Fifth Edition
The Mind and Heart of the
Negotiator
Leigh L. Thompson
Kellogg School of Management
Northwestern University
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Library of Congress Cataloging-in-Publication Data
Thompson, Leigh L.
The mind and heart of the negotiator / Leigh L. Thompson. — 5th ed.
p. cm.
ISBN-13: 978-0-13-254386-6
ISBN-10: 0-13-254386-9
1. Negotiation in business. 2. Negotiation. I. Title.
HD58.6.T478 2012
658.4'052—dc22
2011014992
10 9 8 7 6 5 4 3 2 1
ISBN 10:
0-13-254386-9
ISBN 13: 978-0-13-254386-6
To the loves of my life:
Bob, Sam, Ray, and Anna
BRIEF CONTENTS
PART I
Essentials of Negotiation 1
Chapter 1
Chapter 2
Chapter 3
Chapter 4
PART II
Advanced Negotiation Skills 92
Chapter 5
Chapter 6
Chapter 7
Chapter 8
PART III
Negotiation: The Mind and The Heart 1
Preparation: What to Do Before Negotiation 12
Distributive Negotiation: Slicing the Pie 38
Win-Win Negotiation: Expanding the Pie 69
Developing a Negotiating Style 92
Establishing Trust and Building a Relationship 125
Power, Persuasion, and Ethics 153
Creativity and Problem Solving in Negotiations 179
Applications and Special Scenarios 215
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Multiple Parties, Coalitions, and Teams 215
Cross-Cultural Negotiation 252
Tacit Negotiations and Social Dilemmas 285
Negotiating Via Information Technology 312
APPENDICES
Appendix 1
Appendix 2
Appendix 3
Appendix 4
iv
Are You a Rational Person? Check Yourself 329
Nonverbal Communication and Lie Detection 351
Third-Party Intervention 361
Negotiating a Job Offer 370
CONTENTS
Preface xvii
Overview xix
Part I
Essentials of Negotiation 1
Chapter 1 NEGOTIATION: THE MIND AND THE HEART 1
Negotiation: Definition and Scope 2
Negotiation as a Core Management Competency 3
Dynamic Nature of Business 3
Interdependence 3
Economic Forces 4
Information Technology 4
Globalization 4
Most People Are Ineffective Negotiators 5
Negotiation Traps 5
Why People Are Ineffective Negotiators 6
Egocentrism 6
Confirmation Bias 6
Satisficing 7
Self-Reinforcing Incompetence 7
Debunking Negotiation Myths 8
Myth 1: Negotiations Are Fixed-Sum 8
Myth 2: You Need to Be Either Tough or Soft 8
Myth 3: Good Negotiators Are Born 8
Myth 4: Life Experience Is a Great Teacher 9
Myth 5: Good Negotiators Take Risks 9
Myth 6: Good Negotiators Rely on Intuition 9
Learning Objectives 10
The Mind and Heart 11
Chapter 2 PREPARATION: WHAT TO DO BEFORE
NEGOTIATION 12
Self-Assessment 13
What Do I Want? 14
What Is My Alternative to Reaching Agreement in This
Situation? 15
Determine Your Reservation Point 16
v
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Contents
Be Aware of Focal Points 19
Beware of Sunk Costs 19
Do Not Confuse the Target Point with Your Reservation Point 19
Identify the Issues in the Negotiation 19
Identify the Alternatives for Each Issue 20
Identify Equivalent Multi-Issue Proposals 20
Assess Your Risk Propensity 20
Endowment Effects 23
Am I Going to Regret This? 24
Violations of the Sure Thing Principle 25
Do I Have an Appropriate Level of Confidence? 26
Sizing Up the Other Party 26
Who Are the Other Parties? 27
Are the Parties Monolithic? 27
Counterparties’ Interests and Position 27
Counterparties’ BATNAs 27
Situation Assessment 28
Is the Negotiation One Shot, Long Term, or Repetitive? 28
Do the Negotiations Involve Scarce Resources, Ideologies, or
Both? 28
Is the Negotiation One of Necessity or Opportunity? 29
Is the Negotiation a Transaction or Dispute Situation? 30
Are Linkage Effects Present? 30
Is Agreement Required? 30
Is It Legal to Negotiate? 31
Is Ratification Required? 32
Are Time Constraints or Other Time-Related Costs Involved? 32
Are Contracts Official or Unofficial? 34
Where Do the Negotiations Take Place? 34
Are Negotiations Public or Private? 34
Is Third-Party Intervention a Possibility? 35
What Conventions Guide the Process of Negotiation (Such as Who
Makes the First Offer)? 35
Do Negotiations Involve More Than One Offer? 35
Do Negotiators Communicate Explicitly or Tacitly? 36
Is There a Power Differential Between Parties? 36
Is Precedent Important? 36
Conclusion 36
Contents
Chapter 3 DISTRIBUTIVE NEGOTIATION: SLICING THE PIE 38
The Bargaining Zone 39
Bargaining Surplus 41
Negotiator’s Surplus 41
Pie-Slicing Strategies 42
Strategy 1: Assess Your BATNA and Improve It 43
Strategy 2: Determine Your Reservation Point, but Do Not
Reveal It 43
Strategy 3: Research the Other Party’s BATNA and Estimate Their
Reservation Point 44
Strategy 4: Set High Aspirations (Be Realistic but Optimistic) 44
Strategy 5: Make the First Offer (If You Are Prepared) 46
Strategy 6: Immediately Reanchor if the Other Party Opens
First 47
Strategy 7: Plan Your Concessions 47
Strategy 8: Support Your Offer with Facts 49
Strategy 9: Appeal to Norms of Fairness 49
Strategy 10: Do Not Fall for the “Even Split” Ploy 50
The Most Commonly Asked Questions 50
Should I Reveal My Reservation Point? 50
Should I Lie About My Reservation Point? 50
Should I Try to Manipulate the Counterparty’s Reservation
Point? 52
Should I Make a “Final Offer” or Commit to a Position? 52
Saving Face 52
The Power of Fairness 53
Multiple Methods of Fair Division 54
Situation-Specific Rules of Fairness 54
Social Comparison 56
The Equity Principle 58
Restoring Equity 59
Procedural Justice 60
Fairness in Relationships 62
Egocentrism 62
Wise Pie-Slicing 66
Consistency 67
Simplicity 67
Effectiveness 67
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Contents
Justifiability 67
Consensus 67
Generalizability 67
Satisfaction 68
Conclusion 68
Chapter 4 WIN-WIN NEGOTIATION: EXPANDING THE PIE 69
What Is Win-Win Negotiation? 70
Telltale Signs Of Win-Win Potential 70
Does the Negotiation Contain More Than One Issue? 70
Can Other Issues Be Brought In? 71
Can Side Deals Be Made? 71
Do Parties Have Different Preferences Across Negotiation
Issues? 71
A Pyramid Model 72
Most Common Pie-Expanding Errors 73
False Conflict 73
Fixed-Pie Perception 74
Strategies That Do Not Really Work 75
Commitment to Reaching a Win-Win Deal 75
Compromise 75
Focusing on a Long-Term Relationship 75
Adopting a Cooperative Orientation 75
Taking Extra Time to Negotiate 75
Effective Pie-Expanding Strategies 76
Perspective-Taking 76
Ask Questions About Interests and Priorities 77
Provide Information About Your Interests and Priorities 79
Unbundle the Issues 81
Make Package Deals, Not Single-Issue Offers 81
Make Multiple Offers of Equivalent Value Simultaneously 82
Structure Contingency Contracts by Capitalizing on Differences 85
Presettlement Settlements (PreSS) 87
Search for Postsettlement Settlements 87
A Strategic Framework for Reaching Integrative Agreements 88
Resource Assessment 88
Assessment of Differences 89
Contents
Offers and Trade-Offs 90
Acceptance/Rejection Decision 90
Prolonging Negotiation and Renegotiation 90
Do Not Forget About Claiming 90
Conclusion 91
Part II Advanced Negotiation Skills 92
Chapter 5 DEVELOPING A NEGOTIATING STYLE 92
Motivational Orientation 94
Assessing Your Motivational Style 95
Strategic Issues Concerning Motivational Style 98
Interests, Rights, and Power Model of Disputing 102
Assessing Your Approach 104
Strategic Issues Concerning Approaches 108
Emotions and Emotional Knowledge 114
Emotions and Moods 114
Expressed Versus Felt Emotion 115
Genuine Versus Strategic Emotion 116
Negative Emotion 118
Emotional Intelligence 119
Positive Emotion 120
Emotional Intelligence and Negotiated Outcomes 121
Strategic Advice for Dealing with Emotions at the Table 122
Conclusion 124
Chapter 6 ESTABLISHING TRUST AND BUILDING A
RELATIONSHIP 125
The People Side of Win-Win 126
Trust as the Bedrock of Relationships 128
Three Types of Trust in Relationships 128
Building Trust: Rational and Deliberate Mechanisms 131
Building Trust: Psychological Strategies 134
What Leads to Mistrust? 138
Repairing Broken Trust 139
Reputation 142
Relationships in Negotiation 143
Negotiating with Friends 145
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Contents
Negotiating with Businesspeople 148
When in Business with Friends and Family 150
Conclusion 151
Chapter 7 POWER, PERSUASION, AND ETHICS 153
Your BATNA Is Your Most Important Source of Power in
Negotiation 154
Sources of Power 155
Analyzing Your Power 155
Persuasion Tactics 156
Two Routes to Persuasion 156
Central Route Persuasion Tactics 156
Peripheral Route Persuasion Tactics 160
The Effects of Power on Those Who Hold Power 168
The Effects of Power on Those with Less Power 168
Negotiation Ethics 169
Lying 169
Other Questionable Negotiation Strategies 171
Sins of Omission and Commission 172
Costs of Lying 175
Under What Conditions Do People Engage in Deception? 175
Psychological Bias and Unethical Behavior 175
Conclusion 178
Chapter 8 CREATIVITY AND PROBLEM SOLVING IN
NEGOTIATIONS 179
Creativity in Negotiation 180
Test Your Own Creativity 180
What Is Your Mental Model of Negotiation? 180
Haggling 180
Cost-Benefit Analysis 184
Game Playing 184
Partnership 185
Problem Solving 185
Creative Negotiation Agreements 185
Fractionating Problems into Solvable Parts 185
Finding Differences: Issue Alignment and
Realignment 186
Expanding the Pie 186
Contents
Bridging 187
Cost Cutting 187
Nonspecific Compensation 188
Structuring Contingencies 188
Threats to Effective Problem Solving and Creativity 191
The Inert Knowledge Problem 191
Availability Heuristic 193
Representativeness 194
Anchoring and Adjustment 195
Unwarranted Causation 195
Belief Perseverance 196
Illusory Correlation 196
Just World 197
Hindsight Bias 197
Functional Fixedness 197
Set Effect 198
Selective Attention 199
Overconfidence 199
The Limits of Short-Term Memory 200
Creative Negotiation Strategies 200
Analogical Training 200
Feedback 201
Counter-Factual Reflection 202
Incubation 202
Rational Problem-Solving Model 204
Fluency, Flexibility, and Originality 205
Brainstorming 205
Convergent Versus Divergent Thinking 206
Deductive Reasoning 207
