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1
Negotiation and Competitive Decision Making
Before You Leave Class Today!
Pick Up Confidential Information for SALT HARBOR: Brims versus
Easterly
Identify your negotiating partner
2
Next Class
DEBRIEF Street Streaker & Alpert-Raiffa
Experiment
NEGOTIATE Salt Harbor
In class matchups
3
Course Objective
Improve your ability to achieve
your negotiating objectives in a responsible fashion.
4
5
Todays Themes
HOW WE LEARN
PREPARATION
SPLIT THE PIE!
Distributive Bargaining Principles
COGNITIVE BIASES
Anchoring affects negotiation outcomes A first controlled feedback experiment
6
Negotiation is a Core Competency!
7
Avoid Negotiation Sand Traps Leigh Thompson Ch 1 page 5
Leaving money on the table Lose Lose Both parties could do better
Settling for too little or paying too much The Winners Curse=>You achieve agreement but
give up too large a portion of the bargaining pie
Walking away from the table You reject terms that are demonstrably better than any
other option available
Settling for terms that are worse than the alternative Agreement bias or you agree to agree even when
other alternatives are better
8
How We Will Learn Practice
Calibrated Feedback and Results Analysis
To avoid self-reinforcing ineffectiveness
Outcome Based Evaluation
Seeing how others See You!
Barriers to Effective Negotiation
Egocentrism
Self congratulatory views: In Lake Woebegone, all children are above the town average in intelligence
Confirmation Bias Tendency to see what you want to see when
appraising your own performance
9
Thompson Ch. 1 Pages 6-7
Barriers =>Self Reinforcing Incompetence We tend to be blissfully unaware of our own
incompetence!
Mergers and Acquisitions CEOs develop overconfidence
They overly attribute their influence when deals are successful
This leads to MORE deals that are unsuccessful
The problem persists even when promised significant financial rewards for accurate appraisal of ones own performance
10 Thompson Page 7 cites Billet et al MGT SCIENCE (2008)
11
Myths
All negotiations are fixed sum Good Negotiators are born
You need to be either tough or soft
Experience is a great teacher
12
Good negotiators take risks: (translation) Good negotiators make threats in a disciplined
and organized fashion
Good negotiators know how to balance risks and rewards
Good negotiators rely on intuition: Usually not! Behavior is often influenced by
arbitrary and irrelevant aspects of a setting
Good negotiators are self-aware
They can articulate the rules that guide them and police against being fleeced
13
Our focus =>skill building and learning by doing
Doing negotiations in different substantive contexts sharpens our ability to recognize untested assumptions, alternative explanations
Increases our sensitivity to what works, what doesnt work and why.
14
Negotiation in a Nutshell! PARTIES
Who are the real parties to a negotiation? BATNAS
What will negotiators do if they dont reach an agreement?
INTERESTS What are the parties basic needs and
priorities?
From Negotiation Analysis: An Introduction by Michael Wheeler HBS 9-801-156
15
VALUES How can value be created and who is likely to
get it?
BARRIERS What are obstacles to agreement and
maximization of value and how can they be overcome?
POWER What levers of power does each negotiator
possess and how should they be deployed?
ETHICS What is the right thing to do? From Negotiation Analysis: An Introduction by Michael Wheeler HBS 9-
801-156
16
TOPICS I. Distributive BargainingSplit the Pie!
Street Streaker Salt Harbor
II. Competitive Gaming Oil Price Negotiation Iterative Prisoners
Dilemma
III. Fair Division The Rothman Family Art Collection Calculating the Efficient Frontier
IV. Contingent Contracts Jessie Jumpshot
V. Mixed MotiveIntegrative Bargaining Nelson Contracting
Alphexo vs. Betonn (negotiating an IT venture)
Winemaster.com (sale of an online wine enterprise)
CP Hong Kong vs. MegaMarket USA (email or text-message negotiation)
17
18
VI Balanced Concerns Negotiations
Stakes of Engagement
Aerospace Investments
VI. Many Party Negotiations
Teams: Eureka vs Flagship Renegotiate
Welsh Water Mgt-Union Negotiation
SCORING & GRADING
19
20
Scoring
Winemaster HomeBase Outcomes =>Net Gain: $750 K $1,200 K
Overall Class Statistics
Average Net Gain: $650 K $1,100 K
Standard Deviation of
Net Gain: $1,200 K $1,600 K
Z-Scores
ZWinemaster= = .083
ZHomebase= = .0625 1200$
)650$750($
Preparation Survey
A Best Effort response will receive a +0.25 Z-score increment
21
Subjective Valuation Survey
You will be asked to express your opinions about your negotiation counterpart
You will receive +0.25 Z-score points for completing the survey
We will summarize responses and feed the summary back to each of you at the course end
22
23
How Well Do You Think You
Did? COUNTS OF ANNOUNCED VS ACTUAL
Actual Percentile
0-25th 26-50th 51-75th 76-100th
0-25 2 0 1 3 6
Announced 26-50 1 1 1 0 3
Percentile
51-75 1 2 5 10
75-100 4 0 2 9
7 7 7 7 28
3
2
Negotiation Dance Records Record the sequence of offers made by you
and counter-offers made by your counterpart: Amstore versus Nelson
Stakes of Engagement
Aerospace Investment
Enter record using the online survey
You will receive +0.25 Z-score points for entry
24
The Fog of Negotiation
Your negotiation dance records will help us decipher why multiple issue negotiation trajectories vary wildly.even when negotiator role information is held fixed
25
26
Distributive Bargaining
Principles and Key Ideas
27
Outcome
Who received which tangible goods?
