BUSINESS MANAGEMENT

Chapter 2: Negotiations
Contents

The Fixed-Pie Perception ...................................................................................................... 3

Mixed-Motive Decision-Making: A More Effective and Accurate Model ................................. 3

Self-assessment ................................................................................................................... 4

Targets and aspirations ..................................................................................................... 4

What is My BATNA? .......................................................................................................... 4

1. BATNAs are not wishful, they are factual. ................................................................ 4

2. Your BATNA is time sensitive................................................................................... 4

3. Do not let the other party manipulate your BATNA. .................................................. 5

4. Negotiators should be willing to accept any set of terms superior to their BATNA .... 5

What is My Reservation Point? .......................................................................................... 5

Setting Up the Negotiation ................................................................................................. 5

Risk & Uncertainty ............................................................................................................. 7

Assess Your Risk Propensity ............................................................................................. 7

Endowment Effects............................................................................................................ 8

Buyer’s Remorse & Seller’s Regret ................................................................................... 8

Negotiator Confidence ....................................................................................................... 8

Perspective Taking ............................................................................................................... 9

Situational Awareness......................................................................................................... 10

Is the negotiation one shot, long term, or repetitive?........................................................ 10

Is the negotiation a transaction or a dispute situation? .................................................... 10

Are linkage effects present? ............................................................................................ 10

Are negotiations false or sincere?.................................................................................... 11

Is it legal to negotiate?..................................................................................................... 11

Is ratification required? .................................................................................................... 11

Are there time constraints or time-related costs? ............................................................. 11

Time pressures and deadlines ..................................................................................... 11

Time related costs........................................................................................................ 12

Time Horizon ............................................................................................................... 12

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Are contracts official or unofficial? ................................................................................... 12

Where will the negotiations take place? ........................................................................... 13

Are the negotiations public or private? ............................................................................. 13

Scripted vs unscripted ..................................................................................................... 13

Single versus Multiple Offers ........................................................................................... 13

Is third-party intervention a possibility? ............................................................................ 13

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The Fixed-Pie Perception
• Most negotiators believe whatever is good for one party must be bad for the
counterparty.
• The 80/20 rule applies to negotiation; about 80% of your effort should go toward
preparation and 20% should be the actual work involved in the negotiation. Most
people clearly realize that preparation is important, yet most do not prepare in an
effective fashion.
• People with this fixed-pie perception take one of three mindsets when preparing for a
negotiation:
1. Resign themselves to capitulating to the counterparty (soft bargaining)
2. Prepare for hard bargaining with the counterparty (Hard bargaining)
3. Compromise in an attempt to reach a midpoint between opposing demands
• It is commonly assumed that concessions are necessary by one or both parties to
reach an agreement.
• The fixed-pie perception is almost always wrong and often leads to an ineffective
approach to negotiations.

Mixed-Motive Decision-Making: A More Effective and Accurate

Model
• A more accurate model of negotiation is to approach it as a mixed-motive decision-
making enterprise involving both cooperation and competition.
• Effective preparation for a negotiation encompasses three general abilities:
1. Self-assessment
2. Perspective-taking
3. Situational awareness
• There are several advantages for having a framework for preparation.
o It can save the negotiator time.
o It assures the negotiator that relevant information will be considered.
o When companies and organizations use frameworks that are consistent, this
allows colleagues to communicate clearly with one another and develop a
shared mental model.
• According to the OMoN (Organizational Model of Negotiation), organizations should
consider four things:
o How individuals interact at the negotiation table;
o How different negotiations impact one another (linkages);

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 o How companies can best organize their negotiation functions (infrastructure);
and
o How negotiation can be a competitive advantage (capability)

Self-assessment
Targets and aspirations
Identifying your ideal outcome may sound straightforward, but three major problems often
arise:

• Under aspiring negotiator (the Winner’s Curse)

o Negotiator sets his or her target or aspirations too low.
o The under aspiring negotiator opens the negotiation by requesting something
that the counterparty immediately agrees to and thus, the negotiator realizes
they were too generous.
o The winner’s curse refers to the feeling that if the other party immediately
agrees, you have offered too much!
• Over aspiring or positional negotiator
o The over aspiring negotiator or positional negotiator is too “tough”; he or she
sets the target point too high and refuses to make any concessions.
• The grass-is-greener negotiator
o The grass-is-greener negotiator does not know what he or she really wants—
only that he or she wants what the other party does not want to give—and
does not want what the other party is willing to offer.
o This type of negotiation behaviour is also known as reactive devaluation.