Inductive Reasoning 207
Flow 209
Conclusion 210
Part III Applications and Special Scenarios 215
Chapter 9 MULTIPLE PARTIES, COALITIONS, AND TEAMS 215
Analyzing Multiparty Negotiations 216
Multiparty Negotiations 217
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Contents
Key Challenges of Multiparty Negotiations 217
Key Strategies for Multiparty Negotiations 224
Coalitions 226
Key Challenges of Coalitions 226
Strategies for Maximizing Coalitional Effectiveness 231
Principal-Agent Negotiations 231
Disadvantages of Agents 233
Strategies for Working Effectively with Agents 235
Constituent Relationships 236
Challenges for Constituent Relationships 237
Strategies for Improving Constituent Relationships 239
Team Negotiation 240
Challenges That Face Negotiating Teams 241
Strategies for Improving Team Negotiations 242
Intergroup Negotiation 244
Challenges of Intergroup Negotiations 244
Strategies for Optimizing Intergroup Negotiations 246
Conclusion 249
Chapter 10 CROSS-CULTURAL NEGOTIATION 252
Learning About Cultures 253
Defining Culture 253
Culture as an Iceberg 254
Cultural Values and Negotiation Norms 255
Individualism Versus Collectivism 256
Egalitarianism Versus Hierarchy 265
Direct Versus Indirect Communications 268
Key Challenges of Intercultural Negotiation 271
Expanding the Pie 271
Dividing the Pie 271
Sacred Values and Taboo Trade-Offs 272
Biased Punctuation of Conflict 274
Ethnocentrism 275
Affiliation Bias 275
Faulty Perceptions of Conciliation and Coercion 276
Naïve Realism 277
Predictors of Success in Intercultural Interactions 278
Contents
Advice for Cross-Cultural Negotiations 279
Anticipate Differences in Strategy and Tactics That May Cause
Misunderstandings 280
Analyze Cultural Differences to Identify Differences in Values That
Expand the Pie 280
Recognize That the Other Party May Not Share Your View of What
Constitutes Power 280
Avoid Attribution Errors 280
Find Out How to Show Respect in the Other Culture 281
Find Out How Time Is Perceived in the Other Culture 282
Know Your Options for Change 282
Conclusion 283
Chapter 11 TACIT NEGOTIATIONS AND SOCIAL DILEMMAS 285
Business as a Social Dilemma 287
The Prisoner’s Dilemma 287
Cooperation and Defection as Unilateral Choices 288
Rational Analysis 289
Psychological Analysis of Why Tit-for-Tat Is Effective 291
Social Dilemmas 295
The Tragedy of the Commons 297
Types of Social Dilemmas 298
How to Build Cooperation in Social Dilemmas 301
How to Encourage Cooperation in Social Dilemmas When Parties
Should Not Collude 307
Escalation of Commitment 308
Avoiding the Escalation of Commitment in Negotiations 310
Conclusion 311
Chapter 12 NEGOTIATING VIA INFORMATION TECHNOLOGY 312
Place-Time Model of Social Interaction 313
Face-to-Face Communication 314
Same Time, Different Place 316
Different Time, Same Place 317
Different Place, Different Time 317
Information Technology and Its Effects on Social Behavior 322
Trust 322
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Contents
Status and Power: The “Weak Get Strong” Effect 322
Social Networks 324
Risk Taking 324
Rapport and Social Norms 325
Paranoia 325
Strategies for Enhancing Technology-Mediated Negotiations 326
Initial Face-to-Face Experience 326
One-Day Videoconference/Teleconference 327
Schmoozing 327
Humor 328
Conclusion 328
Appendix 1 ARE YOU A RATIONAL PERSON? CHECK YOURSELF 329
Why Is It Important to Be Rational? 329
Individual Decision Making 330
Riskless Choice 330
Decision Making Under Uncertainty 332
Risky Choice 332
Summing Up: Individual Decision Making 345
Game Theoretic Rationality 345
Nash Bargaining Theory 346
Appendix 2 NONVERBAL COMMUNICATION AND LIE
DETECTION 351
What Are We Looking for in Nonverbal Communication? 351
Are Women More “Nonverbally Gifted” Than Men? 352
Dominance 353
Personal Charisma 354
Detecting Deception 355
Direct Methods 357
Indirect Methods 357
How Motivation and Temptation Affect Lying and Deception 359
Deception and Secrecy Can Create a Life of Their Own 360
Appendix 3 THIRD-PARTY INTERVENTION 361
Common Third-Party Roles 361
Mediation 361
Arbitration 362
Mediation-Arbitration 363
Arbitration-Mediation 363
Contents
Key Choice Points in Third-Party Intervention 363
Outcome Versus Process Control 363
Formal Versus Informal 364
Invited Versus Uninvited 364
Interpersonal Versus Intergroup 364
Content Versus Process Orientation 364
Facilitation, Formulation, or Manipulation 364
Disputant Preferences 365
Mediators and Gender 365
Challenges Facing Third Parties 365
Meeting Disputants’ Expectations 365
Increasing the Likelihood That Parties Reach an Agreement
if a Positive Bargaining Zone Exists 366
Promoting a Pareto-Efficient Outcome 366
Promoting Outcomes That Are Perceived as Fair in the Eyes of
Disputants 366
Improving the Relationship Between Parties 366
Empowering Parties in the Negotiation Process 366
Debiasing Negotiators 367
Maintaining Neutrality 368
Strategies for Enhancing Effectiveness of Third-Party Intervention 369
Accept Your Share of Responsibility 369
Test Your Own Position 369
Role-Play a Third Party in Your Own Dispute 369
Training in Win-Win Negotiation 369
Appendix 4 NEGOTIATING A JOB OFFER
370
Preparation 370
Step 1: Figure Out What You Really Want 370
Step 2: Do Your Homework 370
Step 3: Determine Your BATNA and Your Aspiration
Point 370
Step 4: Research the Employer’s BATNA 372
Step 5: Determine the Issue Mix 372
Step 6: Prepare Several Scenarios 372
Step 7: Consider Getting a “Coach” 372
In Vivo: During the Negotiation Itself 373
Think About the Best Way to Position and Present Your Opening
Offer 373
Assume the Offer Is Negotiable 373
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Contents
Immediately Reanchor the Interviewer by Reviewing Your Needs
and Your Rationale 374
Reveal Neither Your BATNA nor Your Reservation Point 375
Rehearse and Practice 375
Imagine You Are Negotiating on Behalf of Someone Else (Not Just
Yourself) 375
Comparables and Benchmarks 376
Post-Offer: You Have the Offer, Now What? 376
Do Not Immediately Agree to the Offer 376
Get the Offer in Writing 376
Be Enthusiastic and Gracious 377
Assess the Interviewer’s Power to Negotiate with You 377
State Exactly What Needs to Be Done for You to Agree 377
Do Not Negotiate If You Are Not or Could Not Be Interested 377
Exploding Offers 377
Do Not Try to Create a Bidding War 378
Know When to Stop Pushing 378
Use a Rational Strategy for Choosing Among Job Offers 378
Name Index
379
Subject Index 397
Note: Every effort has been made to provide accurate and current Internet information in this book.
However, the Internet and information posted on it are constantly changing, so it is inevitable that
some of the Internet addresses listed in this textbook will change.
PREFACE
This book is dedicated to negotiators who want to improve their ability to negotiate—whether
in multimillion-dollar business deals or personal interactions. It is possible for most people to
dramatically improve their ability to negotiate. You can improve your monetary returns and feel
better about yourself and the people with whom you deal. New to this edition is an integration of
theory, scientific research, and practical examples. Moreover, the practical examples—selected
from hundreds of real-world negotiations involving people from several organizations and many
different cultures—illustrate effective, as well as ineffective, negotiation skills.
Here is what you can expect when you read this book:
• Illustrative case studies. I include multiple examples and actual cases of negotiating in
managerial and executive contexts. Each chapter opens with a case study or actual business
situation (from business, government, world affairs, community, and personal life). New to
this edition, are more than 122 updated examples from the business world.
• Real-life negotiations. Furthermore, many of the points in the chapters are supplemented
with illustrations and examples drawn from actual negotiations, both contemporary and
historical. I do not use these examples to prove a theory; rather, I use them to illustrate how
many of the concepts in the book are borne out in real-world situations. New to this edition
are updated opening chapter vignettes derived from current business, political, and global
events that illustrate real world negotiations.
• Skills-based approach. In this edition I provide practical take-away points for the manager
and the executive. A good example is Chapter 4 on integrative negotiation. A series of handson principles that have been proven to increase the value of negotiated deals is provided.
• Self-insight. I include several ways that negotiators can test their own intuition and approach.
For example, Chapter 5 gives negotiators an opportunity to assess their “instinctive” bargaining
style and provides suggestions for how to further develop their bargaining repertoire. Moreover,
Chapter 10 provides a deep look at cultural differences in negotiation so that the negotiator can
better understand his or her own cultural style and that of others.
• Advanced bargaining skills. The second and third sections of the book deal with complex
yet commonly occurring negotiating situations, such as negotiating with agents, mediation
and arbitration, negotiating via e-mail and conference calls, negotiating with competitor
companies, and, of course, negotiating cross-culturally. These sections have been revised
in this edition.
• Scientific Research. New to this edition are the groundbreaking results of more than 100
new scientific articles on negotiation.
I benefit greatly from the advice, comments, and critiques given to me by my students and
colleagues, and I hope their advice keeps coming so that I am able to improve upon the book even
further. The research and ideas in this book come from an invaluable set of scholars in the fields
of social psychology, organizational behavior, sociology, negotiation, and cognitive psychology.
