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Judgments and Decisions Psych 253

Negotiations

Negotiation: A process by which two or more people come to agreement on how to allocate scarce resources.
Parties are interdependent; neither has complete power to choose The process is a decision, not a contest of wills

Common Problems in Negotiation

Leaving money on the table (lose-lose negotiation) Settling for too little (winners curse) Walking away from the table (hubris) Settling for terms that are worse than your current situation (agreement bias)

Why Are People Ineffective Negotiators?

Absence of relevant and diagnostic feedback


Search for confirming information Egocentrism

Satisficing

Versus Optimizing

Self-reinforcement

Fear of change and experimentation

Myths

Good negotiators are born, not made Experience is a great teacher

Good negotiators are risk-takers


Good negotiators rely on intuition

Todays Negotiation: Synertech-Dosagen


Assign Roles Read ONLY your materials (do not look at your partners materials) You have 5 minutes to read, think, and prepare You have 15 minutes to negotiate and you can do this outside of the classroom. But come BACK in 20 minutes with the results of your negotiation on the handout.

Relevant Facts
Dosagen bought the plant 3 years ago for $15 M (but sellers was distressed)
Plant appraised 2 years ago at $19 M with 5% real estate decline since then Similar but newer plant sold for $26 M nine months ago

Key Negotiation Principles

Best Alternative To a Negotiated Agreement (BATNA)

Reservation price
Bargaining zone

Aspiration level

Key Negotiation Principles

Best Alternative To a Negotiated Agreement (BATNA)


Reservation price

Bargaining zone
Aspiration level

BATNA Tips

Know your BATNA

Do not think of your BATNA in aggregate terms

Improve your BATNA before you negotiate

Fall in love with three rule

You want your counterpart to think you have a good BATNA

Key Negotiation Principles

Best Alternative To a Negotiated Agreement (BATNA) Reservation price Bargaining zone Aspiration level

Reservation Price

Reservation Price is your bottom line

The point at which you are indifferent to whether you achieve a negotiated agreement or walk away. Beyond the reservation price, you prefer no agreement.

Reservation Price is equal to your BATNA +/- other issues that make you want to do the deal

e.g., opportunity costs, switching costs, ego, miscellaneous preferences

Define your reservation price before negotiating Learn your opponents reservation price, if possible

Should You Reveal your BATNA and Reservation Price?

Do not reveal your reservation price!!! One of the critical pieces of information in a negotiation is the other partys reservation point. If it becomes known to one party, the negotiator can push for a resolution that is only marginally acceptable to the other party. Do not state ranges Reveal your BATNA only when:

You are nearing an impasse You have a strong BATNA You want to make an agreement in the current negotiation

Key Negotiation Principles

Best Alternative To a Negotiated Agreement (BATNA)

Reservation price
Bargaining zone

Aspiration level

The Negotiation Bargaining Zone


Buyers Target Price Buyers Reservation Price (BR) (e.g., $25M)

Sellers Reservation Price (SR) (e.g., $17M)

Sellers Target

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

A Negative Bargaining Zone


Sellers Reservation Price (SR) (e.g., $25M)

Buyers Reservation Price (BR) (e.g., $17M)

If BR < SR, then there is no zone of possible agreement.

Key Negotiation Principles

Best Alternative To a Negotiated Agreement (BATNA)


Reservation price

Bargaining zone
Aspiration level

Aspiration Level
Final Price (in millions)
$23.5 $23.0 $22.5 $22.0 $21.5 $21.0 $20.5 Buyer focused on BATNA Buyer focused on aspiration level

Distributive Bargaining Tactics

First offers

Concessions
Persuasion

First Offers

Who made the first offer? How did the first offer affect the negotiation?

First Offers in Synertech-Dosagen


Final Price (in millions)
$25 $24 $23 $22 $21 $20 $19 $18 $17 Buyer made first offer Seller made first offer

There is a high correlation between the first offer and the final price Counteroffers and later concession behavior less predictive of final price

The First Offer

How high should the first offer be? As high as you can go without embarrassing yourself in front of a respected 3rd party (Fisher & Ury, 1991)

Whats embarrassing? Whats optimistic? Learn the market!

Only let the other party make the first offer when You have no information

It is inappropriate to do so (e.g., job negotiations)

Immediately re-anchor if your counterpart makes the first offer

Concessions & Persuasion

Allow yourself room to make concessions Dont go in with a first and final offer Make bi-lateral, not uni-lateral concessions Make your concessions smaller as you approach your goal Use objective rationale to support your argument Again, learn the market

Distributive Negotiation Strategies

Know your BATNA Strengthen your BATNA whenever possible Know your reservation price Do not reveal your reservation price

Research the other partys BATNA/reservation price


Define your aspiration level and focus on that Make first offers whenever possible If they make the first offer, immediately re-anchor Watch how you are making concessions Prepare objective rationale for your arguments

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