by you, Marlene, from your share of each of the ten tangible items
up for negotiation.
THIS SECTION IS FOR THE PROCESS POINTS PART OF THE NEGOTIATION (FOLDED PIECE OF
PAPER).
19. MARLENE'S EVALUATION OF JACQUES:
The following five questions bear on your personal evaluation of Jacques as seen through the lense of
this negotiation. Each possible response to a question is assigned a point value. Point range from 0 to
5.
The first question is about the attribute RESPECT: How much do you believe Jacques RESPECTS
you?

He deeply respects me - > 5
20. MARLENE'S EVALUATION OF JACQUES: Trustworthiness

How much do you, Marlene, trust Jacques?
I do not trust him at all - > 0

He is hiding a lot - > 1

I do not fully trust him - > 2

I have no reason not to trust him - > 3
He is very trustworthy - > 4
I would trust him with anything - > 5

21. MARLENE'S EVALUATION OF JACQUES: Understanding of others
How interested was Jacques in understanding your needs?
He only cared about his own needs - > 0
He seemed interested in my needs as a front - > 1
He considered my needs when convenient for himself - > 2

He was fairly interested in understanding my needs - > 3
He often attempted to understand my needs - > 4

He was great concerned with my needs - > 5

22. MARLENE'S EVALUATION OF JACQUES: Openness to Future Negotiations.
How open would you be to future negotiations with Jacques?
I never want to negotiate with him again! - > 0
Only if it could not be avoided - > 1

I'd prefer not to negotiate with him - > 2
I don't mind negotiating with him - > 3

I enjoyed negotiating with him - > 4

I would love to negotiate with him all the time - > 5

23. MARLENE'S EVALUATION OF JACQUES: General Fondness.
How fond of Jacques are you at this point?
I really hate him! - > 0
I dislike him - > 1
Indifferent - > 2
we got along really well - > 3
I really enjoyed negotiating with him - > 4

He's the greatest! - > 5

24. PROCESS OUTCOME TOTAL: Sum the process points you assigned to Jacques in questions 19

through 23 and enter the results here::

25. TOTAL PROCESS POINTS AWARDED BY MARLENE TO JACQUES: Multiply the PROCESS
purpose (5) and enter the result below.
26. JACQUES EVALUATION OF MARLENE:

Use the sheet your partner gave you to fill this in with their evaluation of Marlene as seen through the
lense of this negotiation. Each possible response to a question is assigned a point value. Point range
from 0 to 5.
The first question is about attribute RESPECT: How much does Jacques believe Marlene RESPECTS
him?

She deeply respects me - > 5

27. JACQUES EVALUATION OF MARLENE: Trustworthiness
How much does Jacques trust Marlene?
I do not trust her at all - > 0
She is hiding a lot- > 1
I do not fully trust her - > 2
have no reason not to trust her - > 3
She is very trustworthy- > 4

I would trust her with anything- > 5
28. JACQUES EVALUATION OF MARLENE: Understanding of Others. How interested was Marlene in
understanding Jacques' needs?
She only cared about her own needs - > 0
She only seemed interested in my needs as a front- > 1
She considered my needs when convenient for herself - > 2

She was fairly interested in understanding my needs - > 3

She often attempted to understand my needs - > 4
She was greatly concerned with my needs - > 5

29. JACQUES" EVALUATION OF MARLENE: Openness to Future Negotiations.
How open would Jacques be to future negotiations with Marlene?
I never want to negotiate with her again! - > 0

Only if it could not be avoided- > 1

I'd prefer not to negotiate with her - > 2

I don't mind negotiating with her - > 3
I enjoyed negotiating with her - > 4
I would love to negotiate with her all the time! - > 5
30. JACQUES' EVALUATION of MARLENE: General Fondness.