My research, thinking, and writing have been inspired in important ways by the following people: Wendi Adair, Cameron Anderson, Evan Apfelbaum, Linda Babcock, Chris Bauman, Max
Bazerman, Kristin Behfar, Terry Boles, Jeanne Brett, Susan Brodt, Karen Cates, Hoon-Seok Choi,
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Preface
Taya Cohen, Susan Crotty, Jeanne Egmon, Hal Ersner-Hershfield, Gary Fine, Craig Fox, Adam
Galinsky, Wendi Gardner, Dedre Gentner, Robert Gibbons, Kevin Gibson, James Gillespie, Rich
Gonzalez, Deborah Gruenfeld, Reid Hastie, Andy Hoffman, Elizabeth Howard, Peter Kim, Shirli
Kopelman, Rod Kramer, Laura Kray, Terri Kurtzburg, Geoffrey Leonardelli, John Levine, Allan
Lind, George Loewenstein, Jeff Loewenstein, Brian Lucas, Deepak Malhotra, Beta Mannix, Kathleen
McGinn, Vicki Medvec, Tanya Menon, Dave Messick, Terry Mitchell, Don Moore, Michael Morris,
Keith Murnighan, Janice Nadler, Maggie Neale, Kathy Phillips, Robin Pinkley, Erika Richardson,
Ashleigh Rosette, Nancy Rothbard, Edward Smith, Marwan Sinaceur, Harris Sondak, Roderick
Swaab, Tom Tyler, Leaf Van Boven, Kimberly Wade-Benzoni, Laurie Weingart, and Judith White.
Throughout the text of The Mind and Heart of the Negotiator, I use the pronoun “we” because so
much of my thinking has been influenced and shaped by this set of eminent scholars.
The revision of this book would not have been possible without the dedication, organization, and editorial skills of Joel Erickson, Larissa Tripp, and Neerali Shah, who created the
layout, organized hundreds of drafts, mastered the figures, and researched many case studies
for this book.
In this book, I talk about the “power of the situation” and how strongly the environment
shapes our behavior. The Kellogg School of Management is one of the most supportive, dynamic
environments I have ever had the pleasure to be a part of. In particular, Dean Sally Blount strongly
supports research, teaching, and intellectual leadership as well as pedagogical leadership. I am
particularly indebted to my wonderful visionary colleague, Jeanne Brett, who created the Dispute
Resolution Research Center (DRRC) at Kellogg in 1986, and to the Hewlett Foundation for their
generous support of the DRRC.
This book is very much a team effort of the people I have mentioned here, whose talents
are diverse, broad, and extraordinarily impressive. I am deeply indebted to my colleagues and my
students, and I feel grateful that they have touched my life and this book.
OVERVIEW
This book is divided into three major sections. The first section deals with the essentials of
negotiation—the key principles and groundwork for effective negotiation. Chapter 2 leads the
manager through effective preparation strategies for negotiation. Chapter 3 discusses distributive negotiation skills, or how to optimally allocate resources in ways that are favorable to one’s
self—a process called “slicing the pie.” Chapter 4 is the integral chapter of the book; it focuses
on “win-win” negotiation or, more formally, integrative negotiation. This creative part of negotiation involves expanding the pie of resources in ways that provide more gains to go around.
The second section of the book deals with advanced and expert negotiation skills. Chapter 5
focuses on assessing and developing your negotiation style. This chapter invites readers to honestly
appraise their own negotiation style in terms of three dimensions: motivation, approach, and emotion.
The negotiator can accurately assess his or her own style and its limitations and learn to assess the
styles adopted by other negotiators. Chapter 6 focuses on establishing trust and building relationships.
This chapter examines business and personal relationships and how trust is developed, broken, and
repaired. Chapter 7 discusses power, persuasion, and influence tactics. This chapter looks at the topic
of persuasion and influence as it occurs across the bargaining table and also deals with the important issue of ethics in negotiation. In Chapter 8, the focus is on problem solving and creativity. This
chapter provides strategies for learning how to think out of the box and provides techniques for using
creativity and imagination in negotiation.
The third section deals with special scenarios in negotiation. Chapter 9 examines the
complexities of negotiating with multiple parties, such as conflicting incentives, coalitions,
voting rules, and how to leverage one’s own bargaining position when negotiating with multiple
parties. Chapter 10 focuses on cross-cultural negotiation, which addresses the key cultural
values and negotiation norms across a variety of nationalities, along with some advice for
cross-cultural negotiations. Chapter 11 deals with dilemmas, or situations in which negotiators
make choices in a mixed-motive context, where cooperation involves building trust with the
other party and competition involves an attempt to increase one’s own share of resources.
This chapter examines the nature of social dilemmas and how to negotiate successfully within
various types of dilemmas. Chapter 12 focuses on information technology and its impact on
negotiation and uses a place-time model of social interaction to examine the challenges and
opportunities of negotiation as it occurs in this technological age.
Four appendices provide a variety of additional material: Appendix 1 invites readers to
examine the rationality of their negotiation beliefs and preferences; Appendix 2 provides a short
course on lie detection and nonverbal communication; Appendix 3 reviews the essentials of
third-party intervention; and Appendix 4 provides tips and a checklist for negotiating a job offer.
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Overview
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ABOUT THE AUTHOR
Leigh L. Thompson joined the Kellogg School of Management in 1995. She is the J. Jay
Gerber Distinguished Professor of Dispute Resolution and Organizations. She directs the
Leading High Impact Teams executive program and the Kellogg Team and Group Research
Center and co-directs the Negotiation Strategies for Managers program. An active scholar and
researcher, she has published over 100 research articles and chapters and has authored 10 books,
including: Making the Team (4th edition), Creativity in Organizations, Shared Knowledge in
Organizations, Negotiation: Theory and Research, The Social Psychology of Organizational
Behavior: Essential Reading, Organizational Behavior Today, The Truth about Negotiation, and
Conflict in Organizational Teams. Thompson has worked with private and public organizations
in the United States, Latin America, Canada, Europe, and the Middle East. Her teaching style
combines experiential learning with theory-driven best practices. For more information about
Leigh Thompson’s teaching and research, please visit leighthompson.com.
Part I: Essentials of Negotiation
C H A P T E R
1
Negotiation: The Mind
and the Heart
The deal was dead. Most people could not imagine turning down a multibillion-dollar
acquisition offer. However, that is exactly what Chicago-based Groupon Inc. did in
late 2010. Google had offered Groupon $6 billion. Venture capitalist, Paul Kedrosky,
bemoaned, “I would have taken that $6 billion in a heartbeat. I would have been
knocking over random strangers to accept it.” Google’s interest in Groupon was to tap
into Groupon’s massive human network of sales employees and their relationships with
small businesses. What was Groupon’s best alternative to accepting the Google offer?
Well, Groupon had many potential suitors, including Yahoo!, who previously offered
$3 billion, and Groupon confidently believed that it still had lots of room to grow
(at the time, Groupon did roughly $2 billion in sales and kept half, making $1 billion
in revenue). However, the rejection of Google’s offer came at the risk of Groupon’s
venture bankers. Accel Partners, Battery Ventures, Digital Sky Technologies, and New
Enterprise Associations had invested a combined $169.8 million in Groupon. What
was Google’s best alternative to a negotiated agreement with Groupon? Either try to
buy something or make it themselves. In this sense, by turning down Google’s offer,
Groupon set the stage for the creation of another competitor in their marketplace.
According to some business analysts, Groupon created a monster: “I hope they realize
that they could have had $6 billion or decide to do battle with a Goliath of the internet
world…” Others speculated that Groupon could defend its turf and further lodge its
brand in consumer minds and even add another zero to their Miracle-Gro valuation.1
1
Groupon turns down Google: What just happened here? (2010, December 4). Seeking Alpha. Seekingalpha.com; Stone, B.,
& MacMillan, D. (2010, December 12–19). Groupon’s $6 Billion snub. Bloomberg Businessweek, p. 6–7.
1
2
Part I • Essentials of Negotiation
N
egotiations like the one between Google and Groupon often involve a complex mix of
strategy, signaling, and of course, the personalities of the negotiators. Whereas most of us
are not negotiating giant corporate deals, one thing that business scholars and businesspeople are in complete agreement on is that everyone negotiates nearly every day. Getting to Yes
begins by stating, “Like it or not, you are a negotiator…. Everyone negotiates something every
day.”2 Similarly, Lax and Sebenius, in The Manager as Negotiator, state that “Negotiating is a way
of life for managers . . .when managers deal with their superiors, boards of directors, even legislators.”3 G. Richard Shell, who wrote Bargaining for Advantage, asserts, “All of us negotiate many
times a day.”4 Herb Cohen, author of You Can Negotiate Anything, dramatically suggests that
“your world is a giant negotiation table.” One business article on negotiation warns, “However
much you think negotiation is part of your life, you’re underestimating.”5
Negotiation is your key communication and influence tool inside and outside the company.
Anytime you cannot achieve your objectives (whether an acquisition or a dinner date) without
the cooperation of others, you are negotiating. We provide dramatic (and disturbing) evidence in
this chapter that most people do not live up to their negotiating potential. The good news is that
you can do something about it.
The sole purpose of this book is to improve your ability to negotiate. We do this through
an integration of scientific studies of negotiation and real business cases. And, in case you are
wondering, it is not all common sense. Science drives the best practices covered in this book. We
focus on business negotiations, and understanding business negotiations helps people to be more
effective negotiators in their personal lives.6
In this book, we focus on three major negotiation skills: (a) creating value, (b) claiming
value, and (c) building trust. By the end of this book, you will have a mind-set or mental model7
that will allow you to know what to do and say in virtually every negotiation situation. You
can prepare effectively for negotiations and enjoy the peace of mind that comes from having a
game plan. Things may not always go according to plan, but your mental model will allow you
to perform effectively and most important, to learn from your experiences. Indeed, people who
view negotiation as a challenge are more successful in reaching high-quality deals than people
who view negotiation as threatening.8
NEGOTIATION: DEFINITION AND SCOPE
Negotiation is an interpersonal decision-making process necessary whenever we cannot achieve
our objectives single-handedly. Negotiations include one-on-one business meetings, but also
multiparty, multicompany, and multinational relationships. Whether simple or complex,
negotiations boil down to people, communication, and influence. Even the most complex of
business deals can be analyzed as a system of one-on-one relationships.
2
Fisher, R., & Ury, W. (1981). Getting to yes (p. xviii). Boston: Houghton Mifflin.
D. A., & Sebenius, J. K. (1986). The manager as negotiator (p. 6). New York: Free Press.
Shell, G. R. (1999). Bargaining for advantage: Negotiation strategies for reasonable people (p. 76). New York: Viking.
5
Walker, R. (2003, August). Take it or leave it: The only guide to negotiating you will ever need. Inc., 25(8) 75–82.