What is My BATNA?
• What is my Best Alternative To a Negotiated Agreement in this situation?

1. BATNAs are not wishful, they are factual.

• Negotiators are reluctant to acknowledge their actual BATNAs, and they fall prey to
wishful thinking and unrealistic optimism.

2. Your BATNA is time sensitive.

• At any point in time, your BATNA is either improving or deteriorating as a result of
market forces and environmental and situational conditions. Thus, negotiators should
constantly attempt to improve their BATNAs.
• Many negotiators are reluctant to recognize their BATNAs and confuse them with
their aspiration point.

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3. Do not let the other party manipulate your BATNA.
• The counterparty has an incentive to minimize the quality of your BATNA and thus,
will be motivated to provide negative information vis-à-vis your BATNA.
• In a negotiation, the person who stands to gain most by changing your mind should
be the least persuasive. Thus, it is important to develop a BATNA before
commencing negotiations and to stick to it during the course of negotiations

4. Negotiators should be willing to accept any set of terms superior to their BATNA
• Negotiators should be willing to accept any set of terms superior to their BATNA and
reject outcomes that are worse than their BATNA.

What is My Reservation Point?

• This is the least you could possibly settle for.
• Failure to assess reservation points can lead to two unfortunate outcomes.
o In some instances, negotiators may agree to an outcome that is worse than
their BATNA.
o A second problem is that negotiators may often reject an offer that is better
than their BATNA.
• You can determine your reservation point, or the quantification of your BATNA, with
respect to other alternatives by the following steps:
1. Brainstorm your alternatives.
2. Evaluate and order each alternative’s value.
▪ You should rank order the various alternatives identified in step 1 in
terms of their relative attractiveness, or value, to you.
3. Attempt to improve your BATNA.
▪ Your bargaining position can be strengthened substantially to the
extent that you have an attractive, viable BATNA.
4. Determine your reservation price based on facts.
▪ Once you have determined your most attractive BATNA, it is then time
to identify your reservation price—the least amount of money you
would accept for your home at the present time. Your assessment
must be based on facts.

Setting Up the Negotiation

When determining your reservation point, be aware and knowledgeable of the following:

• Be aware of focal points.

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 o Negotiators who make the mistake of not developing a reservation point
before they negotiate often focus on an arbitrary value that masquerades as a
reservation price.
o Such arbitrary points are focal points.
o Focal points, like anchors, are salient numbers, figures, or values that appear
to be valid but have no basis in fact.
• Beware of sunk costs.
o Sunk costs is money that has been invested that is, for all practical purposes,
irrecoverable.
o Economic theory asserts that only future costs and benefits should affect
decisions.
• Do not confuse your target point with your reservation point.
o Target point is something that you wish to achieve from that negotiation
o Reservation point is the last you would settle for in that negotiation.
• Identify the issues in the negotiation.
o Many negotiations appear to be about a single, salient issue—such as price
or salary. Single-issue negotiations are purely fixed sum.
o By identifying other issues, negotiators can create integrative potential.
Negotiators should take time to brainstorm how a single-issue negotiation
may be segmented into multiple issues.
o One way to do this is by adding issues.
• Identify the alternatives for each issue.
o Once the negotiator has identified the issues to be negotiated, it is a good
idea to identify several alternatives for each issue.
• Identify multi-issue proposals of equivalent value.
o By identifying multiple-issue packages, negotiators expand their options.
o The most important aspect of identifying packages of offers is that the
packages should all be of equivalent value or attractiveness to oneself.
o This requires that negotiators ask themselves some important questions
about what they value and what is attractive to them.
o Another benefit of identifying packages of offers is that the negotiator does
not give the counterparty the impression that he or she is positional (i.e., will
not budge on any issue). By identifying multiple issues and multiple
alternatives within each issue, a negotiator is more likely to achieve his or her
target.