How fond of Marlene is Jacques at this point?
I really hate her! - > 0

I dislike her - > 1

Indifferent - > 2
We got along well - > 3

I really enjoyed negotiating with her - > 4
She's the greatest! - > 5
31. *PROCESS OUTCOME TOTAL: Sum the process points Jacques assigned to YOU (Marlene) in
questions 26 through 30 and enter the results here:
32. TOTAL PROCESS POINTS AWARDED BY JACQUES TO MARLENE: Multiply the PROCESS
purpose (4) and enter the result below

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Spring 2011
BASE SURVEY
This is the survey for Betonn. If your role was Alphexo, please go back to and go to the Alphexo survey.
2. Your First name:
3. Your Last name:
4. Your MIT ID:
5. Team number:
6. Name(s) of your negotiation counterpart(s):

Counterpart(s)
7. Your assigned role:
Betonn
8. Venture leadership:
Ralph

Beth
9. Value of venture leadership decision to Joint Venture:

(Entry format: enter 5.0 for $5 million)
$
million
10. Location of facilities:

Alphexo
Betonn
11. Did you negotiate a Facilities Charge?

Yes

No

12. If so, how much was this charge?
(Example Entry: enter $1,000,000 as 1.0)
$
million
13. To whom was the Facilities Charge paid?

Alphexo
Betonn (you)
14. What were Alphexo's sales restrictions:
No restrictions
6 months
12 months
18 months
24 months
15. What were your (Betonn's) sales restrictions:
No restrictions
6 months
12 months
18 months
24 months
16. Enter Joint Venture (J.V.) SALES given months of sales restrictions by you and by Alphexo from the
table in your case.
$
million
17. Total J.V. PROFITABILITY (Sales + Venture leadership gain - Facilities charge):
$
million
18. What was your share of J.V. profits?

(Enter as a FRACTION. Example: enter 0.4 if you obtained 40% of the profits.)
J.V. Share
19. What was your SHARE OF J.V. PROFITS in millions of dollars?
$
million
20. Your NET SALES given AGREED UPON SALES RESTRICTIONS:

$
million
21. Did you get the exclusive residual IP rights?
Yes
No
22. If YES, value of the EXCLUSIVE RESIDUAL IP RIGHTS to you:
$
million
23. If you are the recipient of the FACILITIES CHARGE, please re-enter the amount of the facilities charge
here (otherwise, enter 0):
$
million
24. If the J.V. facilities are located at your site (i.e., Betonn), enter the cost incurred by eliminating current
activities in the space used by the J.V. facilities. If the facilities are located at Alphexo, enter 0:
$
million
25. VALUE OF THE DEAL TO YOU BEFORE INVESTMENT COSTS (This is the sum of your answers to
19, 20 , 22 and 23 minus 24) in millions of dollars:
(Example Entry: 1.0 for $1,000,000)
Sum in $
Millions
26. What FRACTION of the total $30 million investment cost did you bear:
(Example Entry: enter .40 if you are bearing 40% of the total investment, i.e. $12 million excluding
corporate borrowing charges)
$
million
27. What is your EFFECTIVE INVESTMENT COST in millions of dollars (investment cost * corporate
borrowing charge):
$
million
28. TOTAL VALUE OF THE DEAL FOR YOU (answer to 25 - answer to 27):
$
million
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Spring 2011
Alphexo Betonn: Subjective Evaluation Survey

1. Your first name
2. Your last name
3. Your MIT ID

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft

Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
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Spring 2011
BASE SURVEY
USE THIS SURVEY ONLY IF YOUR ROLE IS HOMEBASE. (If your role is Winemaster, please go back and click on the link
for the Winemaster survey.)
2. Your first name:
3. Your last name:
4. Your MIT ID:
5. Team number:
6. Enter names of negotiating PARTNER:
7. Enter names of negotiating OPPONENTS:
8. HomeBase Acquisition Cost: (calculation: Number of Shares x $50 per share)

(Entry example: enter 1000000 for 1 million dollars)
$
9. x Vesting Discount
Immediately
Pro Rata
At end of second year
10. = Present Value of Shares

$
11. + Cost of Board Seat
Board Seat Given

No Board Seat
12. + Cost of Liability
Liability remains with Winemaster.com partners