6
Gentner, D., Loewenstein, J., & Thompson, L. (2003). Learning and transfer: A general role for analogical encoding.
Journal of Educational Psychology, 95(2), 393–408.
7
Van Boven, L., & Thompson, L. (2003). A look into the mind of the negotiator: Mental models in negotiation. Group
Processes & Intergroup Relations, 6(4), 387–404.
8
O’Connor, K. M., Arnold, J. A., & Maurizio, A. M., (2010). The prospect of negotiating: Stress, cognitive appraisal and
performance. Journal of Experimental Social Psychology, 46(5), 729–735.
3
Lax,
4
Chapter 1 • Negotiation: The Mind and the Heart
People negotiate in their personal life (e.g., with their spouses, children, schoolteachers,
neighbors), as well as in their business life. Thus, the scope of negotiation ranges from
one-on-one to highly complex multiparty and multinational deals. In the business world, people
negotiate on multiple levels: within departmental or business units, between departments,
between companies, and even across industries. For this reason, managers must understand
enough about negotiations to be effective negotiating within, between, up, and across all of these
organizational environments.9
NEGOTIATION AS A CORE MANAGEMENT COMPETENCY
Negotiation skills are increasingly important for managers. Key reasons for the importance of
negotiation skills include (a) the dynamic nature of business, (b) interdependence, (c) economic
forces, (d) information technology, and (e) globalization.
Dynamic Nature of Business
Most people do not stay in the same job that they take upon graduating from college or receiving
their MBA degree. Sixty percent of younger workers said it is not very likely or not likely at all
that they will stay with their current employers for the remainder of their working life; 6 in 10
employed Millennials reported switching careers at least once; 40% expect to stay at their current
position for 2 years or less.10 The dynamic, changing nature of business means that people must
renegotiate their existence in organizations throughout their careers. The advent of decentralized business structures and the absence of hierarchical decision making provide opportunities
for managers, but they also pose some daunting challenges. People must continually create
possibilities, integrate their interests with others, and recognize the inevitability of competition
both within and between companies. Managers must be in a near-constant mode of negotiating
opportunities. Negotiation comes into play when people participate in important meetings, get
new assignments, lead a team, participate in a reorganization process, and set priorities for their
work unit. Negotiation should be second nature to the business manager, but often it is not.
Interdependence
The increasing interdependence of people within organizations, both laterally and hierarchically,
implies that people need to know how to integrate their interests and work across business units
and functional areas. In November of 2010, a long and winding negotiation stretching back more
than three decades was resolved when the Beatles and Apple Computer reached a deal that put
the entire Beatles catalogue of albums and singles on the iTunes music site. Apple Computer and
the Beatles had been fighting on and off since 1978, when the Beatles accused Apple of infringing on the trademark of their Apple Records. While that dispute was settled when the Beatles
licensed the Apple name to the computer company, they fought through the years over Apple’s
music synthesizer and iTunes’ apple logo. Apple owned 90% of the online music market, but
lacked the Beatles, one of the few bands that had managed to consistently draw huge profits from
CD sales after the online digital music revolution. In 2007, the Beatles hired Jeff Jones as the
chief executive of their Apple Corps. Unlike his predecessor who was a childhood friend of Paul
9
Thompson, L., Wang, J., & Gunia, B. C. (2010). Negotiation. Annual Review of Psychology, 61(1), 491–515.
Thurman, R. (2010, July 21). 36 facts about generation Y in the workplace & beyond. Brazen Careerist.
Brazencareerist.com
10
3
4
Part I • Essentials of Negotiation
McCartney and George Harrison, Jones—an American executive with Sony/BMG—had no such
sentimental ties. The nature of their relationship was purely business and defined a new era of
deal-making for the company. Once the deal was struck, the previously competitive relationship
changed to a cooperative one. In their first week on iTunes, over 2 million Beatles songs were
purchased.11
The increasing degree of specialization and expertise in the business world indicates that
people are more and more dependent on others. However, others do not always have similar
incentive structures, so managers must know how to promote their own interests while simultaneously creating joint value for their organizations. This balance of cooperation and competition
requires negotiation.
Economic Forces
The unemployment rate in January 2011 was 9.0%, with about 13.9 million persons unemployed.12 That was down slightly from the 15.3 million unemployed in November of 2009, the
highest number of unemployed Americans since the Bureau of Labor Statistics began tracking
the nation’s unemployment in 1948.13 Economic pressures and forces such as these mean that
negotiators need to know how to operate in uncertain and ambiguous environments. Focusing on
minimizing losses may loom larger than focusing on profits.
Information Technology
Information technology also provides special opportunities and challenges for negotiators.
Information technology has created a culture of 24/7 availability. With technology that makes
it possible to communicate with people anywhere in the world, managers are expected to
negotiate at a moment’s notice. Computer technology, for example, extends a company’s
obligations and capacity to add value to its customers. Among elected officials, staff members,
and other in the United States House of Representatives there were 9,140 Blackberry users
in 2010. It has become not only necessary, but vital, for elected representatives and staff
members to be connected at all times to constituents, fellow representatives, and business
partners.14
Globalization
Most managers must effectively cross cultural boundaries to do their jobs. Setting aside obvious language and currency issues, globalization presents challenges in terms of different norms
of communication. For example, InfoPrint, a combination of IBM’s printing systems division
with the huge Japanese company Ricoh, requires a great deal of cross-cultural adaptability. For
Sandra Zoratti, the head of global solutions at InfoPrint, it’s often been a learning experience.
From the start, she found Japanese executives very subdued. “I’m Italian, so I talk with my
hands and get enthused about what I’m saying. Once, when I gave a presentation in my usual
11
Moore, H. (2010, November 16). Apple and the Beatles: A long and winding road. New York Times. Nytimes.com
United States Department of Labor Bureau of Labor Statistics. (2011, January). The Employment Situation.
Bls.gov/news
13
United States Department of Labor, Bureau of Labor Statistics. (2011). Employment status of the civilian population
by sex and age. Bls.gov
14
Rosenwald, M. S. (2010, June 20). iPhone insurgency stirs where Blackberry rules. The Washington Post, p. A01.
12
Chapter 1 • Negotiation: The Mind and the Heart
style, it got so little response from my audience that I really thought I blew it,” she said. “But
two weeks later, they gave my proposal the go-ahead. It turned out they did get what I was
saying; they just didn’t show it at the time.” The two companies hold cultural training for all
employees. That includes an interactive blog called Culture Jam, where employees from both
companies can ask questions and receive feedback.15 Managers need to develop negotiation
skills that can be successfully employed with people of different nationalities, backgrounds,
and personalities. Consequently, negotiators who have developed a bargaining style that works
only within a narrow subset of the business world will suffer unless they can broaden their
negotiation skills to effectively work with different people across functional units, industries,
and cultures.16 It is a challenge to develop negotiation skills general enough to be used across
different contexts, groups, and continents but specialized enough to provide meaningful behavioral strategies in a given situation.
MOST PEOPLE ARE INEFFECTIVE NEGOTIATORS
On the question of whether people are effective negotiators, managers and scholars often disagree. Many people regard themselves to be effective at negotiation. However, these same people
believe most of their colleagues are distinctly ineffective at the negotiation table. Most people
often fall extremely short of their potential at the negotiation table, judging from their performance in realistic business negotiation simulations.17 Numerous business executives describe
their negotiations as win-win only to discover that they left hundreds of thousands of dollars on
the table. Fewer than 4% of managers reach win-win outcomes when put to the test,18 and the
incidence of outright lose-lose outcomes is 20%.19 Even on issues on which negotiators are in
perfect agreement, they fail to realize it 50% of the time.20 Moreover, we make the point several
times throughout this book that effective negotiation is not just about money—it is equally about
relationships and trust.
NEGOTIATION TRAPS
In our research, we have observed and documented four major shortcomings in negotiation:
1. Leaving money on the table (also known as “lose-lose” negotiation) occurs when negotiators fail to recognize and capitalize on their win-win potential.
2. Settling for too little (also known as “the winner’s curse”) occurs when negotiators make
too-large concessions, resulting in a too-small share of the bargaining pie.
3. Walking away from the table occurs when negotiators reject terms offered by the other
party that are demonstrably better than any other option available to them. (Sometimes this
shortcoming is traceable to hubris or pride; other times it results from gross miscalculation.)
15
Fisher, A.
16
(2009, November 16). Flourishing in a merger of two cultures. Crain’s New York Business, p. 35.
Bazerman, M. H., & Neale, M. A. (1992). Negotiating rationally. New York: Free Press.
17
Neale, M. A., & Bazerman, M. H. (1991). Cognition and rationality in negotiation. New York: Free Press; Thompson, L.,
& Hrebec, D. (1996). Lose-lose agreements in interdependent decision making. Psychological Bulletin, 120(3), 396–409;
Loewenstein, J., Thompson, L., & Gentner, D. (2003). Analogical learning in negotiation teams: Comparing cases promotes
learning and transfer. Academy of Management Learning and Education, 2(2), 119–127.
18
Nadler, J., Thompson, L., & van Boven, L. (2003). Learning negotiation skills: Four models of knowledge creation and
transfer. Management Science, 49(4), 529–540.
19
Thompson & Hrebec, “Lose-lose agreements.”
20
Ibid.
5
6
Part I • Essentials of Negotiation
4. Settling for terms that are worse than your best alternative (also known as the “agreement
bias”) occurs when negotiators feel obligated to reach agreement even when the settlement
terms are not as good as their other alternatives.
This book teaches you how to avoid these errors, create value in negotiation, get your share of
the bargaining pie, reach agreement when it is profitable to do so, and quickly recognize when
agreement is not a viable option in a negotiation.
WHY PEOPLE ARE INEFFECTIVE NEGOTIATORS
The dramatic instances of lose-lose outcomes, the winner’s curse, walking away from the table,
and the agreement bias raise the question of why people are not more effective at the bargaining
table. Because negotiation is so important for personal and business success, it is rather surprising that most people do not negotiate very well. Stated starkly, it just does not make sense that
people would be so poor at a skill that is so important for their personal and business life. The
reason is not due to a lack of motivation or intelligence on the part of negotiators. The problem is rooted in four fundamental biases: egocentrism, confirmatory information processing,
satisficing, and self-reinforcing incompetence.
Egocentrism
Egocentrism is the tendency for people to view their experiences in a way that is flattering or
fulfilling for them. Two-thirds of MBA students rank their decision-making abilities as above
average.21 In one investigation, people who were self-absorbed in terms of reflecting upon their
own values were more likely to exhibit decision-making biases, such as the confirmation bias.
