NEG Chapter 2.(MQC) Flashcards
80-20 Negotiation rule
The rule applies to negotiation, about 80% of your effort should go towards preparation: 20% should be actual work involved in the negotiation.
Reactive devaluation
Target or aspiration point (What do I want)
3 Major problems:
- Under aspiring negotiator = sets his target or goals too low, the winner’s curse occurs when a negotiator makes an offer that is immediately accepted by the other party
- Over aspiring negotiator = is too tough, egocentric and sets the target point too high and refuses to compromise, ego-defensive behaviour triggers comp comm, disciplinary behaviour, negative perceptions and attitude polarisation
- Grass-is-greener negotiator = does not know what he or she really wants, he wants what the other party does not want to give, or does not want what the other party has to offer (reactive devaluation)
What is my alternative to reaching agreement in this situation
(BATNA(Best alternative to a negotiated agreement)):
Define a BATNA and explain it
Determines the point at which a neg is prepared to walk away from the neg table, accepting superior terms and rejecting outcomes that are worse
-BATNAs and reality: it is difficult to comm to most negotiators, it is not what a neg wishes for but it is rather determined by objective reality
-Your BATNA is not static:
it is dynamic, either improving or
failing as a result of market forces and other activities
What is the “Falling in love rule” and define it
o neg should constantly attempt to improve their BATNAs using Bazerman and Neale’s ―falling in love rule = they should try to identify 2 or more options of interest instead of only one (eg one target job, house, etc)
o it can be influenced and manipulated by the other party during the course of neg
Do not let the other party manipulate your BATNA: constantly improve your BATNA to avoid negative info and persuasive appeals, only change as a result of objective facts and evidence, if tempted to settle for less than your BATNA engage in an objective reassessment.
What is your Reservation point and what do you do with it ?
♣ Most direct influence on his or her final outcomes
♣ Failure to assess reservation points can lead to:
• May agree to an outcome that is worse than their BATNA
• 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 alternative by the following steps:
- Brainstorm your alternatives. Imagine that you want to sell your house. Your target point 2750000. What will you do in the event that you don’t get an offer of 2750000? Consider as many alternatives as possible
- Evaluate and order each alternative’s value. Order the various alternatives in terms of their relative attractiveness or value. If an alternative has an uncertain outcome such as reducing the list price, you should determine the probability that a buyer will make an offer at a price. Suppose that you reduce the list price to 2650000. Based on research, you assess the probability of an offer to be 60%. The best alternative should be selected to represent your BATNA
- Attempt to improve your BATNA. In this case, you might contact a rental company and develop your rental options or you may make some improvements that have high return on investments. Your most attractive BATNA is to have an offer in hand in your house
- Determine your reservation price based on facts. The least amount of money you would accept for your home at the present time. You assess the probability of an offer of 250000 or higher to be 95%. You think there is a 5% chance that you will not get such offer and will rent it. The probabilities always sum to exactly 100%. We have considered all possible events occurring. No alternative is left to chance. You can assess your expected probabilities of selling your house
(Setting up the negotiation/When setting up the negotiation)
What is Focal points?
Be aware of focal points Focal points (arbitrary points) = salient numbers, figures or values that appear to be valid but have no basis in fact
(Setting up the negotiation/When setting up the negotiation)
What is Sunk costs and why should you beware of them?
Beware of sunk costs
- Sunk costs = money you have invested that is, for all practical purpose, gone eg: purchasing a house at a certain price in the past (sunk cost) and that that price is now irrelevant to the negotiation the seller has with a buyer today
- Negotiators must be aware that sunk costs will influence their own behaviour and the behaviour of the counter party
Steps in developing a reservation point
STEP 1: Brainstorm Your Alternatives
Imagine that you want to sell your house. Your target point—$275,000. What will you do in the event that you do not get an offer of $275,000? Consider as many alternatives as possible.