Liability goes to Homebase.com
Other (Calculate expected value to you)
13. If you chose "Other" for the liability, please explain your calculations to us.
14. = Total Cost of Acquisition

$
15. Enter your BATNA in millions of dollars.
(Entry example: enter 1.5 for 1.5 million dollars)
$
million
16. In the space provided, describe how you calculated HomeBase.com's BATNA
17. In your judgment, how well did your negotiation counterparts prepare for this negotiation?
Well prepared
Adequately prepared
Poorly prepared
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BASE SURVEY
2. Your first name:
3. Your last name:
4. Your MIT ID:
5. What is your Role?

Homebase
Winemaster
6. What is your BATNA? (calculation: Number of Shares x $50 per share). *Hint*: Use a Decision Tree.
There are currently three counter offers with different probabilities of occurrence. There will be three
branches in your tree. Work backwards from the definitive offer (page 2 of both cases).
(Entry example: enter 1.0 for 1 million dollars)
$
7. In the space provided, describe how you calculated your BATNA
8. Is the current deal attractive to you?

Yes
No
9. If you are Homebase, what is the MAXIMUM number of shares that Homebase can offer: Assuming No
board seat, immediate vesting, and without acceptance of liability to Homebase.
If you are Winemaster, what is the MINIMUM number of shares that Winemaster can accept: Assuming
No board seat, immediate vesting, and liability to Homebase.
*Hint* Answer = BATNA/$50 per share

Answer format: 500,000 shares = 500000
shares
10. Now, if Homebase assumes liability;
If you are Homebase, how many shares will Homebase reduce its original offer price (in terms of
shares)
OR
If you are Winemaster, how many MORE shares will how will you require from Homebase (in terms of
shares)
*Hint*: Cost assuming liability / $50 per share = incremental number of shares
For present value of the cost of assuming the liability refer to page 4
Entry format: 500,000 shares = 500000

shares
11. If you are Homebase, what would be Homebase's gain if the deal shifted from immediate vesting to
2nd year vesting?
If you are Winemaster, what would be Winemaster's cost if the deal shifted from immediate vesting to
2nd year vesting?
Give you answer in terms of number of shares.
Hint: 2nd Year Vesting Discount * $50/share = New $/share
Gain for Homebase = $50/share - New $/share
Cost to Winemaster = $50/share - New $/share
Entry Format $50/share = 50

$
/share
12. If you are Homebase, what is the maximum number of shares that Homebase can offer: Assuming No
board seat, 2 year vesting, and without acceptance of liability to Homebase.
If you are Winemaster, what is the MINIMUM number of shares that Winemaster can accept: Assuming
No board seat, 2 year vesting, and without acceptance of liability to Homebase.
Hint: BATNA / (Share Price Calculated in Question #11) = # of shares
Entry format: 500,000 shares = 500000
shares
THE KEY TO THIS PREPARATION EXERCISE IS TO THINK OF EVERY NEGOTIATING POINT IN
TERMS OF # OF SHARES.
I.E. HOW MANY SHARES IS THIS COST WORTH?
GOOD LUCK!
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1. Your first name
2. Your last name
3. Your MIT ID

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft

Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
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Spring 2011
BASE SURVEY
USE THIS SURVEY ONLY IF YOUR ROLE IS THE FOUNDER. (If your role is the VC, please go back
and click on the link for the VC survey.)
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
Construct two deal proposals that you would be indifferent to based on SUBSTANTIVE POINTS ONLY
6. For Proposal #1: What is the VC Equity Percentage?
60% or more
56% to 59%
50% to 55%
47% to 49%
42% to 46%
36% to 41%
31% to 35%
30% or less

7. For Proposal #1: What type of stock?
Redeemable Preferred
Convertable Preferred
Common
8. For Proposal #1: What level of dividends?

8% or more
5% to 7%

3% to 4%

1% to 2%

No dividends
9. For Proposal #1: Are antidilution rights included?