In contrast, people who had taken time to focus on values that were not important to them were
more likely to focus on valid threats and assess correlations more accurately in data.22 The
National Safety Council estimates that 1 in 4 crashes on the highway involve cell phone use—
either dialing, talking or texting—and as many as 10,000 deaths can be attributed to one of the
activities. Yet, drivers overestimate their own abilities to multitask. According to David Strayer,
the director of the University of Utah Applied Cognition Lab, “We have a tendency to overrate
our own abilities. We think we are better than average drivers and we think we are better than
average multi-taskers.”23
Confirmation Bias
Confirmation bias is the tendency of people to see what they want to see when appraising their
own performance. The confirmation bias leads individuals to selectively seek information that
confirms what they believe is true. Whereas the confirmation bias may seem perfectly harmless,
it results in a myopic view of reality and can hinder learning. Three weeks into the 2010 BP
Deepwater Horizon oil disaster, the former chief executive of BP, Tony Hayward, downplayed the
looming environmental disaster despite mounting evidence to the contrary. Hayward claimed the
21
Diekmann, K., & Galinsky, A. (2006). Overconfident, underprepared: Why you may not be ready to negotiate.
Negotiation, 7, 6–9.
22
Munro, G. D., & Stanbury, J. A. (2009). The dark side of self-affirmation: Confirmation bias and illusory correlation in
response to threatening information. Personality and Social Psychology Bulletin, 35(9), 1143–1153.
23
Walter, L. (2010, June 1). Why we need to hang up on our distracted driving addiction. EHS Today. Ehstoday.com
Chapter 1 • Negotiation: The Mind and the Heart
spill in Gulf of Mexico was “relatively tiny” compared with the “very big ocean.” Oil continued to
leak at a rapid rate for nearly two months until the well was finally capped, and the total amount
of oil poured into the Gulf surpassed the 1989 Exxon Valdez disaster as the largest spill in US
history.24
Satisficing
A third reason why people often fall short in negotiation is the human tendency to satisfice.25
According to Nobel Laureate Herb Simon, satisficing is the opposite of optimizing. In a
negotiation situation, it is important to optimize one’s strategies by setting high aspirations and
attempting to achieve as much as possible; in contrast, when people satisfice, they settle for
something less than they could otherwise have. Over the long run, satisficing (or the acceptance
of mediocrity) can be detrimental to both individuals and companies, especially when a variety
of effective negotiation strategies and skills can be cheaply employed to dramatically increase
profit. (We discuss these strategies in detail in the next three chapters.)
Self-Reinforcing Incompetence
To achieve and maintain effectiveness in the business world, people must have insight into their
limitations. The same is true for negotiation. However, most people are “blissfully unaware of
their own incompetence.”26 Moreover, it creates a cycle in which the lack of skill deprives
them not only of the ability to produce correct responses but also of the expertise necessary
to surmise that they are not producing them. As a case in point, Dunning and colleagues
examined the question of whether students taking a test had insight into their performance.27
The students were grouped into quartiles based on their performance. The lowest-performing
quartile greatly overestimated their performance on the test. Even though they were actually
in the 12th percentile, they estimated themselves to be in the 60th percentile.28 This example
is not an isolated case, according to Dunning. People overestimate their percentile ranking
relative to others by as much as 40 to 50 points. A study of CEOs’ merger and acquisition
decisions revealed that CEOs develop overconfidence through a self-attribution bias when
making deals. CEOs overly attribute their influence when deals are successful. This leads
CEOs to make more deals that are not successful.29 A better business plan would involve
judging each deal on its own merits, rather than simply using the past to justify the present
decision. Moreover, the problem cannot be attributed to a lack of incentives. The overestimation pattern even appears after people are promised significant financial rewards for accurate
assessments of their performance.30
24
Webb, T. (2010, May 14). BP boss admits job on the line over Gulf oil spill. The Guardian, p.1.
Simon, H. A. (1955). A behavioral model of rational choice. Quarterly Journal of Economics, 69, 99–118.
Dunning, D., Johnson, K., Ehrlinger, J., & Kruger, J. (2003).Why people fail to recognize their own incompetence.
Current Directions in Psychological Science, 12(3), 83–87.
27
Kruger, J., & Dunning, D. (1999). Unskilled and unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments. Journal of Personality and Social Psychology, 77(6), 1121–1134.
28
Ehrlinger, J., Johnson, K., Banner, M., Dunning, D., & Kruger, J. (2008). Why the unskilled are unaware: Further
explorations of (absent) self-insight among the incompetent. Organizational Behavior and Human Decision Processes,
105(1), 98–121.
29
Billet, M. T., & Qian, Y. (2008). Are overconfident CEOs born or made? Evidence of self-attribution bias from
frequent acquirers. Management of Science, 54(6), 1037–1051.
30
Ehrlinger, Johnson, Banner, Dunning, & Kruger, “Why the unskilled are unaware.”
25
26
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Part I • Essentials of Negotiation
Related to the principle of self-reinforcing incompetence is the fact that people are reluctant to change their behavior and experiment with new courses of action because of the risks
associated with experimentation. In short, the fear of losing keeps people from experimenting
with change. Negotiators instead rationalize their behavior in a self-perpetuating fashion. The
fear of making mistakes may result in a manager’s inability to improve his or her negotiation
skills. In this book, we remove the risk of experimentation by providing several exercises and
clear demonstrations of how changing one’s behavior can lead to better negotiation outcomes.
We invite managers to be active learners in terms of understanding their own values when it
comes to negotiation.
DEBUNKING NEGOTIATION MYTHS
When we delve into managers’ theories and beliefs about negotiation, we are often startled to
find that they operate with faulty beliefs. Before we start on our journey toward developing
a more effective negotiation strategy, we need to dispel several faulty assumptions and myths
about negotiation. These myths hamper people’s ability to learn effective negotiation skills and,
in some cases, reinforce poor negotiation skills. In this section, we expose six of the most prevalent myths about negotiation behavior.
Myth 1: Negotiations Are Fixed-Sum
Probably the most common myth is that most negotiations are fixed-sum, or fixed-pie, in
nature, such that whatever is good for one person must ipso facto be bad for the other party.
The truth is that most negotiations are not purely fixed-sum; in fact, most negotiations are
variable-sum in nature, meaning that if parties work together, they can create more joint value
than if they are purely combative. However, effective negotiators also realize that they cannot
be purely trusting because any value that is created must ultimately be claimed by someone at
the table. Our approach to negotiation is based on Walton and McKersie’s conceptualization
that negotiation is a mixed-motive enterprise, such that parties have incentives to cooperate as
well as compete.31
Myth 2: You Need to Be Either Tough or Soft
The fixed-sum myth gives rise to a myopic view of the strategic choices that negotiators have.
Most negotiators believe they must choose between either behaving in a tough (and sometimes
punitive fashion) or being “reasonable” to the point of soft and concessionary. We disagree.
The truly effective negotiator is neither tough as nails nor soft as pudding but, rather, principled.32 Effective negotiators follow an “enlightened” view of negotiation and correctly recognize
that to achieve their own outcomes they must work effectively with the other party (and hence,
cooperate) but must also leverage their own power and strengths.
Myth 3: Good Negotiators Are Born
A pervasive belief is that effective negotiation skills are something that people are born with, not
something that can be readily learned. This notion is false because most excellent negotiators are
31
Walton,
32
R. E., & McKersie, R. B. (1965). A behavioral theory of labor relations. New York: McGraw-Hill.
Bazerman & Neale, Negotiating rationally; Fisher & Ury, ‘Getting to yes.’
Chapter 1 • Negotiation: The Mind and the Heart
self-made. In fact, naturally gifted negotiators are rare. We tend to hear their stories, but we must
remember that their stories are selective, meaning that it is always possible for someone to have
a lucky day or a fortunate experience. This myth is often perpetuated by the tendency for people
to judge negotiation skills by their car-dealership experiences. Purchasing a car is certainly an
important and common type of negotiation, but it is not the best context by which to judge your
negotiation skills. The most important negotiations are those that we engage in every day with
our colleagues, supervisors, coworkers, and business associates. These relationships provide
a much better index of one’s negotiation effectiveness. In short, effective negotiation requires
practice and feedback. The problem is that most of us do not get an opportunity to develop
effective negotiation skills in a disciplined fashion; rather, most of us learn by doing. Experience
is helpful but not sufficient.
Myth 4: Life Experience Is a Great Teacher
It is only partly true that experience can improve negotiation skills; in fact, experience in the
absence of feedback is largely ineffective in improving negotiation skills.33 Casual experience
as an effective teacher has three strikes against it. First, in the absence of feedback, it is nearly
impossible to improve performance. For example, can you imagine trying to learn mathematics
without ever doing homework or taking tests? Without diagnostic feedback, it is very difficult to
learn from experience.
The second problem is that our memories tend to be selective, meaning that people are
more likely to remember their successes and forget their failures or shortcomings. This tendency
is, of course, comforting to our ego but it does not improve our ability to negotiate.
In addition, experience improves our confidence, but not necessarily our accuracy. People
with more experience grow more confident, but the accuracy of their judgment and the effectiveness of their behavior do not increase in a commensurate fashion. Overconfidence can be dangerous because it may lead people to take unwise risks.
Myth 5: Good Negotiators Take Risks
A pervasive myth is that effective negotiation necessitates taking risks and gambles. In negotiation, this approach may mean saying things like “This is my final offer” or “Take it or leave it”
or using threats and bluffs. This is what we call a “tough” style of negotiation. Tough negotiators
are rarely effective; however, we tend to be impressed by the tough negotiator. In this book, we
teach negotiators how to evaluate risk, how to determine the appropriate time to make a final
offer, and, more important, how to make excellent decisions in the face of the uncertainty of
negotiation.
Myth 6: Good Negotiators Rely on Intuition
An interesting exercise is to ask managers and anyone else who negotiates to describe their
approach to negotiating. Many seasoned negotiators believe that their negotiation style
involves a lot of “gut feeling,” or intuition. We believe that intuition does not serve people
33
Loewenstein, Thompson, & Gentner, “Analogical learning in negotiation”; Nadler, Thompson, & van Boven, “Learning
negotiation skills”; Thompson, L., & DeHarpport, T. (1994). Social judgment, feedback, and interpersonal learning in
negotiation. Organizational Behavior and Human Decision Processes, 58(3), 327–345; Thompson, L., Loewenstein, J., &
Gentner, D. (2000). Avoiding missed opportunities in managerial life: Analogical training more powerful than case-based
training. Organizational Behavior and Human Decision Processes, 82(1), 60–75.
