Fifth Edition The Mind and Heart of the Negotiator Leigh L. Thompson Kellogg School of Management Northwestern University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Editorial Director: Sally Yagan Acquisitions Editor: Brian Mickelson Director of Editorial Services: Ashley Santora Editorial Assistant: Carter Anderson Director of Marketing: Maggie Moylan Senior Marketing Manager: Nikki Ayana Jones Marketing Assistant: Ian Gold Senior Managing Editor: Judy Leale Supervisor/Sr. Production Project Manager: Lynn Savino Wendel Senior Operations Supervisor: Arnold Vila Operations Specialist: Cathleen Petersen Creative Director: Jayne Conte Cover Designer: Bruce Kenselaar Cover Illustration/Photo: Robert Weeks Full-Service Project Management and Composition: Integra Printer/Binder: STP Courier Cover Printer: STP Courier Text Font: 10/12 Times Ten Roman Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page in text. Copyright © 2012, 2009, 2005, 2001 Pearson Education, Inc., publishing as Prentice Hall. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458 or you may fax your request to 201-236-3290. 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 vi 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 vii viii 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 ix x 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 xi xii 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 xiii xiv 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 xv xvi 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, xvii xviii 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. FACULTY RESOURCES Instructor Resource Center At http://www.pearsonhighered.com/educator, instructors can access a variety of print, media, and presentation resources available with this text in downloadable, digital format. Once you register, you will not have additional forms to fill out, or multiple usernames and passwords to remember to access new titles and/or editions. As a registered faculty member, you xix xx Overview can log in directly to download resource files, and receive immediate access and instructions for installing Course Management content to your campus server. Our dedicated Technical Support team is ready to assist instructors with questions about the media supplements that accompany this text. Visit http://247pearsoned.custhelp.com for answers to frequently asked questions and toll-free user support phone numbers. To download the supplements available with this text, including an Instructor’s Manual, Power Point presentation, and Test Item File, please visit http://www.pearsonhighered.com/educator. 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 7 8 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 10 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 16 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 20 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 22 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...
Purchase answer to see full attachment