No Antidilution Rights
VC Right of First Refusal
10. For Proposal #1: How many VC appointed board members?
More than 2 members

2 members

1 member
0 members

11. For Proposal #1: What is the vesting schedule for the founder's shares?
3 or less years

No vesting
4 or 5 years

6 or more years
12. For Proposal #1: What CEO replacement provision is included?

Aggressive Projections
Moderate Projections

Conservative Projections

No provision
13. For Proposal #1: Is a No Shop Provision included?

Provision included

Provision NOT included
14. For Proposal #1: TOTAL POINTS FOR SUBSTANTIVE ITEMS: Sum the points that you received for
your share of each of the eight substantive terms in play and enter this sum below:
NOW PLEASE CONSTRUCT PROPOSAL #2

60% or more

56% to 59%

50% to 55%

47% to 49%

42% to 46%

36% to 41%

31% to 35%
30% or less

Common

8% or more
5% to 7%
3% to 4%
1% to 2%
No dividends


More than 2 members

2 members

1 member
0 members

4 or 5 years

No vesting

3 or less years
6 or more years



No provision

Provision included

24. What will be the first question you will ask the VC?
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Spring 2011
BASE SURVEY
USE THIS SURVEY ONLY IF YOUR ROLE IS THE VC. (If your role is the Founder, please go back
and click on the link for the Founder survey.)
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
Construct two deal proposals that you would be indifferent to based on SUBSTANTIVE POINTS ONLY
25% or less

26% to 34%
35% to 39%
40% to 45%
46% to 49%
50%

51% to 59%
60% to 69%
70% or more

Common

No dividends
1% to 3%

4% to 7%

8% to 9%

10% or more

0 members

1 member
2 members

3 members

More than 3 members

4 years

Less than 4 years

5 years

More than 5 years

No provision



Provision included

NOW PLEASE CONSTRUCT PROPOSAL #2

25% or less
26% to 34%

35% to 39%

40% to 45%

46% to 49%

50%
51% to 59%

60% to 69%

70% or more

Common


No dividends

1% to 3%
4% to 7%
8% to 9%
10% or more


0 members

1 member
2 members

3 members

More than 3 members

Less than 4 years
More than 5 years

5 years

4 years

No provision



Provision included

24. What will be the first question you will ask the Founder?
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Spring 2011
BASE SURVEY
USE THIS SURVEY ONLY IF YOUR ROLE IS THE FOUNDER.
(If your role is the VC, please go back and click on the link for the VC survey.)
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
6. Your negotiation counterpart
7. No deal takes place unless there are 2 or fewer VC appointed board members, 4 or more years of
vesting of the founder's shares, and a CEO replacement provision with conservative or moderate
projections.
Did you and the VC arrive at a term sheet that meets both of these requirements?
Yes
No
8. What VC Equity Percentage was agreed upon?
60% or more
56% to 59%
50% to 55%
47% to 49%
42% to 46%
36% to 41%
31% to 35%
30% or less
9. What type of stock?
Convertible Preferred
Common
10. What level of dividends?
8% or more
5% to 7%
3% to 4%
1% to 2%
No dividends
11. Are antidilution rights included?

12. How many VC appointed board members?

More than 2 members
2 members
1 member
0 members
No vesting
3 or less years
6 or more years
4 or 5 years
14. What CEO replacement provision is included?


No provision
15. Is a No Shop Provision included?

Provision included

16. TOTAL POINTS FOR SUBSTANTIVE ITEMS: Sum the points that you received for your share of each
of the eight substantive terms in play and enter this sum below:
17. FOUNDER'S EVALUATION OF THE VC:

The following five questions bear on your personal evaluation of the VC as seen through the lens of
this negotiation. Each possible response to a question is assigned a point value. Points range from 0 to
10.
The first question is about attribute TRUST: How much do you, the Founder, trust the VC?
I do not trust the VC at all
I do not fully trust the VC
I have no reason to distrust the VC
I think the VC is trustworthy
The VC is very trustworthy