9
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Part I • Essentials of Negotiation
well. Effective negotiation involves deliberate thought and preparation and is quite systematic.
The goal of this book is to help managers effectively prepare for negotiation, become more
self-aware of their own strengths and shortcomings, and develop strategies that are proactive
(i.e., they anticipate the reactions of their opponent) rather than reactive (i.e., they are dependent upon the actions and reactions of their opponent). Thus, excellent negotiators do not rely
on intuition; rather, they are deliberate planners. As a general rule, don’t rely on your intuition
unless you are an expert.
LEARNING OBJECTIVES
This book promises three things: First (and most important), reading this book will improve
your ability to negotiate successfully. You and your company will be richer, and you will
experience fewer sleepless nights because you will have a solid framework and excellent toolbox for successful negotiation. However, in making this promise, we must also issue a warning:
Successful negotiation skills do not come through passive learning. Rather, you will need to
actively challenge yourself. We can think of no better way to engage in this challenge than to
supplement this book with classroom experiences in negotiation in which managers can test their
negotiation skills, receive timely feedback, and repeatedly refine their negotiation strategies.
Moreover, within the classroom, data suggest that students who take the course for a grade will
be more effective than students who take the course pass-fail.34
Second, we provide you with a general strategy for successful negotiation. Take a look
at the table of contents. Notice the distinct absence of chapter titles such as “Negotiating in the
Pharmaceutical Industry” or “Real Estate Negotiations” or “High-Tech Negotiations.” We don’t
believe that negotiations in the pharmaceutical world require a fundamentally different set of
skills from negotiations in the insurance industry or the software industry. Rather, we believe that
negotiation skills are transferable across situations. In making this statement, we do not mean
to imply that all negotiation situations are identical. This assumption is patently false because
negotiation situations differ dramatically across cultures and industries. However, certain key
negotiation principles are essential in all these different contexts. The skills in this book are
effective across a wide range of situations, ranging from complex, multiparty, multicultural deals
to one-on-one personal exchanges.
In addition, this book offers an enlightened model of negotiation. Being a successful
negotiator does not depend on your opponent’s lack of familiarity with a book such as this one
or lack of training in negotiation. In fact, it would be ideal if your key clients and customers
knew about these strategies. This approach follows what we call a fraternal twin model, which
assumes that the other person you are negotiating with is every bit as motivated, intelligent, and
prepared as you are. Thus, the negotiating strategies and techniques outlined in this book do not
rely on “outsmarting” or tricking the other party; rather, they teach you to focus on simultaneously expanding the pie of resources and ensuring the resources are allocated in a manner that is
favorable to you.
In summary, our model of learning is based on a three-phase cycle: experiential learning,
feedback, and learning new strategies and skills.
34
Craver, C. B. (1998).The impact of a pass/fail option on negotiation course performance. Journal of Legal Education,
48(2), 176–186.
Chapter 1 • Negotiation: The Mind and the Heart
THE MIND AND HEART
Across the sections of this book, we focus on the mind of the negotiator as it involves the
development of deliberate, rational, and thoughtful strategies for negotiation. We also focus
on the heart of the negotiator, because ultimately we care about relationships and trust. We
base all our teachings and best practices on scientific research in the areas of economics and
psychology, reflecting the idea that the bottom line and our relationships are both important.35
Even through a sustained recession, in which the U.S. national unemployment rate hovered
around 10%, many people reported that unemployment, even though painful, had actually
improved them in some ways, by being less reliant on materialism, using free time for volunteering, becoming more sensitive to the suffering of others, and reevaluating career choices for
their next jobs.36
35
Bazerman, M. H., Curhan, J. R., Moore, D. A., & Valley, K. L. (2000). Negotiation. Annual Review of Psychology, 51,
279–314.
36
Peck, D. (2010, March). How a new jobless era will transform America. The Atlantic.
11
C H A P T E R
2
Preparation: What to Do
Before Negotiation
Jane Boon is a mystery shopper. She is hired to pretend to shop for luxury watches,
negotiate on price, and then evaluate the negotiation experience. Many companies
hire mystery shoppers to find out if their front-line customer service representatives
and sales associates are indeed complying with corporate guidelines. Mystery
shoppers are highly prepared when it comes to negotiation. How prepared? During
a five hour training session, a group of 10 mystery shoppers engage in intensive
role-play training with a sales trainer. The sales trainer teaches the sales associates
how to close at the highest possible price. Mystery shoppers are trying to get the
lowest possible price. The mystery shoppers also learn the etiquette of luxury
buying. First, it is key to realize that unlike shopping for used cars, luxury watch
negotiation is civilized and friendly. Being rude and aggressive does not work when
you are buying a $20,000 timepiece. Thus, Jane is coached to be gentle, patient, and
likeable. Jane is trained to use some well-rehearsed sentences when bargaining the
price down, including, “Is there something more you can do for me?” and “can you
offer any price assistance?” and “This isn’t what I was thinking about: is there any
further consideration you can offer?” By using these phrases in her first assignment,
Jane reduced the price of a Cartier Tank Française watch from $28,200 to $21,500.
Another technique is to ask to speak to a higher authority: “I’m a bit embarrassed,
but I have a hang up about paying more than $20,000 for a watch. Would your boss
consider $19,900.” That line worked.1
1
12
Boon, J. (2010, December 9). The watchword in watches: Negotiate. Bloomberg Businessweek. Businessweek.com
Chapter 2 • Preparation: What to Do Before Negotiation
A
s the opening example in this chapter illustrates, preparation is the key to successful
negotiation. The work that you do prior to negotiation pays off substantially when you
finally find yourself seated at the table. The 80–20 rule applies to negotiation: About
80% of your effort should go toward preparation; 20% should be the actual work involved in the
negotiation. Most people clearly realize that preparation is important, yet they do not prepare in
an effective fashion. Faulty preparation is not due to lack of motivation; rather, it has its roots in
negotiators’ faulty perceptions about negotiation.
We noted in Chapter 1 that most negotiators operate under the fixed-pie perception.2
Negotiators who have fixed-pie perceptions usually adopt one of three mindsets when preparing
for negotiation:
1. They resign themselves to capitulating to the other side (soft bargaining).
2. They prepare themselves for attack (hard bargaining).
3. They compromise in an attempt to reach a midpoint between their opposing demands
(often regarded to be a win-win negotiation, when in fact, it is not).
Depending on what the other party decides to do in the negotiation, fixed-pie perceptions can
lead to a battle of wills (e.g., if both parties are in attack mode), mutual compromise (e.g., if both
parties are soft), or a combination of attack and capitulation. The common assumption among all
three approaches is that concessions are necessary by one or both parties to reach an agreement.
The fixed-pie perception is almost always wrong; thus, choosing between capitulation, attack, and
compromise is not an effective approach to negotiation.
A more accurate model of negotiation is to approach it as a mixed-motive decision-making
enterprise. As a mixed-motive enterprise, negotiation involves both cooperation and competition.
In this chapter, we review the essentials of effective preparation, whether it be with a next-door
neighbor, a corporate executive officer, or someone from a different culture. Effective preparation
encompasses three general abilities:
1. Self-assessment
2. Assessment of the other party
3. Assessment of the situation
We systematically review each of these abilities and the skills they require. For each, we pose
questions that a negotiator should ask himself or herself when preparing for negotiation.
SELF-ASSESSMENT
The most important questions a negotiator needs to ask of himself or herself at the outset of
negotiation are “What do I want?” and “What are my alternatives?” Many people do not think
carefully about what they want before entering negotiations. The second question defines a negotiator’s power in the negotiation and influences the ultimate outcome of the negotiation. We now
take up these questions in more detail.
2
Thompson, L., & Hastie, R. (1990). Social perception in negotiation. Organizational Behavior and Human Decision
Processes, 47(1), 98–123.
13
14
Part I • Essentials of Negotiation
What Do I Want?
In any negotiation scenario, a negotiator needs to determine what would constitute an ideal
outcome. This ideal is known as a target or aspiration (sometimes called a target point or
aspiration point). Identifying a target or aspiration may sound straightforward enough, but
three major problems often arise:
1. The underaspiring negotiator sets his or her target or aspirations too low. The underaspiring negotiator opens the negotiation by requesting something that is immediately
granted, resulting in a regrettable state of affairs known as the winner’s curse.3 The
winner’s curse occurs when a negotiator makes an offer that is immediately accepted
by the other party. The largest real-estate deal in history—a $5.4 billion whopper—
went bust in 2010 when New York companies Tishman Speyer Properties and Black
Rock Realty surrendered two Manhattan housing complexes, totaling 11,000 units
that they had purchased four years previous. The investors based their inflated price
tag on projected rather than actual rentals, and failed to account for a downturn in the
housing market when agreeing to the high purchase price. Observers to the failed deal
noted the tendency of auctions to be won by the people who are the most delusionally
overoptimistic, a clear sign of the winner’s curse.4 The immediate acceptance of one’s
offer by an opponent signals that a negotiator did not ask for enough. Another example is
that of an army sergeant returning from a tour of duty in the Gulf War. Recently engaged,
the sergeant wanted to bring back a beautiful gold necklace for his bride-to-be. When
he entered the jewelry store in Saudi Arabia, he knew enough not to offer full price for
the gold necklace, so he offered exactly half of the marked price. The shopkeeper was
overjoyed, immediately accepted the offer and even included the matching earrings and
bracelet! The sergeant’s key mistake: His initial offer was too generous because he had
not adequately prepared. The winner’s curse is nearly impossible to remedy: In a series
of experiments, negotiators were given different parameters, full feedback, and several
counterexamples in an attempt to counteract the winner’s curse, but none was effective
in eliminating the faulty behavior.5
2. The overaspiring negotiator or positional negotiator is too “tough”; he or she
sets the target point too high and refuses to make any concessions. When Wisconsin
Republican Governor Scott Walker refused $800 million in federal grants to establish
high-speed rail networks linking Milwaukee and Madison, many thought he was crazy.
Walker and Republican Governor John Kasich of Ohio instead wrote to United States
Transportation Secretary Ray LaHood asking that they be allowed to repurpose the
funds—which both had previously criticized as federal largesse. LaHood’s response
to Walker was “no” before he pulled the funds from the states. Almost immediately,
Illinois, New York, California and North Carolina put in requests for the $1.8 billion
given up by Wisconsin and Ohio citing the importance of transportation and new jobs
3
Akerlof, G. (1970). The market for lemons: Quality uncertainty and the market mechanism. Quarterly Journal of
Economics, 84, 488–500; Neale, M. A., & Bazerman, M. H. (1991). Cognition and rationality in negotiation. New York:
Free Press.