Net Gains Yours
Your Negotiating Counterparts
See-Saw or Tug of War outcome
28
Key Power Source
BATNA =
Best Alternative to No Agreement
29
Other Sources of Power in Negotiation
Authority Chain of Command Moral
Relational Friends, Family, Tribe
Ability to Reward Ability to Punish Knowledge
30
Distributive Bargaining Principles
Target Point=>What do I want?
Your preferred settlement, taking into account limits imposed by the interests of your counterpart
BEST ALTERNATIVE to N0 AGREEMENT = BATNA
NOT a wish-> Objective Reality determines it! Real World DYNAMIC-> a function of market
forces, changing environment. Changes as available alternatives change
31
32
Bargaining Zone--the region between parties reservation points
Positive when parties reservation points overlap
Doesnt exist when there is no overlap
33
Bargaining Surplus
Amount of overlap produced by reservation points
Measures the size of the bargaining zone
34
Seller Reservation Price
Buyer Reservation Price
Bargaining Zone
Bargaining Zone = Zone of Possible Agreement or ZOPA
Settlement
Sellers Surplus
Buyers Surplus
Buyers Target
Buyers Bargaining Range
Sellers Bargaining Range
Sellers Target
35
The Zirconia ZT Sale
Marcia walks in with no plan: No counter offer to the Zirconia sticker price
No thought about trade-in value of her car
No thought about max she will pay for a given bundle of options
No thought about extras, prep, insurance fee, etc.
No thought about financing options and trade-offs
36
Prepare,Prepare,Prepare!
Determine your BATNA
Improve your BATNA if possible
Think through tactics in advance
37
Understand the interests of your negotiating counterpart(s)
Self-evident in formal zero-sum and non-zero sum games
NOT self-evident in multiple issue negotiations where each party possesses private information
Information about BATNAs usually arrives through the dynamics of negotiation
38
ANCHORING People make estimates by starting from
an initial value and adjusting to provide a final answer.
Adjustments are typically insufficient
39
Calibration Prior to each of 84 days the U.S. Weather
Bureau announced a 0.60 probability of rain, snow or both
It rained or snowed (or both) on 49 of these
84 days 49/84 = 0.58, close to 0.60
The Bureau is well calibrated for
announced probabilities of 0.60.
40
An initial value is a psychological anchor
Large and systematic departures from accuracy can occur
Facts: Unless carefully trained, individuals tend to be
poorly calibrated.
Adjustment is almost always insufficient.
In Global Catastrophic Risks, eds. Nick Bostrom and Milan Cirkovic
Eliezer Yudkowsky Singularity Institute for Artificial Intelligence
Palo Alto, CA
41
Despite all dangers and temptations, it is better to know about psychological biases than to not know. Otherwise we will walk directly into the whirling helicopter blades of life.
But be very careful not to have too much fun accusing others of biases. That is the road that leads to becoming a sophisticated arguer - someone who, faced with any discomforting argument, finds at once a bias in it. The one whom you must watch above all is yourself.
Alpert-Raiffa Experiment
A learn by doing controlled feedback exercise
42
43
1. Greater New York Citys Metro Area is more populous than LAs. What is the New York CMSA in 106 people?
2. What fraction of the Earths surface lies above latitude 66 known as the Circum-Arctic ?
3. 100 avid basketball fans were asked, Does a player have a better chance of making a shot after having just made his last two or three shots than he does after missing his last two or three shots? What fraction answered YES?
44
Alpert-Raiffa Experiment
Individuals are asked to specify 50-50 probability intervals [inter-quartile ranges] for a large number of uncertain quantities such as: NYC Metro Area population in millions
Circum Arctic as a fraction of Earths surface
Fraction of basketball fans who believe in the Hot Hand
45
Fractiles 0.25 Fractile:
The value x0.25 of an uncertain quantity such that you believe there is a chance that it is less than or equal to x0.25 and a chance that it is greater than x0.25
0.75 Fractile: The value x0.75 of an uncertain quantity such
that you believe there is a chance that it is less than or equal to x0.75 and a chance that it is greater than x0.75
46
(1)
Announced 50-50 Interval
True Value Announced 50-50 Interval
(2)
True Value
COUNT
1
0
(3)
Announced 50-50 Interval
1
True Value
Outcomes
47
Much narrower ranges than 50-50 appear
Such interval estimates reflect more certainty than is warranted by available knowledge
36% is a pseudo semi-constant!