I completely trust the VC
18. FOUNDER'S EVALUATION OF THE VC: Respect

How much respect were you, the Founder, given for the value you bring to the deal?
No respect whatsoever
Very little respect
Sufficient respect
Considerable respect

Very much respect
Maximum respect
19. FOUNDER'S EVALUATION OF THE VC: Equitability

How equitable do you believe the deal process was?
I was fully taken advantage of
The process was not very fair
The process seemed fair at times

Most of the process seemed fair
I think the process was very fair
I am confident that the process was extremely fair
20. FOUNDER'S EVALUATION OF THE VC: Regard for Other's Interests

How much did the VC attempt to understand your interests?
The VC was concerned only with the firm's interests
The VC was only receptive to my interests as a front

The VC considered my interests when convenient
The VC was fairly interested in understanding my interests
The VC often attempted to understand my interests

The VC was greatly concerned with understanding my interests

21. FOUNDER'S EVALUATION OF THE VC: Interest in Future Collaboration
How interested are you in working with this VC in the future?
I would never deal with this VC again

I would prefer to work with a different VC
I am indifferent
I am interested in working with this VC
I would enjoy working with this VC

I am extremely interested in working with this VC

22. *PROCESS OUTCOME TOTAL: Sum the process points you assigned to the VC in questions 17
23. VC'S EVALUATION OF THE FOUNDER:

Use the sheet your partner gave you to fill this in with their evaluation of the Founder as seen through
the lens of this negotiation. Each possible response to a question is assigned a point value. Points
range from 0 to 10.
The first question is about attribute TRUST: How much does the VC trust you, the Founder?
The VC does not trust the Founder at all

The VC does not fully trust the Founder

The VC has no reason to distrust the Founder
The VC thinks the Founder is trustworthy

The VC thinks the Founder is very trustworthy

The VC completely trusts the Founder
24. VC'S EVALUATION OF THE FOUNDER: Respect

How much respect did the VC feel he/she was given for the value brought to the deal?
Very little respect
Sufficient respect

Very much respect
Maximum respect
25. VC'S EVALUATION OF THE FOUNDER: Equitability

How equitable does the VC believe the deal process was?
The VC felt fully taken advantage of
The VC thought the process was not very fair
The VC thought the process seemed fair at times

The VC thought that most of the process seemed fair

The VC thought the process was very fair
The VC is confident that the process was extremely fair

26. VC'S EVALUATION OF THE FOUNDER: Regard for Other's Interests
How much did the Founder attempt to understand the VC's interests?
The Founder was concerned only with EE's interests
The Founder was only receptive to the VC's interests as a front

The Founder considered the VC's interests when convenient
The Founder was fairly interested in understanding the VC's interests
The Founder often attempted to understand the VC's interests

The Founder was greatly concerned with understanding the VC's interests

27. VC'S EVALUATION OF THE FOUNDER: Interest in Future Collaboration

How interested is the VC in working with you, the Founder, in the future?
The VC would never deal with the Founder again
The VC would prefer to work with someone else
The VC is indifferent
The VC is interested in working with the Founder
The VC would enjoy working with the Founder
The VC is extremely interested in working with the Founder
28. *PROCESS OUTCOME TOTAL: Sum the process points the VC assigned to you, the Founder, in
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USE THIS SURVEY ONLY IF YOUR ROLE IS THE VC.
(If your role is the Founder, please go back and click on the link for the Founder survey.)
2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
6. Your counterpart's name
7. No deal takes place unless there are 2 or fewer VC appointed board members, 4 or more years of
vesting of the founder's shares, and a CEO replacement provision with conservative or moderate
projections.
Did you and the Founder arrive at a term sheet that meets both of these requirements?
Yes
No
8. What VC Equity Percentage was agreed upon?
25% or less

26% to 34%
35% to 39%
40% to 45%
46% to 49%
50%

51% to 59%
60% to 69%
70% or more
9. What type of stock?

Common
Convertible Preferred
10. What level of dividends?