STEP 2: Evaluate Each Alternative
Order the various alternatives in terms of their relative attractiveness, or value. If an alternative has an uncertain outcome, such as reducing the list price, you should determine the probability that a buyer will make an offer at that price. Suppose that you reduce the list price to $265,000. Based on research, you assess the probability of an offer to be 60%. The best alternative should be selected to represent your BATNA.
STEP 3: Attempt to Improve Your BATNA
In this case, you might contact a rental company and develop your rental options, or you may make some improvements that have high return on investment (e.g., new paint). Of course, your most attractive BATNA is to have an offer in hand on your house.
STEP 4: Determine Your Reservation Price
The least amount of money you would accept for your home at the present time. You assess the probability of an offer of $250,000 or higher to be 95%. You think there is a 5% chance that you will not get such offer and will rent it. The probabilities always sum to exactly 100%. We have considered all possible events occurring. No alternative is left to chance.
You can assess your expected probabilities of selling your house:
↘ Reduce the price of your home to $265,000 Psale = 60%
↘ Reduce the price of your home to $250,000 Psale = 35%
Do not confuse your target point with your reservation point:
This results in 2 undesirable outcomes:
o Negotiator who lacks a well-formed reservation point runs the risk of agreeing to a settlement that is worse than what he could do by following another course of action
o Negotiator may walk away from a potentially profitable deal
Identify the issues in the negotiation -NB
Do not focus on a single issue, other issues may remain hidden. By identifying other issues, negotiators can add value to negotiations and should take time to brainstorm how a single-issue neg may be segmented into multiple issues
Identify the alternatives for each issue Negotiators can formalise the issues and alternatives by creating a matrix in which the issues are located
along columns and alternatives located along the rows
Define Multi-issue proposals of equivalent value
o The most important aspect of identifying packages of offers is that the packages should be all if equivalent value or attractiveness to oneself
o Premature concession – gives up important
bargaining ground and moves too close to his or her BATNA
o The negotiator does not give the counterparty the impression that he or she is positional
Which three sources of risk should be considered
- Stategic Risk
- BATNA Risk
- Contractual Risk
- Strategic risk: Refers to the riskiness of the tactics that negotiators use at the bargaining table. Often choose between extremely cooperative tactics and other extreme competitive tactics. Loss-framed are reluctant to reveal information that could be used to exploit them, they prefer to manage risk by delaying outcomes
- BATNA risk: given BATNAs of equal expected value, the more risk-averse negotiator will be in a weaker bargaining position. We might expect negotiators who are in a gain-frame to be more risk averse. A negotiators BATNA acts as an important reference point from which other outcomes are evaluated.
- Contractual risk: refers to the risk associated with the willingness of the other party to honour its terms. Negotiators with negative frames are more likely to reach integrative agreements that those with positive frames
What is BATNA risk
given BATNAs of equal expected value, the more risk-averse negotiator will be in a weaker bargaining position. We might expect negotiators who are in a gain-frame to be more risk averse. A negotiators BATNA acts as an important reference point from which other outcomes are evaluated.
What is Gain frame:
negotiators are more risk-averse and more
concessionary
Contractual risk
risk associated with the willingness of the other party to honour his terms
o Negative frames (risk-seeking): are more effective if integrative neg outcomes req the negotiator to ―roll the dice, are more likely to reach integrative agreements than positive frames
o Positive frames (risk-averse): are more effective if integrative neg outcomes involve ―sure things‖
o Loss frame: negotiators create more integrative agreements and are more cooperative and more likely to settle than a those of a gain frame
What is your Reference point?
defines what a person considers to be gain or a loss thus, rather than waiting on a course of action by its impact on total wealth, people generally frame outcomes as even gains or losses relative to some arbitrary reference point
Endowment effects
- Value of object should be the same for buyer & seller
- Difference 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
- Operates only when the seller regards himself or herself to be the owner of the object
- The difference between what sellers demand and what buyers are willing to pay is a manifestation of loss-aversion
- Prevents negotiators from reaching agreements in negotiators, 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