4
Allan, N. (2010, January 25). America’s most expensive real estate deal goes bust. The Atlantic Wire. Theatlanticwire.com
5
Grosskopf, B., Bereby-Meyer, Y., & Bazerman, M. (2007). On the robustness of the winner’s curse phenomenon.
Theory and Decision, 63(4), 398–418.
Chapter 2 • Preparation: What to Do Before Negotiation
in a bad economy.6 The other problem with positional bargaining, like that displayed
by Walker, is that it reinforces egocentrism. Indeed, people quickly develop ownership
of the arguments and positions they make, and these positions become part of people’s
self-concept, making any opposition an ego threat.7 Ego-defensive behavior triggers
competitive communication, retaliatory behavior, negative perceptions of the counterparty, and attitude polarization.
3. 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. This type of negotiation behavior is also known as reactive
devaluation.8 For example, in a survey of opinions regarding possible arms reductions by
the United States and the Soviet Union, respondents were asked to evaluate the terms of
a nuclear disarmament proposal, a proposal that was either allegedly taken by the United
States, Soviet Union, or a neutral third party.9 In all cases, the proposal was identical;
however, reactions to it depended upon who allegedly initiated it. The terms were seen
as unfavorable to the United States when the Soviets were the initiators, even though the
same terms appeared moderately favorable when attributed to a neutral third party and
quite favorable when attributed to the United States.10
What Is My Alternative to Reaching Agreement in This Situation?
A negotiator needs to determine his or her best alternative to a negotiated agreement or BATNA
(Best Alternative To a Negotiated Agreement).11 Negotiators should be willing to accept any
set of terms superior to their BATNA and reject outcomes that are worse than their BATNA.
Surprising as it may seem, negotiators often fail on both counts.
BATNAS AND REALITY A BATNA is not something that a negotiator wishes for; rather, it
is determined by objective reality. A common problem we have seen in our training of MBA
students and executives is that negotiators are reluctant to acknowledge their actual BATNAs,
and they fall prey to wishful thinking and unrealistic optimism.
Your BATNA—once properly identified—is time sensitive. At any point in time, your BATNA is either improving or deteriorating as a result of market
forces, environmental and situational conditions. Thus, negotiators should constantly attempt
to improve their BATNAs. One strategy for improving BATNAs is to follow Bazerman and
Neale’s “falling in love” rule, which means not falling in love with one house, one job, or one
set of circumstances, but instead, identifying two or three options of interest.12 By following this
YOUR BATNA IS TIME SENSITIVE
6
Schaper,
7
D. (2010, November 12). Not so fast: Future for high-speed rail uncertain. National PublicRadio. Npr.org
De Dreu, C. K. W., & Van Knippenberg, D. (2005). The possessive self as a barrier to conflict resolution: Effects of
mere ownership, process accountability, and self-concept clarity on competitive cognitions and behavior. Journal of
Personality and Social Psychology, 89(3), 345–357.
8
Ross, L., & Stillinger, C. (1991). Barriers to conflict resolution. Negotiation Journal, 7(4), 389–404; Curhan, J. R.,
Neale, M. A., Ross, L., & Rosencranz-Engelmann, J. (2008). Relational accommodation in negotiation: Effects of egalitarianism and gender on economic efficiency and relational capital. Organizational Behavior and Human Decision
Processes, 107(2), 192–205.
9
Ross & Stillinger, “Barriers to conflict resolution.”
10
Oskamp, S. (1965). Attitudes toward U.S. and Russian actions: A double standard. Psychological Reports, 16, 43–46.
11
Fisher, R., & Ury, W. (1981). Getting to yes. Boston: Houghton Mifflin.
12
Bazerman, M. H., Neale, M. (1992). Negotiating rationally. New York: Free Press.
15
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Part I • Essentials of Negotiation
strategy, the negotiator has a readily available set of alternatives that represent viable options
should the current alternative come at too high a price or be eliminated. The “falling in love” rule
is difficult to follow because most people set their sights on one target job, house, or set of terms
and exclude all others. Many negotiators are reluctant to recognize their BATNAs and confuse
them with their aspiration point.
Greek Prime Minister George Papandreou understood the time-sensitive nature of
BATNAs. At the height of the 2010 financial meltdown, Greece appeared to have a weak
BATNA. If Greece did not cooperate with the European Union and slash its budget deficit, it
would lose the confidence of investors and default on foreign debts. However, because European
countries such as Germany and France were huge lenders to Greece, they also had much to lose
if the Greek economy collapsed. The BATNAs in this case were best described as a “teetering
domino.” Papandreou used this time-sensitive information to secure a $39 billion bailout from
the International Monetary Fund, despite the country’s debt crisis.13
The other party has an incentive to minimize the quality of your BATNA and, thus, will be motivated to provide negative
information vis-à-vis your BATNA.
If you have not properly prepared, you might be particularly influenced by such persuasive
appeals. However, your BATNA should not change as a result of the other party’s persuasion
techniques. Your BATNA should only change as a result of objective facts and evidence.
In a negotiation, the person who stands to gain most by changing our 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. It is helpful to write your BATNA in ink on a piece
of paper and put it in your pocket before negotiating. If you feel tempted to settle for less than
your BATNA, it may be a good time to pull out the paper, call a halt to the negotiation process,
and engage in an objective reassessment.
DO NOT LET THE OTHER PARTY MANIPULATE YOUR BATNA
Determine Your Reservation Point
Consider an MBA student negotiating her employment terms. In this case, the MBA student has
a $90,000 job offer from company A, plus some stock options, moving expenses, and a signing
bonus. The student is interested in getting an offer from company B. Thus, company A is her
BATNA. The question the student should ask herself is, “What does company B need to offer
me so that I feel it is as attractive as the offer made by company A?” The answer to this question
represents her reservation point, which includes all things relevant to the job offer, such as salary,
stock options, moving expenses, and signing bonus, as well as quality of life and feelings about
the city to which she will move. A reservation point, then, is a quantification of a negotiator’s
BATNA with respect to other alternatives.
A negotiator’s reservation point has the most direct influence on his or her final outcome.
When three types of information—market price, reservation price, and aspiration—were made
available to negotiators, only reservation prices drove final outcomes.14
13
Davis,
14
B. (2010, May 10). IMF approves Greek bailout, urges against debt default. The Wall Street Journal. Wsj.com
Blount-White, S., Valley, K., Bazerman, M., Neale, M., & Peck, S. (1994). Alternative models of price behavior in
dyadic negotiations: Market prices, reservation prices, and negotiator aspirations. Organizational Behavior and Human
Decision Processes, 57(3), 430–447.
Chapter 2 • Preparation: What to Do Before Negotiation
Failure to assess reservation points can lead to two unfortunate outcomes. In some instances,
negotiators may agree to an outcome that is worse than their BATNA. In our example, the student
could agree to a set of employment terms at company B that are actually worse for her than what
company A is offering. A second problem is that negotiators may often reject an offer that is better
than their BATNA. For example, the MBA student may reject an offer from company B that is actually more attractive than the offer from company A. Although this example may seem implausible,
the incidence of agreeing to something worse than one’s BATNA and rejecting an offer better than
one’s BATNA is quite high. To avoid both of these errors, we suggest that the negotiator follow the
steps outlined in Exhibit 2-1.
EXHIBIT 2-1
Developing a Reservation Point
Step 1:
Step 2:
Step 3:
Step 4:
Brainstorm Your Alternatives. Imagine that you want to sell your house. You
have already determined your target point—in this case, $275,000. That is the easy
part. The real question is, “What is the lowest offer you will accept for your home?”
This step involves thinking about what you will do in the event that you do not get
an offer of $275,000 for your house. Perhaps you reduce the list price by $10,000
(or more), perhaps you stay in the house, or you may consider renting. You should
consider as many alternatives as possible. The only restriction is that the alternatives
must be feasible—that is, realistic. This requirement involves research on your part.
Evaluate Each Alternative. In this step, you should order the various alternatives
identified in step 1 in terms of their relative attractiveness, or value, to you. If an alternative has an uncertain outcome, such as reducing the list price, you should determine the
probability a buyer will make an offer at that price. For example, suppose that you reduce the list price to $265,000. You assess the probability of a buyer making an offer of
$265,000 for your house to be 70%, based on recent home sale prices in the area. Your
reservation price is based on research, not hope. The best, most valuable, alternative
should be selected to represent your BATNA.
Attempt to Improve Your BATNA. Your bargaining position can be strengthened
substantially to the extent that you have an attractive, viable BATNA. Unfortunately,
this step is the one that many negotiators fail to develop fully. 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.
Determine Your Reservation Price. 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. Once again, it is not advisable
to make a guess. Your assessment must be based on facts. For example, you assess
the probability of getting an offer on your house of $265,000 (or higher) to be 60%,
based upon recent home sales in your area. Suppose that you assess the probability
that you will get an offer of $250,000 or higher to be 95%, based upon recent sales
activity in your area. You think there is a 5% chance that you will not get an offer
(continued)
17
18
Part I • Essentials of Negotiation
of $250,000 and will rent your house. You can use this information to 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%
Rent the house
Prent = 5%
The probabilities represent the chances that you think your house will sell at a particular price or will have to be rented. Thus, you think that if the list price of your house
is reduced to $265,000, it is 60% likely that you will receive an offer of that amount
within 6 weeks. If you reduce the price of your home to $250,000, you are 95%
certain that you will get an offer. (Note that we write this probability as 35% because
it includes the 60% probability of receiving an offer of $265,000.) Finally, you think
you have only a 5% chance of getting an offer of $250,000 or more in the next 6
weeks and that you will have to rent your house—a value you assess to be worth only
$100,000 to you at the present time.
Note that in our calculation, the probabilities always sum to exactly 100%, meaning we have considered all possible events occurring. No alternative is left to chance.
An overall value for each of these “risky” alternatives is assessed by multiplying
the value of each option by its probability of occurrence:
Value of reducing price to $265,000
= $265,000 * 0.6 = $159,000
Value of reducing price to $250,000
= $250,000 * 0.35 = $87,500
Value of renting the house
= $100,000 * 0.05 = $5,000
As a final step, we add all the values of the alternatives to arrive at an overall
evaluation:
= 0.6($265,000) + 0.35($250,000) + 0.05($100,000)
= $159,000 + $ 87,500 + $5,000 = $251,500
This value is your reservation price. It means that you would never settle for
anything less than $251,500 in the next 6 weeks.* It also means that if a buyer were
to make you an offer right now of $251,000, you would seriously consider it because
it is very close to your reservation price. Obviously, you want to get a lot more than
$251,500, but you are prepared to go as low as this amount at the present time.