No dividends

1% to 3%
4% to 7%
8% to 9%
10% or more

11. Are antidilution rights included?

12. How many VC appointed board members?

0 members

1 member
2 members

3 members

More than 3 members

13. What is the vesting schedule for the founder's shares?
Less than 4 years
4 years

More than 5 years

5 years

14. What CEO replacement provision is included?
No provision


15. Is a No Shop Provision included?

Provision included

16. TOTAL POINTS FOR SUBSTANTIVE ITEMS: Sum the points that you received for your share of each
of the eight substantive terms in play and enter this sum below:

17. VC'S EVALUATION OF THE FOUNDER:
The following five questions bear on your personal evaluation of the Founder as seen through the lens
of this negotiation. Each possible response to a question is assigned a point value. Points range from 0
to 10.
The first question is about attribute TRUST: How much do you, the VC, trust the Founder?
I do not trust the Founder at all
I do not fully trust the Founder
I have no reason to distrust the Founder
I think the Founder is trustworthy
The Founder is very trustworthy

I completely trust the Founder
18. VC'S EVALUATION OF THE FOUNDER: Respect

How much respect were you, the VC, given for the value you bring to the deal?
Very little respect
Sufficient respect

Very much respect
Maximum respect
19. VC'S EVALUATION OF THE FOUNDER: Equitability

How equitable do you believe the deal process was?
I was fully taken advantage of
The process was not very fair
The process seemed fair at times

Most of the process seemed fair
I think the process was very fair
I am confident that the process was extremely fair
20. VC'S EVALUATION OF THE FOUNDER: Regard for Other's Interests

How much did the Founder attempt to understand your interests?
The Founder was concerned only with EE's interests
The Founder was only receptive to my interests as a front

The Founder considered my interests when convenient
The Founder was fairly interested in understanding my interests
The Founder often attempted to understand my interests

The Founder was greatly concerned with understanding my interests

21. VC'S EVALUATION OF THE FOUNDER: Interest in Future Collaboration
How interested are you in working with the Founder in the future?
I would never deal with the Founder again
I would prefer to work with someone else

I am indifferent
I am interested in working with the Founder

I would enjoy working with the Founder
I am extremely interested in working with the Founder
22. *PROCESS OUTCOME TOTAL: Sum the process points you assigned to the Founder in questions 17
23. FOUNDER'S EVALUATION OF THE VC:

Use the sheet your partner gave you to fill this in with their evaluation of the VC as seen through the
lens of this negotiation. Each possible response to a question is assigned a point value. Point range
from 0 to 10.
The first question is about attribute TRUST: How much does the Founder trust you, the VC?
The Founder does not trust the VC at all

The Founder does not fully trust the VC

The Founder has no reason to distrust the VC
The Founder thinks the VC is trustworthy

The Founder thinks the VC is very trustworthy

The Founder completely trusts the VC
24. FOUNDER'S EVALUATION OF THE VC: Respect

How much respect did the Founder feel he/she was given for the value brought to the deal?
Very little respect
Sufficient respect

Very much respect
Maximum respect
25. FOUNDER'S EVALUATION OF THE VC: Equitability

How equitable does the Founder believe the deal process was?
The Founder felt fully taken advantage of
The Founder thought the process was not very fair
The Founder thought the process seemed fair at times

The Founder thought that most of the process seemed fair

The Founder thought the process was very fair
The Founder is confident that the process was extremely fair

26. FOUNDER'S EVALUATION OF THE VC: Regard for Other's Interests
How much did the VC attempt to understand the Founder's interests?
The VC was concerned only with the firm's interests
The VC was only receptive to the Founder's interests as a front

The VC considered the Founder's interests when convenient
The VC was fairly interested in understanding the Founder's interests
The VC often attempted to understand the Founder's interests

The VC was greatly concerned with understanding the Founder's interests

27. FOUNDER'S EVALUATION OF THE VC: Interest in Future Collaboration
How interested is the Founder in working with you, the VC, in the future?
The founder would never deal with this VC again
The founder would prefer to work with a different VC
The founder is indifferent
The founder is interested in working with this VC
The founder would enjoy working with this VC
The founder is extremely interested in working with this VC
28. *PROCESS OUTCOME TOTAL: Sum the process points the Founder assigned to you, the VC, in
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2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
6. What was your assigned role?