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Risk & Uncertainty
• Most people are risk-seeking when it comes to losses, and risk-averse when it comes
to gains.
• Reference points define what people consider to be a gain or a loss.
o Thus, rather than weighing a course of action by its impact on total wealth,
people generally “frame” outcomes as either “gains” or “losses” relative to
some arbitrary reference point.

Assess Your Risk Propensity

In any negotiation, negotiators should consider the differential impact of three sources of
risk:

• Strategic risk: refers to the riskiness of the tactics that negotiators use at the
bargaining table.
o Negotiators often choose between extremely cooperative tactics (e.g.,
information sharing and brainstorming), and at the other extreme, competitive
tactics (e.g., threats and demands).
• BATNA risk: given BATNAs of equal expected value, the more risk-averse negotiator
will be in a weaker bargaining position.
o For example, consider a student who has several interviews scheduled over
the next 10 weeks, but no actual offers. The student’s BATNA is an estimate
about the likelihood of actually receiving an offer.
o Under most circumstances, we might expect negotiators with a “gain frame”
to be more risk averse (and therefore, more concessionary) than negotiators
with a “loss frame” (who might hold out).
o The negotiators who are told to “minimize their losses” adopt more risky
bargaining strategies, preferring to hold out for a better, but more risky
settlement.
o In contrast, those who are told to “maximize their gains” are more inclined to
accept the sure thing.
o In price negotiations, buyers and prevention-focused people prefer vigilant
strategies, whereas sellers and promotion-focused people prefer eager
strategies.
• Contractual risk: refers to the risk associated with the willingness of the other party to
honour its terms.

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Endowment Effects
• Differences in negotiators’ reference points may lead buyers and sellers to have
different valuations for the same object.
• Someone who possesses an object has a reference point that reflects his or her
current endowment, or private valuation, of the object.
• The difference between what sellers demand and what buyers are willing to pay is a
manifestation of loss aversion.
• The endowment effect operates only when the seller regards him or herself to be the
owner of the object. If a seller expects to sell goods for a profit and views the goods
as currency, the endowment effect does not occur.
• Endowment effects prevent negotiators from reaching agreement in negotiations;
however, by changing the sequencing proposals so that the first one is conceived as
a loss and the second as a gain, the endowment effect may be mitigated

Buyer’s Remorse & Seller’s Regret

• An important component in determining whether a person experiences regret is
counterfactual thinking, or “what might have been.”
• In negotiation, immediate acceptance of a first offer by the counterparty often means
a better outcome for the proposing negotiator, but the outcome is less satisfying.
o One of the benefits of having a first offer accepted is that it can improve
preparation. Negotiators whose first offer is accepted by the counterparty are
more likely to prepare longer for a subsequent negotiation; it also makes
negotiators reluctant to make the first offer again
• Thinking about what might have been, but did not occur, may be a reference point for
the psychological evaluation of actual outcomes.

Negotiator Confidence
• Being confident is usually considered an admirable personality trait. And, having
confidence in oneself as a negotiator is important for success. Negotiators who are
high in self-efficacy (i.e., they believe they can do well) are more successful.
• Often, negotiators’ probability judgments for certain types of events occurring are
more optimistic than is warranted.
• The overconfidence effect refers to a negotiator’s unwarranted level of confidence in
the judgment of their abilities and the likelihood of positive events. This effect also
causes people to underestimate the likelihood of negative events.
• When we find ourselves highly confident of a particular outcome, it is important to
examine why we feel this way.