48
Irrelevant numbers can serve as anchors and influence perception of the bargaining zone: Reader Example: 81% of residential real estate
agents in the survey said they did not use list price to estimate sales price
Nevertheless, a list price manipulated by 12% and shown to agents resulted in significant differences in their estimates of the propertys sales price
The average price with a low list price was 15% lower than that for the high list price
49
First Offers as Anchors
Does making the first offer lead to a better outcome for you?
Translation: Does anchoring work?
Hint: Think interactively!
50
Subjective Values In Negotiation
Affective = Feelings and opinions about: The Objective Outcome
The Process
Myself
My Negotiating Counterpart Fairness
Empathy
Her outcome
Negotiating Sale of the Street Streaker
Some Big Questions!
51
Reveal your reservation price? No! Unless it is very,very good. Seldom the
case
Lie about your reservation price? No! You can back yourself into a corner and
fail to reach agreement
Try to convince your counterpart that her BATNA is no good? Probably Not. Only if you have supportable
evidence that it is really no good Beware of a Boomerang effect: people often do
the opposite of what you want them to do
Tough or Soft?
You should be neither: Too tough may blow the deal
Too soft, you give away your bargaining surplus
Ideal: Try to make an offer in the bargaining zone, not
outside
IF you are certain of your counterparts BATNA, offer just slightly better
MIT OpenCourseWarehttp://ocw.mit.edu
15.067 Competitive Decision-Making and NegotiationSpring 2011
For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.
Lecture 2 Debrief
Street Streaker
Alpert-Raiffa Experiment
Todays Discussion Themes
Who should make the first offer?
Bluffing, Strategic Misrepresentation & Lying!
Negotiate Salt Harbor
Private Information and Facts
2
Who Should Make the First Offer?
What Should it be?
3
Is there a universal, reliable advantage to making the first offer?
Only when we are highly certain of our counterpoints BATNA (reservation (walkaway) price
We can rarely determine our counterparts reservation point at the outset
The first offer can be a powerful anchor
HOWEVER!
If we have made an overly generous first offer, we may fall victim to the Winners Curse
If we have made a ridiculously low offer or ridiculously high offer, we may insult or not be
taken seriously
5
Does Making the First Offer Lead to a Better Outcome for You?
YES!, if you are certain of your counterparts BATNA
NOT NECESSARILY if you are uncertain
6
Let Your Counterpart Make the First Offer IF
She has more market information that you do
You are unsure about her reservation point
You suspect that you are strongly influenced by subjectivity, emotion
Ethics
Bluffing, Lying, Speaking the Truth
Bluffing
A respected business person remarked with some heat, You mean to say youre going to encourage managers to bluff? Why, bluffing
is nothing more than a form of lying!Youre advising them to lie!
A.Z. Carr Is Business Bluffing Ethical?
HBR Jan-Feb 1968
I agreed that the basis of private morality is a respect for truth and that the closer a
business person comes to the truth, the more
he or she deserves respect. At the same
time, I suggested that most bluffing in
business might be regarded simply as game
strategy--much like bluffing in poker, which
does not reflect on the morality of the bluffer.
A.Z.Carr in Is Business Bluffing Ethical? HBR 1968
We can learn a good deal about the nature of business by comparing it with poker. While both have a large element of chance, in the long run the winner is the individual who plays with steady skill. In both games ultimate victory requires:
Intimate knowledge of the rules,
Insight into the psychology of the other players,
A bold front,
A considerable amount of self-discipline, and
Ability to respond swiftly and effectively to chance opportunities.
Poker
In poker it is right and proper to bluff a friend out of the rewards of being dealt a
good hand. In the words of an excellent
poker player, President Harry Truman, If you cant stand the heat, stay out of the kitchen. If one shows mercy to a loser in poker, it is a personal gesture, divorced
from the rules of the game. A.Z.Carr in Is Business Bluffing Ethical? HBR 1968
Poker has its special ethics, and here I am not referring to rules against cheating. The players
who keep an ace up their sleeves or who mark
the cards are more than unethical; they are
crooks, and can be punished as such--kicked
out of the game or, in the Old West, shot.
A.Z.Carr in Is Business Bluffing Ethical? HBR 1968
When Should the Truth be Spoken?
I quoted Henry Taylor, the British statesman :
Falsehood ceases to be falsehood when it is understood on all sides that the truth is not expected to be spoken
In court, everyone from the judge on down takes it
for granted that the job of the defendants attorney is
to get their client off, not to reveal the truth; and
this is considered ethical practice
I reminded my friend that millions business people feel constrained every day to say yes when they mean no and this is generally accepted as permissible strategy when the
alternative might be this loss of a job.
The essential point is that the ethics of business are game ethics, different from the
ethics of religion
Individuals within a company often find it difficult to adjust to the requirements of the
business game. They try to preserve their
private ethical standards in situations that call
for game strategy.
15
John Rutledge in Forbes
walk away from a deal, any deal, rather than violate your principles to win
it.