Pat Stiles - EUREKA
Lou Atchison - EUREKA
Alex Delling - EUREKA
Sam Gordon - FLAGSHIP
Lorin Ross - FLAGSHIP
Marty Langton - FLAGSHIP
7. According to the case, what is your primary concern today? (Please keep this simple. A long answer is
not required or expected.)
8. What was the original agreement on the table? Please refer to the white 'General Information Sheet'?
Specifically,
(1) What was the original $ value of the agreement? And for how many planes?
(2) What types of engines did Eureka agree to provide?
(3) What was the value of the 100 "engine kits"?

(4) What type of parts were included in the kit?
9. List one solid question that you would ask EACH of your teammates.
List one solid question that you would ask EACH of your counterparts.
You should list FIVE questions in total.
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2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
6. Names of your negotiation counterparties (include both Flagship and Eureka counterparties):
7. What was your assigned role?

Pat Stiles - EUREKA
Lou Atchison - EUREKA
Alex Delling - EUREKA
Sam Gordon - FLAGSHIP
Lorin Ross - FLAGSHIP
Marty Langton - FLAGSHIP
8. How much will Flagship prefer to spend on the reduced purchase (original - $1 Billion)?
$850 Million

$800 Million

$750 Million

$700 Million

$650 Million

9. Which engines will Flagship purchase?

JX5 engines only

Half each of JX5 and C-323s
C-323 engines only

10. What will be the new total dollar value of the upgrade to the Firebird fleet?
$150 Million

$120 Million

$100 Million

$80 Million

11. What parts will be included in the Firebird upgrade?
4 - Full Kit
3 - Fan, Frames and Compressor
2 - Fan and LT Turbine
1 - Frames and Compressor
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2. Your last name
3. Your MIT ID
Negotiation Counterpart #1

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft

Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
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2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
7. Your assigned role:
Chris Smith
James Wiley
8. Negotiation medium:
email
instant messenger
9. Who extended the first offer?
Chris
James
10. Quantity Discounts?
-10%
no change
+10%
+20%
11. Terms of payment?
30 days
45 days
60 days
12. Promotional discounts?
none
5%
10%
15%
13. Cooperative advertising?
none
$0.25 million
$0.50 million
$0.75 million
$1.00 million
14. Shelf space?
-10%
no change
+10%
+20%
15. Lush accepted?
Yes
No
16. Compensation?
none
10%
20%
17. End-of-aisle displays? (Only if "Lush" accepted)
Not applicable (Lush not accepted)

Yes
No
18. What is your final score?
Entry example: 1500
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2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
7. What is your assigned role?

M. Harrington
C. Smith
S. Johnson
P. Cooper
8. Which counterparty do you believe you will have the most in common with and why? Please write at most 2-3
sentences.
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2. First name:
3. Last name:
4. Your MIT ID:
5. Team number:
7. What is your assigned role?

M. Harrington
C. Smith
S. Johnson
P. Cooper
8. CPI-Linked Increases:
Accepted
Rejected

9. % above or below CPI:
(Entry example: type the number 2 for 2%. Do NOT use fractions of %.)
10. Market-position protection (MPP):
Accepted
Rejected
11. MPP percentile ranking

(Entry example: enter 70 for the 70th percentile.)
12. Single-status pay scales:

Accepted
Rejected
13. Profit sharing scheme:

Accepted
Rejected
14. Reduce to 37-hour week:

Accepted
Rejected
15. Planned work time (PWT):

Accepted
Rejected
16. Job security:

Accepted
Rejected
17. Job flexibility:

Accepted
Rejected
18. Did one or more of the unions strike or get derecogonized?

