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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

Satisficing

Search for confirming information


Egocentrism

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

Improve your BATNA before you negotiate

Do not think of your BATNA in aggregate


terms

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

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

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