16
Ethics in Negotiation
Reitz, Wall & Love
Kelly School of Business
Indiana University
17
Questionable Tactics
Lies Statements made in contradiction to
negotiators knowledge of belief about something material to the negotiation
Puffery Exaggerating the value of something in the
negotiation
18
Deception An act or statement intended to mislead
the opponent about the negotiators own intent or future actions relevant to the
negotiation
Nondisclosure Keeping to oneself knowledge that would
benefit the opponent without damaging
your position
Information Exploitation Using information provided by the
opponent to weaken him, either in the
direct exchange or by sharing it with others
19
What is Permissible?
20
You are NOT required to disclose personal information that could be harmful to your case:
Reservation price, amount willing to pay
But you are NOT permitted to lie about it.
Are you permitted to disclose the true value of an object to a misinformed seller?
There is nothing wrong with being generous
However, if you are an agent for another, you are required to obtain the best deal possible that is
legally and ethically permissible, so you cannot
disclose the true value.
22
Is it ethical to maximize your payoff at your counterparts expense? Yes, but it depends on the manner in which
the gain is pursued
What about a distributive bargain? The Golden Rule says that a negotiator
should pursue his own interests only as far as
he would want the opponent to do
23
Lost Opportunities In integrative and balanced concerns
bargaining, one has the opportunity to
assemble packages of offers that, if properly exploited, leads to joint gains by
all parties to the negotiation
Unethical behavior, if detected, drives your negotiating partner to withhold information,
undermining possibilities for generating
joint gains
24
In Sum
Unethical behavior often backfires and leaves you worse off than if you had done
the right thing
Recall Rutledges admonition:
walk away from a deal, any deal, rather than violate your principles to win it.
When is it Legal to Lie in Negotiations?
G.R. Shell
Sloan Mgt Review Spring 1991
26
It is a mistake to assume that certain forms of deceptive conduct are legal
and that ethical sensibilities alone
should govern negotiating behavior.
Business negotiation law is infused with the norms of ethical business
conduct.
Unethical bargaining practices are often either illegal or become so after
brought to light. Sloan Mgt Review Spring 1991
27
When ethically acceptable conduct such as lying about reservation price
appears to run foul of legal definitions,
the law adjusts and refuses to penalize
it.
an ethical sensibility, far from being a luxury in business negotiations, may be a negotiators best counselor.
Sloan Management Review Spring 1991
28
In a business transaction both sides presumably try to get the best deal. That is the essence of bargaining and the free marketNo legal rule bounds the run of business interest. So one cannot characterize self-interest as bad faith
No particular demand in negotiations could be termed dishonest, even if it seemed outrageous to the other party.
The proper recourse is to walk away from the bargaining table, not sue for bad faith in negotiation.
U.S. Court of Appeals for the
Seventh District
29
FRAUD!
when the speaker makes a knowing misrepresentation of a material fact on which the victim reasonably relies and which causes damages.
A car dealer resets the odometer
The seller of a business lies about business debts
A home seller fails to disclose termite infestation
Ken Lay just prior to Enrons demise
Prosser and Keaton on The Law of Torts (1984)
30
Lying About Reservation Price
Lies about reservation price are so prevalent in bargaining that many professional negotiators do not consider such misstatements to be lies Shell (1991)
31
Negotiating with Liars Adler in Summer 2007 Sloan Mgt Review
Prepare!
Background checks
Anticipate scenarios
Commit to high standards
32
Ask same question differently
Summarize and demand Yes or No answers
Ask questions to which you know the answer
Take notes
Establish contingent agreements
Salt Harbor Negotiation Guidelines
All numbers are to be taken as FACT. You cannot modify or change them
If plus or minus x% appears beside a numberIGNORE the range statement and adopt the mid-point as a CERTAINTY
EQUIVALENT.
Your Obligation: KEEP CONFIDENTIAL INFORMATION CONFIDENTIAL.
Do not show your confidential information to your negotiating counterpart before, during or after the negotiation
Enter your results in the online survey as soon as you have completed your negotiation.
MIT OpenCourseWarehttp://ocw.mit.edu
15.067 Competitive Decision-Making and NegotiationSpring 2011
For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.
Lecture 3
Salt Harbor, Prisoners Dilemmas & Oil Price Game
Debrief Salt Harbor
Overview of Prisoners Dilemma Situations
The first PD example
Analysis of static game
Iterative Prisoners Dilemma
Holdup (if time)
Oil Price Game
Hard Hat or Soft Hat?
What Should it be?
Which is Better?
Black Hat/White Hat: Few early concessions, followed by increasingly larger concessions
White Hat/Black Hat: Generous early concessions, followed by increasingly smaller concessions
Hilty and Carnevale found that BH/WH is more effective
F
Prisoners Dilemmas
ADAM SMITH
(The Wealth of the Nations, 1776)
An individual who intends only his own gain, is, as
it were, led by an invisible hand to promote the
public interest.