Yes

No
19. Which ones? (ignore if answer to question above is "No")

NALGO
SWAB
NUPE

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1. Your first name
2. Your last name
3. Your MIT ID
Counterpart # 1

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft

Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
Counterpart #2

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
Counterpart #3

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
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2. Your First name:
3. Your Last name:
4. Your MIT ID:
5. Team number:
6. Name(s) of your negotiation counterpart(s):

Counterpart(s)

Yes
No

8. Your assigned role
Baxter - Mel Mackenzie
Baxter - Lee Lewis
Baxter - Pat Penny
Apex - Terry Taylor
Apex - Sandy Stokes
Apex - Chris Cashman
9. Overhead Rate
120%

125%

130%
135%

140%

145%

150%

10. Profit
12% base
12% base +3% incentive
12% base +1% surplus sales
12% base +2% surplus sales
15% base
15% base +/-3% incentive
18% base
11. Billable Hours Denominator
1600

1700

1800

1900

2000

12. Tom Talent
Keep Tom on the account
Remove Tom from the account
13. Capped?
Yes
No
14. Administrative Reporting
Quarterly summary
Monthly summary
Quarterly detailed
Monthly detailed
15. Payment Schedule
pro-rated monthly
60% up front
75% up front
16. Out-Clause
90 days
120 days

180 days

17. TOTAL COST / VALUE OF THE DEAL FOR YOU
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1. Your first name
2. Your last name
3. Your MIT ID
Counterpart # 1

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft

Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
Counterpart #2

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
Counterpart #3

Not at all
Only marginally
Marginally
To a large degree
Perfectly
Not at all
Only marginally
Marginally
To a large degree
Perfectly
Extremely tough
Marginally tough
Marginally soft
Extremely soft
Extremely negative
Negative
Positive
Extremely positive

Not at all
Only marginally
Moderately
To a large degree
Perfectly
Not at all
Only marginally
Moderately
To a large degree
Perfectly
Definitely not
Possibly
Yes
Less Likely to join
Makes no difference
More Likely to join
I would endorse it
would you give?
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Negotiation and Competitive

Before You Leave Class Today!

Confidential Information for

your negotiating partner

SPLIT THE PIE!

Distributive Bargaining Principles

Anchoring affects negotiation outcomes

Avoid Negotiation Sand Traps

Leaving money on the table

Settling for too little or paying too much

Walking away from the table

Settling for terms that are worse than the

How We Will Learn

Self congratulatory views: In Lake Woebegone,

Barriers =>Self Reinforcing Incompetence

Good negotiators take risks: (translation)

Good negotiators rely on intuition:

Our focus =>skill building and learning by

How can value be created and who is likely to

What are obstacles to agreement and

What levers of power does each negotiator

What is the right thing to do?

From Negotiation Analysis: An Introduction by Michael Wheeler HBS 9801-156

I. Distributive BargainingSplit the Pie!

Oil Price Negotiation Iterative Prisoners

The Rothman Family Art Collection

Calculating the Efficient Frontier

V. Mixed MotiveIntegrative Bargaining

VI Balanced Concerns Negotiations

VI. Many Party Negotiations

SCORING & GRADING

Overall Class Statistics

A Best Effort response will receive a

Subjective Valuation Survey

How Well Do You Think You

COUNTS OF ANNOUNCED VS ACTUAL

Negotiation Dance Records

Enter record using the online survey

The Fog of Negotiation

See-Saw or Tug of War outcome

Key Power Source

Other Sources of Power in

Friends, Family, Tribe

Real World DYNAMIC-> a function of market

Bargaining Zone--the region between

Buyers Bargaining Range

Bargaining Zone = Zone of Possible Agreement

The Zirconia ZT Sale

Understand the interests of your

People make estimates by starting from

Adjustments are typically insufficient

The Bureau is well calibrated for

An initial value is a psychological anchor

In Global Catastrophic Risks, eds.

Despite all dangers and temptations, it is better to

1. Greater New York Citys Metro Area is more

Announced 50-50 Interval

36% is a pseudo semi-constant!

Irrelevant numbers can serve as anchors

First Offers as Anchors

The Objective Outcome

Negotiating Sale of the Street

Reveal your reservation price?