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Perspective Taking
Negotiators who engage in perspective-taking (i.e., considering how the counterparty thinks
about the negotiation) are more effective than negotiators who engage in empathy (i.e.,
considering how the counterparty feels about the negotiation). A key threat to the ability of
negotiators to take the perspective of the counterparty is egocentrism, or the tendency to
focus on one’s own interests and priorities.

Once a negotiator has thought about their own BATNA, reservation point, target point, and
interests, it is time to identify information about the other negotiating parties:

• Who are the counterparties?

o The counterparty is the person with whom the focal negotiator (you) are
negotiating with.
o Parties are readily identified when they are physically present, but often the
most important parties are not present at the negotiation table. Such parties
are known as the hidden table.
o When more parties are involved in the negotiations, the situation becomes a
team or multiparty negotiation.
• Are the parties monolithic?
o Monolithic (‘of one voice’) refers to whether parties on the same side of the
table are in agreement with one another concerning their interests in the
negotiation.
o Frequently, the parties are composed of people who are on the same side but
have differing values, beliefs, and preferences.
o Lack of alignment can be detrimental to effective negotiation.
• Identify counterparties’ interests and positions.
o A negotiator should do as much research as possible to determine the
counterparty’s interests in the negotiation.
• Research the counterparties’ BATNAs.
o Although it is unlikely the counterparty will truthfully reveal his or her BATNA,
most negotiators fail to do any research on the counterparty’s BATNA.
o In an investigation of negotiations in which negotiators had either symmetric
or asymmetric BATNAs, knowledge of BATNA asymmetries (sharp
differences between the strength of parties’ alternatives to a deal), led to
suboptimal (lose–lose) outcomes.
o Knowledge of BATNA asymmetries leads the negotiator with the strong
BATNA to focus (nearly exclusively) on value-claiming (at the expense of

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 value-creation), and consequently develop faulty perceptions about the
counterparty’s interests.
o Paradoxically, negotiators who regard themselves to be more powerful may
fail to forge win–win agreements because they fail to engage in perspective-
taking.

Situational Awareness
• Situational awareness refers to knowledge about the context in which a negotiation
takes place. Negotiators need to understand the norms of the negotiation situation
and environmental factors.

Is the negotiation one shot, long term, or repetitive?

• In a one-shot negotiation, a transaction occurs, and no future ramifications accrue to
the parties. However, most negotiation situations are not one-shot situations.
• Most people negotiate in the context of social networks, and reputation information is
carried through those social networks. Repetitive negotiations are situations in which
negotiators must renegotiate terms on some regular basis (e.g., unions and their
management).
• In long-term and repetitive negotiations, negotiators must consider how their
relationship evolves and how trust is maintained over time. One of the most important
long-term relationships is the employment negotiation

Is the negotiation a transaction or a dispute situation?

• In a typical negotiation, parties come together to exchange resources, such as when
a buyer pays a seller for goods or services and an exchange takes place (money is
paid for goods or services). These situations are known as transactional negotiations.
• In other situations, negotiations take place because a claim has been made by one
party and has been rejected by the other party. These situations are known as
disputes.
• In a transaction exchange, parties simply resort to their BATNAs; in a dispute,
negotiators often go to court.

Are linkage effects present?

• Linkage effects refer to the fact that some negotiations affect other negotiations.
• Often, direct linkages occur when a multinational firm has operations in several
countries and a decision made in one country carries over to other countries.

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 • Sometimes, indirect linkage effects occur, such as when a decision made at the
negotiation table affects some interest group in a fashion that no one anticipates fully.
A key reason why mergers are often unsuccessful is that companies do not think
about linkage effects with current employees. In most merger scenarios, employees
of the purchased company are given little information about the turn of events until
well after the deal is settled.

Are negotiations false or sincere?