(1, 3) (5, 4)
(4, 1) (6, 8)
Prisoners Dilemma
A striking example of how
individual rationality and group
rationality may diverge
The Drosophila of the
social sciences
The Prisoners Dilemma
An important class of non-strictly
competitive situations where the best
outcome results when the players refrain
from trying to maximize his/her own
payoff.
Each player has a dominant strategy and the use of these dominant strategies leads to a bad outcome (i.e., Non-Pareto-Optimal)
TWO SUSPECTS ARE TAKEN INTO CUSTODY AND SEPARATED. THE DISTRICT
ATTORNEY IS CERTAIN THAT THEY ARE GUILTY OF A SPECIFIC CRIME, BUT HE
DOES NOT HAVE ADEQUATE EVIDENCE TO CONVICT THEM AT A TRIAL.
HE POINTS OUT TO EACH PRISONER THAT EACH HAS TWO ALTERNATIVES:
TO CONFESS TO THE CRIME THE POLICE ARE SURE THEY HAVE DONE, OR NOT
TO CONFESS.
IF THEY BOTH DO NOT CONFESS, THEN THE DISTRICT ATTORNEY STATES
HE WILL BOOK THEM ON SOME VERY MINOR PUNISHMENT.
IF THEY BOTH CONFESS THEY WILL BE PROSECUTED, BUT HE WILL
RECOMMEND LESS THAN THE MOST SEVERE SENTENCE.
BUT IF ONE CONFESSES AND THE OTHER DOES NOT, THEN THE CONFESSOR
WILL RECEIVE LENIENT TREATMENT FOR TURNING STATE'S EVIDENCE
WHEREAS THE LATTER WILL GET "THE BOOK" SLAPPED AT HIM.
Prisoners Dilemma Problem Statement
Two suspects:
A
B
Two Alternatives:
Confess => C
Dont Confess => DC
Prisoners Dilemma Payoff Table
This is a non-zero sum game
No matter what A does, B comes out ahead confessing.
No matter what B does, A comes out ahead confessing.
For A, strategy C dominates DC strategy
For B, strategy C dominates DC strategy
If each prisoner chooses his/her dominant strategy, they both lose.
Both players would be better off if neither confess
(8, 8) (1/2, 10)
(10, 1/2) (1,1)
C
DC
C DC
A
B
Pareto Optimality
An outcome that is not dominated by any other outcome is called
Pareto optimal.
Pareto optimal strategy pairs are (DC,DC) (DC,C) and (C,DC)
(1,1)
(1/2, 10)
(8,8)
(10, 1/2)
What if Prisoners Could Communicate?
Prisoners might choose strategy (DC,DC).
This, however, is not an equilibrium pair, since A and B can each do better by making a unilateral change of choice.
There is incentive to defect, but if both defect, then we are back where we started from.
Pre-choice communication cannot help in solving the dilemma unless there is some binding force (legal, moral, etc.) that holds the players to their agreement.
Prisoners and Paradoxes
It is rational for each player to confess.
There is no strategy that is best in all circumstances.
Problems such as this confuse our notion(s) of
rationality.
Collective or group rationality vs. individual rationality
Forces us to resort to Extra-rational or Meta-rational
notions (e.g., trust, conscience, etc.)
Applying the Prisoners Dilemma
Economists use Prisoners Dilemma-type problems in analyzing
market structures and competitive strategy.
PD-type problems are common in the real world.
PD creates price rigidity in oligopolistic markets.
Firms may be reluctant to change prices for fear of setting off a price war.
Price leadership as a way around the PD.
Iterative Prisoners Dilemma
Removes the static nature of the problem.
Allows players to:
Develop reputations
Study competitors behavior
When Individuals Meet Often:
Axelrod
Strategy: A rule that determines the probability of cooperate or
defect as a function of history of interaction.
WHAT STRATEGIES ARE:
Initially viable?
Robust?
Stable?
One Possible Strategy: Tit for Tat
Tit for Tat:
First move is to cooperate.
Thereafter, mimic the last move of opponent.
Infinite vs. Finite Trials:
In the infinite case, it always pays to cooperate.
Cooperative behavior is profitable in expected value
terms, but depends upon the time horizon in
question.
Why Does Tit for Tat Work?
Because it is nice (!)
Zero-sum myopia, i.e., score envy
Quick to anger, quick to forgive
Value of provocability
Value of clear and consistent strategies
Axelrods Genetic Algorithm (1985) Simulation of evolution
Computer tournament
Round Robin (14 entries)
2nd round (62 entries)
WHAT HAPPENED?
Dont rock the boat! C follows CCC
Be provocable! D follows CCD
Forget & forgive! C after DCC
Accept a rut! D after DDD
TIT FOR TAT
DOMINATED!