The offers you receive in the next 6 weeks can change your reservation point.
Suppose a buyer offers to pay $260,000 for the house next week. It would be your
reservation point by which to evaluate all subsequent offers.
*
After 6 weeks, you may reduce the price of your home to $250,000.
Chapter 2 • Preparation: What to Do Before Negotiation
Be Aware of Focal Points
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. Such arbitrary points
are focal points. Focal points, like anchors, are salient numbers, figures, or values that appear
to be valid but have no basis in fact. A good example of the arbitrariness of focal points is
provided by an investigation in which people were asked for the last four digits of their Social
Security number.15 They were then asked whether the number of physicians in Manhattan was
larger or smaller than the number formed by those last four digits. Finally, they were asked to
estimate how many physicians were located in Manhattan. Despite the fact that it was obvious
to everyone that Social Security digits are random and, therefore, could not possibly be related
to the number of doctors in Manhattan, a strong correlation emerged between the digits and
people’s estimates.
Beware of Sunk Costs
Sunk costs are just what they sound like—money you have invested that is, for all practical
purposes, gone. Economic theory asserts that only future costs and benefits should affect
decisions. However, people have a hard time forgetting the past, and they often try to
recoup sunk costs. One type of sunk cost is the purchase price that home sellers paid for
their house. Sellers and buyers in a simulated real estate negotiation were given the same
Multiple Listing Service (MLS) sheet describing a house. However, negotiators were given
different information about their previous purchase price.16 Buyers offered significantly
higher amounts for a condominium with larger sunk costs, indicating that the seller’s sunk
costs influenced the buyer’s behavior. Moreover, sellers’ BATNAs were significantly lower
when they had low, as opposed to high, sunk costs. Final settlements were significantly lower
in the low (as opposed to high) sunk cost situations. Thus, sunk costs not only influence our
own behavior but the behavior of the counterparty.
Do Not Confuse the Target Point with Your Reservation Point
Negotiators often make the mistake of using their target point as their reservation point. This can
result in one of two undesirable outcomes. The negotiator who lacks a well-formed reservation
point risks agreeing to a settlement that is worse than what he or she could do by following another
course of action. In another case, the negotiator may walk away from a potentially profitable deal.
For example, many home sellers reject early offers that are superior to their reservation point, only
to be forced to accept an offer of less value at some later point in time.
Identify the Issues in the Negotiation
It is a grave mistake to focus on a single issue in a negotiation because single-issue negotiations
are purely fixed-sum. By identifying other issues, negotiators can create integrative potential.
15
Lovallo, D., & Kahneman, D. (2003). Delusions of success: How optimism undermines executives’ decisions. Harvard
Business Review, 81(7), 56–63.
16
Diekmann, K. A., Tenbrunsel, A. E., Shah, P. P., Schroth, H. A., & Bazerman, M. H. (1996). The descriptive and
prescriptive use of previous purchase price in negotiations. Organizational Behavior and Human Decision Processes,
66(2), 179–191.
19
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Part I • Essentials of Negotiation
Negotiators should take time to brainstorm how a single-issue negotiation may be segmented
into multiple issues or they should attempt to add issues.17
Identify the Alternatives for Each Issue
Once the negotiator has identified the issues to be negotiated, it is a good idea to identify several
alternatives within each issue. For example, in a job negotiation, all of the following have a
range: salary, vacation days, and so on. Negotiators can formalize the issues and alternatives by
creating a matrix in which the issues are located along the columns and the alternatives specified
along the rows.
Identify Equivalent Multi-Issue Proposals
The next step of preparation is to determine a variety of different combinations of the issues
that all achieve the target or aspiration point. For example, an MBA student might identify
salary, signing bonus, and vacation days as key issues in a job negotiation. The student
might then take the step of identifying highly attractive packages that she could present as
opening offers in the negotiation. For example, a starting salary of $90,000, three weeks
of vacation per year, and a signing bonus of $10,000 might be subjectively equivalent to a
starting salary of $100,000, 10 days of vacation per year, and a signing bonus of $12,000. By
identifying multiple-issue packages, negotiators expand their options. The most important
aspect of identifying packages of offers is that the packages should all be of equivalent value
or attractiveness to oneself. This requires that negotiators ask themselves some important
questions about what they value and what is attractive to them. (As a first step, consult
Appendix 1, which helps prepare a negotiator to identify packages of equivalent value by
testing the negotiator’s rationality.)
We strongly discourage negotiators from stating a range (e.g., a salary range). By stating
a range, the negotiator gives up important bargaining ground and moves too close to his or her
BATNA. This is known as a premature concession. By stating a range (“I would be interested in
a salary between $90,000 and $100,000”), a negotiator has already made a concession (implicitly
agreeing to a salary of $90,000). Another benefit of identifying packages of offers is that the
negotiator does not give the counterparty the impression that he or she is positional (won’t budge
on any issue).18 By identifying multiple issues and multiple alternatives within each issue, a
negotiator is more likely to achieve his or her target.
Assess Your Risk Propensity
Suppose you are offered a choice between the following two options:
Option A: Receiving a cashier’s check for $5,000
Option B: Playing a game that offers a 50% chance of winning a $10,000 cashier’s check
and a 50% chance of winning nothing
When presented with a choice between a sure thing and a gamble of equivalent value, most
people choose option A, the sure thing. Note that the expected value of each choice is $5,000,
17
18
Lax, D. A., & Sebenius, J. K. (1986). The manager as negotiator. New York: Free Press.
Fisher, Ury, & Patton, Getting to yes.
Chapter 2 • Preparation: What to Do Before Negotiation
which would mean that negotiators should be indifferent (or risk-neutral) between the two.
However, the strong preference for option A over B reflects a fundamental principle of negotiator
behavior: risk-aversion.
Now, imagine yourself facing the following unenviable choice:
Option C: Losing $5,000 because of an unexpected expense
Option D: Playing a game that offers a 50% chance of losing nothing and a 50% chance of
losing $10,000
Most people find it difficult to choose between options C and D because both choices are
undesirable. However, when forced to make a decision, the majority of negotiators choose
option D, even though the expected value of C and D is exactly the same: $5,000. Option D
represents the “risky” alternative. The dominant choice of D over C reflects a fundamental
principle of human psychology: risk-seeking behavior in the face of loss.
Thus, most people are risk-seeking when it comes to losses, and risk-averse when it comes
to gains. A reference point defines what a person considers to be a gain or a loss. 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.19
What are the implications for negotiation? Negotiators should consider the differential
impact of three sources of risk in any negotiation: strategic risk, BATNA risk, and contractual risk.20
Strategic risk refers to the riskiness of the tactics that negotiators use at
the bargaining table. Negotiators often choose between extremely cooperative tactics (such
as information sharing and brainstorming) and, at the other extreme, competitive tactics
(such as threats and demands). A classic example was the risk that AOL’s David Colburn
took when negotiating with Microsoft to get the AOL icon on the Microsoft Windows start
page—valuable real estate on the computer desktop because it gave AOL access to untold
millions of Microsoft customers who might sign up for the online service.21 It would mean
that AOL would not have to send free disks to get people to sign up because the software
would already be installed on the computer. During the negotiation, Colburn threatened to
use the browser of Microsoft’s archenemy—Netscape—if Microsoft did not agree to put
the AOL icon on the Windows start page. Microsoft agreed. Consider also the risk taken by
Sotheby’s when selling the Mark Rothko painting White Center. Sotheby’s promised owner
David Rockefeller that the painting would sell for at least $46 million. (The previous record
for a Rothko painting was just $22 million, and Sotheby’s would have to pay the difference
if the painting didn’t sell for the record price it promised.) But Sotheby’s knew that the
potential payoff would be enormous. It would not only receive a commission from the buyer
but also would get a cut of 20% of every dollar over the $46 million price. When auction time
came, an anonymous bidder bought the 1950 abstract painting for $72.8 million, granting
Sotheby’s an estimated take of $11.6 million.22
STRATEGIC RISK
19
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–291.
20
Bottom, W. P. (1998). Negotiator risk: Sources of uncertainty and the impact of reference points on negotiated agreements. Organizational Behavior and Human Decision Processes, 76(2), 89–112.
21
Klein, A. (2003, June 15). Lord of the flies. Washington Post, p. W06.
22
The art of the art deal. (2007, June 11). Bloomberg Businessweek. Businessweek.com
21
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Part I • Essentials of Negotiation
Negotiators who have recently experienced a string of failures are more likely to adopt
a “loss frame” and feel less “in control” in a negotiation; conversely, negotiators who have
experienced a recent string of successes feel greater control.23 Consequently, loss-framed
negotiators are reluctant to reveal information that could be used to exploit them; instead,
they prefer to manage risk by delaying outcomes.
BATNA Many people’s BATNAs are uncertain because potential alternatives arrive sequentially. 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. Consider this example of a car dealer’s uncertain BATNA: “A car
dealer who decides not to make the one last concession needed to close a deal is rarely doing
so because an alternative buyer in the next room is waiting to buy the same car at a higher
price. The seller must make a conjecture about the likelihood that a more attractive offer will
be made in the near future. Rejecting an offer entails a risk that the car will remain on the lot
indefinitely, costing the dealer money, with no better offer forthcoming” (p. 94).24
Under most circumstances, we might expect negotiators who are in a “gain frame” to be
more risk-averse (and therefore, more concessionary) than negotiators who hold a “loss frame”
(who might hold out). This gain-loss basis can be a potential problem in negotiation because
negotiators can be “framed.” To see how, consider the following example: Negotiators who are
instructed to “minimize their losses” make fewer concessions, reach fewer agreements, and
perceive settlements to be less fair compared to those who are told to “maximize their gains.”25
In short, the negotiators who are told to “minimize their losses” adopt more risky bargaining
strategies (just as the majority of people choose option D over C in our previous example),
preferring to hold out for a better, but more risky, settlement. In contrast, those who are told to
“maximize their gains” are more inclined to accept the sure thing (just as most people choose
option A over option B in our example). Negotiators who view the glass as “half full” are more
inclined to reach agreement, whereas negotiators who view the glass as “half empty” are more
likely to use threats and exercise their BATNAs. If one negotiator has a negative frame and
the other has a positive frame, the negotiator with the negative frame reaps a greater share of
the resources.26 In price negotiations, buyers and prevention-focused people prefer vigilant
strategies, whereas sellers and promotion-focused pe...
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