• In some situations, a person negotiates without any intention to reach an agreement.
This is known as false negotiation and occurs when a party gains more by stalling
negotiations until an external change takes place that improves their position. Thus,
false negotiators seek to avoid agreement, but keep the negotiation process alive.
• False negotiators use competitive tactics that encumber negotiations while
concealing their intentions by maintaining a façade of cooperation.

Is it legal to negotiate?
• Sometimes, no specific laws govern what can or cannot be negotiated; rather,
individuals rely on strong cultural norms that are highly situation specific.

Is ratification required?
• Ratification refers to whether a negotiating party must have a contract approved by
some other body or group.
• In some circumstances, negotiators may tell the other side that ratification is required
when it is not.

Are there time constraints or time-related costs?

• Virtually all negotiations have some time-related costs. Although the negotiator who
desperately needs an agreement, or for whom the passage of time is extremely
costly, is likely to be at a disadvantage, more time pressure is not necessarily bad.
• Final deadlines are distinct from time-related costs.
• Two negotiators may face radically different time-related costs, but a deadline for one
is a deadline for the other. The shortest final deadline is the only one that counts, and
if they don’t have a deal by that point, the two negotiators must exercise their
BATNAs.

Time pressures and deadlines

• A final deadline is a fixed point in time that ends the negotiations.

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 • Negotiators believe that final deadlines (i.e., time pressure) are a strategic weakness,
so they avoid revealing their deadlines fearing their “weakness” will be exploited by
the counterparty. However, because deadlines restrict the length of the negotiation
for all parties, they place all parties under pressure.
• One person’s final deadline is also the other party’s final deadline.
• The reason that negotiators so often incorrectly predict the consequences of final
deadlines in negotiation has to do with the more general psychological tendency to
focus egocentrically on the self when making comparisons or predictions. Negotiators
focus on the deadline’s effect on themselves more than its effect on their negotiating
partners. The same tendency leads people to predict they will be above average on
simple tasks and below average on difficult tasks.

Time related costs

• Setting a final deadline on negotiations can be helpful, especially if the passage of
time is particularly costly for the negotiator

Time Horizon
• Time horizon – the amount of time between the negotiation and the consequences or
realization of negotiated agreements.
• The longer the temporal distance between the act of negotiation and the
consequences of negotiated agreements, the better the agreement. The reason is
that parties are less contentious because the realization is in the distance.
• Moreover, this time benefit is particularly pronounced in the cases where negotiations
concern “burdens” as opposed to “benefits,” because time gives people opportunity
to discount the effects of burdens.

Are contracts official or unofficial?

• Many negotiation situations, such as the purchase of a house or a job offer, involve
formal, contracts that legally obligate parties to honour stated promises.
• However, in several negotiation situations of equal or greater importance,
negotiations are conducted through a handshake or other forms of informal
agreements.
• Considerable cultural variation surrounds the terms of what social symbols constitute
formal agreements.
• Awkwardness can result when one party approaches the situation from a formal
stance and the other treats it informally.

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Where will the negotiations take place?
• The performance advantage of the negotiator is partly due to the increased
confidence that comes from negotiating on your own turf.
• Not surprisingly, negotiators often find neutral ground for important negotiations.

Are the negotiations public or private?

• In many areas, the negotiation dance takes place in the public eye.
• In other negotiation situations, negotiations take place behind closed doors.
• In some negotiations, political actors make public commitments not to negotiate with
adversaries whom they label as being “beneath diplomacy,” such as terrorists. Such
public commitments are sometimes made even as they are being broken.
• When a negotiator denounces an adversary, this increases motivation to reach a
negotiated settlement if negotiations are undertaken.

Scripted vs unscripted
• In many negotiations, strong conventions and norms dictate how the process of
negotiation unfolds.
• In other negotiations, there is no formal script.
• Most negotiations involve a “narrative grammar”—syntactical forms that help
structure the negotiation process.

Single versus Multiple Offers

• In some situations, offers are bantered back and forth several times before a
mutually agreeable deal is reached. In other situations, this type of dealing is
considered unacceptable.

Is third-party intervention a possibility?

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