Distinguishing Best and Strategic Practices
Keith Allred (2000)
Moves to claim value tend to block moves aimed at
creating value
Claiming is competitive and assertive
The downside of pursuing a cooperative strategy
aimed creating value is that it often exposes you to
exploitation
Best versus Strategic Practices
BEST PRACTICES:
Those that work well irrespective of what your
negotiating counterparts do
STRATEGIC PRACTICES:
Practices that work well in particular situations
with some counterpart responses and poorly in
other situations with other responses
In a formal game-theoretic framework, equilibrium strategies are often, but not always Best Practice
Stud Poker bluffing strategies
Prisoners Dilemma games are an example of cases where equilibrium strategy choice may not be a Best Practice
Dominance leads to poor outcomes for both parties
Holdup!
Brandenburger op. cit
Holdup
Repeated Prisoners Dilemma and
Monopoly Power
From Repeated Interaction
By Adam Brandenburger
HBS 9-793-116 (1992)
Brandenburger op. cit. 27
Holdup
Investor A must first decide whether or not to
make an investment of $1
If made, $3 (gross) of economic value is
created.
B then decides how to divide the $3
Divide the NET pie of $2 equally: then each gets
$1
Grab the $3 so A is $1 out of pocket
Brandenburger op. cit.
Holdup Tree
Split the Pie
Grab the Pie
Dont
B
A
Invest
$1
Payoffs
1 1
1 3
0 0
What is likely if the game is played once?
Ad infinitum?
Brandenburger op. cit. 29
Time Value of Money
Suppose that future payoffs are discounted for
the time value of money
r is the discount rate
w = 1/(1+r) is the discount factor
A constant stream of $1 per time period then has
a present value of 1/(1-w) = 1/r
Brandenburger op. cit.
As BEST STRATEGY:
Begin by investing every time
If B ever takes this whole pie, refuse to I
invest thereafter.
Split the pie yields
$1(1 + w + w2 + . . . ) = $1/(1-w)
Take the whole pie once and get nothing after yields $3.
A jointly beneficial outcome is sustainable if
1 2
3 or 1 3
ww
Brandenburger op. cit.
What happens if B splits the pie n times, then grabs?
A gets
$1 (1 + w + w2 + . . . + wn) 1 wn+1 The game stops at n + 1.
B gets $1 (1 + w + w2 + . . . + wn) + 3 wn+1
This strategy pays for B
The same as Take the Whole Pie!
111 13
1 11 2
or 3 or 1 3
nnw w
w w
ww
Brandenburger op. cit. 33
Ways Around This Dilemma
Coca Cola facilitated investment in bottling plants by
awarding bottlers fixed-price contracts for
concentrate
A computer is designed around a specific micro-
processor, adoption of a new chip may be
jeopardized by a computer manufacturers fears of
being held up
Intel licensed a new design to a second company (up to
intro of 80386 micro-processor
Brandenburger op. cit. 34
Holdup: Factors that Facilitate Cooperation
Size of pie
The greater the value to be divided, the greater the
incentive to play tough BUT future losses from
non-cooperation are also greater!
Discount factor (factor not rate):
A higher discount factor w=1/(1+r) means future
losses from non-cooperation loom larger
Brandenburger op. cit. 35
Frequency of interaction:
More frequent interaction is equivalent to a
larger discount factor
Maintenance of an exclusive relationship
between buyer and seller can increase
interaction frequency, an argument for dealing
only with a few longer term suppliers, for
example.
Break down a large transaction into smaller
ones to achieve more frequent interaction
Brandenburger op. cit. 36
Observation lags:
If choices are observed with a time lag, future
losses from non-cooperation are delayed,
making cooperation harder!
Noise:
Noisy signals make it harder to distinguish
tough from cooperative behavior, inhibiting
cooperation.
Oil Price Game
Analysis of Payoff Table
& Instructions
Price Charged by BATIA
$30 $20 $10 $30 A: $11
B: $11 A: $2 B: $18
A: $2 B: $15
ALBA $20 A: $18 B: $2
A: $8 B: $8
A: $3 B: $15
$10 A: $15 B: $2
A: $15 B: $3
A: $5 B: $5
Iterative Dominance For Alba $ 20 preferred to $30
For Batia $20 preferred to $30
$20 Dominates $30
Price Charged by BATIA
$30 $20 $10 $30 A: $11
B: $11 A: $2 B: $18
A: $2 B: $15
ALBA $20 A: $18 B: $2
A: $8
B: $8
A: $3
B: $15
$10 A: $15 B: $2
A: $15
B: $3
A: $5
B: $5
Now, for Alba, $10 is preferred to $20
Now, for Batia $10 is preferred to $20
$10 Dominates $20
Price Charged by BATIA
$30 $20 $10 $30 A: $11
B: $11 A: $2 B: $18
A: $2 B: $15
ALBA $20 A: $18 B: $2
A: $8 B: $8
A: $3 B: $15
$10 A: $15 B: $2
A: $15 B: $3
A: $5
B: $5
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Lecture 4
Debrief Oil Price Game
Intro to Integrative Bargaining
Negotiate Nelson versus Amstore
1
Nelson vs. Amstore Forms Please fill in your responses to:
The KUHLMAN AND MARSHELLO MOTIVATIONAL STYLE ASSESSMENT FORM
and the
- Amstore vs. Nelson RECORD FORM
2
Pick up confidential information for your role in the Jessie Jumpshot negotiation Jessie Jumpshot
Boston Sharks Manager
Jessies Agent
We will negotiate in the next class meeting
3
TODAYs THEMES Oil Price Game
The central role of TRUST!
Win-Win! What it is, What it is NOT
Power & Persuasion
Key Information Interests versus Positions
Negotiation tactics=> Relative Importance
Indifferent packages 4
Oil Price Game
Trust in Negotiation
Rendering oneself vulnerable with the expectation that your counterpart will not take undue advantage and will reciprocate with an offer that benefits both of you.
TRUST Personal Business Embedded
Deterrence
Based
Lack of Trust
Prenuptial
Surveillance
Theory X
Threats,sanctions
punishments
Surveillance
Threats, punishments,
sanctions
Knowledge
Based
Sympathy
for the other
Assessment of clients needs
Customer-driven
focus
Understand,
appreciate
partners
Identificatio
n
Based
True empathy for the other
Theory Y
Employees fit in
corporate culture,
share values
Empathy
Develop
social identity
TRUST TAXONOMY- Thompson Table 6-2
7
How does Mistrust Arise? Breach or defection
Miscommunication
Dispositional Attribution
Calling into question another persons intentions or character as a device for
attributing cause to an incident or behavior
Thompson Ch. 6
Reciprocity
we feel obligated to return in kind what others have offered or given to us.
Thompson Ch. 6 p. 134
Reciprocity My concessions met with concessions on
your part
I share information expecting that you will too
What I say is truthful and subject to validation
10
Reputation
Negotiators act much tougher when dealing with someone who has the
reputation of being a liar
Tough or manipulative tactics are most often used in a defensive fashion with liars
and tough negotiators
Or in an opportunistic fashion with creampuffs
Thompson Ch. 6 p 141
Building Trust
TRANSFORM personal conflict to task conflict
AGREE on common goal, shared vision CAPITALIZE on network connections FIND shared problems, shared enemies FOCUS on the future!
12
Repairing Broken Trust Thompson Ch. 6 Box 6-2
Suggest Personal Meeting
Focus on Positive Relationship
Apologize
Let other side vent
Dont get defensive 13
Ask for clarifying information
Test your understanding of the other side
Discuss ways to avoid future problems
Get feedback with relationship checkup
14
Win-Win!
Expanding the Pie to be cut
15
What is Win Win?
It is NOT: Compromise
Even Split
Feeling Good
Building a relationship
16
Win Win
A negotiation in which
ALL creative opportunities are surfaced and exploited
NO resources or payoffs available to negotiating parties are left on the table
17
Win-Win Potential
Do parties have different Valuations across issues? Probability beliefs? Risk Preferences? Time Preferences?
18
Pyramid Model
Level I: Agreement exceeds BATNAs or RPs
Level II: Better for BOTH than some other feasible negotiable agreements
Level III: Pareto Optimal Agreement
19
Is Level 3 Easy?
Sounds easy but Hundred of negotiation simulations with executives reveals that:
Fewer than 25% reach Pareto Optimal agreements
Approximately 50% of those who do, do so by chance!
This data is based on executives performance in negotiation simulations that involve (integrative) win-win potential Thompson p73
20
Strategies That Dont Really Work
Commitment to a Win-Win Deal No guarantee
False sense of security
Compromise
Agreeing to equal concessions or splitting the difference can block expanding the pie
Focus is then on slicing not expanding the pie
21
Focus on Long term Relationships Absolutely key in some settings
BUT this does not directly translate into Win-Win in a current negotiation
It does often smooth the path
Cooperative Orientation Nice BUT
Dont let this detract from focus on eliciting/sharing the right information at the right time
Pruitt and Carnevale (1993) Dual Concern Concern for both other party & own interests
22
What DOES Work?
23
While SHARING information
Police yourself against the illusion of transparency
You believe you reveal more than you really are
You believe others have access to information about you that they dont
Avoid Haggling
Avoid haggling over a single issuea tug of war!
This lures you into compromise agreements
24
Positions vs Interests
Distinguish Positions from Interests or Priorities
Position = Stated Demand Interests = Relative Priorities of issues
25
Make Multiple Offers Simultaneously
Devise multiple issue offers
Structure these offers so that they are of equal value to you!
Make them all at one time
26
Why? Avoids sequential split the pie bargaining
Often works with an uncooperative counterpart
Helps avoid substantiation: Arguments in favor of ones position or
against your counterpart that interfere with Win-Win
27
Gains better information
Allows parties to exchange information and unilaterally deduce counterparts true interests and where joint gains lie
More persuasive
Signals priorities more effectively
28
Overcomes concession aversion
If your counterpart perceives that she has more choicesas opposed to only oneshe may be more likely to comply
29
Contingency Contracts Create Value by Building on Differences in:
Valuations
Probabilities
Time preferences
Risk attitudes
Contingency Contracts must be: Enforceable
Clear, measurable and readily evaluated
30
CLAIMING
Do not forget about CLAIMING!
Just expanding the pie is not an effective strategy
You must also be prepared to claim
31
Metamorphosis
Old Fashioned negotiator
Flower Child negotiator
Enlightened negotiator
32
Opening Gambits and Useful Tactics
33
Which do you Prefer and Why?
First Gambit: Open by asking for a lot on issues that are
important to you
Hold the fort! Dont give in
Dont immediately reveal the relative importance of issues to you
Modify the pot with issues that are not very important to you to keep the negotiation going
But do this slowly 34
Second Gambit: Introduce less important issues first and offer
early concessions on these issues as a lever to:
Try to discover the relative importance of issues to your counterpart before establishing a public position on issues that are important to you
Give some, not all information on which issues are really important to you
Then insist on a fair deal on your important issues
35
Developing a Negotiation Style
Thompson Chapter 5
Nice Discussion!
36
Does Style = Tough vs Soft? TOUGH
Unflinching, makes high, concedes little, holds out until the very end, and often rejects offers within the bargaining zone
SOFT Offers too many concessions, reveals his or
her reservation point, and is so concerned that the other party feels good about the negotiation that he or she gives away too much of the bargaining pie.
Thompson Ch. 5 pp. 96-97
37
MOTIVATIONAL STYLES
A Broad Taxonomy
See Thompson Ch. 5 pp 99
38
INDIVIDUALISTIC Her /His Objective
= SELF-INTEREST
View of others
= They are also SELF-INTERESTED
Situations that trigger this orientation
= external incentives to
MAXIMIZE OWN GAINS
39
COMPETITIVE Her /His Objective
= VICTORY!
View of others
= They are COMPETITIVE
Situations that trigger this orientation
= GROUP COMPETITION:
Interpersonal Comparisons are Salient
40
COOPERATIVE Her /His Objective
= JOINT WELFARE
View of others
= SOME COOPERATIVE, SOME
COMPETITIVE, SOME
INDIVIDUALISTIC
Situations that trigger this orientation
= Social Identity & External Goals
41
Thumbnail Summary
INDIVIDUALISTIC Maximize ones own gain. Indifferent to how
much ones counterpart gets
COMPETITIVE Beat the other side by maximizing the
difference between ones own profits and those of your counterpart
COOPERATIVE Seeks to minimize outcome differences
Thompson Ch. 5 page -99-
42
Assess YOUR Style!
Motivational Style Assessment Test
Kuhlman & Marshello (1975) J RES PERSONALITY Vol. 9 240-251
Cited in Thompson Ch 5 Exhibit 5-4 p 100
43
Nelson Contracting
Issues and Comments
44
Issues to Negotiate
Price
Design Type
Targeted Completion Time
Installation
45
Objectives
Maximize your payoff as measured in points
Do so in a fashion that engenders respect from your negotiating partner
Does she want to negotiate again with you?
46
Relative Importance
How do you discover the importance of an issue to you relative to all others?
How do you discover the importance of an issue to your negotiating counterpart
relative to all others?
47
Experiment with Multiple Offers
Discover counterparts ordinal ordering of preferences by putting two or more offers
on the table
Structure these offers so that you are indifferent among them!
48
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Lecture 5
Present Motivational Style Assessments Discuss Negotiating via Technology
Debrief Nelson Contracting
Negotiate Jessie Jumpshot
1
Lecture 5 Themes
Where did the Internet Age Come From? What works? What Doesnt ? Good Practices?
Nelson Contracting Logrolling = Multiple Simultaneous Offers
Measuring Relative Importance
Outcome Efficiency =>Efficient Frontier
Contingent Contracts Betting Against the Future
Jessie Jumpshot Instructions
2
3
Negotiation via Technology
Whats new about negotiation in the Networked Internet Age?
4
New Technology 1878 First level effect:
Direct, intended effectefficiency
Telephone as a replacement for the telegraph
In 1878 Pittsburgh telephone directly had 12 pages all for businesses
Telegraph companies emphasized the telephone as a ...recognized instrument for business purposes
Sproul and Keisler Connections: New ways of working in the networked organization MIT Press 1991
5
New Technology and the Law of Unintended Consequences
Second Level Effects -> social systems are affected by new technologies:
1920s-> Bell System emphasized the social character of the telephone: Friendships path often follows the trail of the telephone wire.
Today the telephone, internet and web are accepted as an automatic core of social and
organizational communication
Technology changes social arrangements in unintended ways! Twitter,YouTube, Facebook
etc.
6
Best practices carry over to this medium
Good interpersonal communication skills are as or more important when it
is more difficult to judge a counterparts interests because of the absence of
face to face social cues
Wellens (1989) Psychological Distancing Model
Face to Face Kinetic, Visual, Paralinguistic, Linguistic
Two-Way TV Visual, Paralinguistic, Linguistic Telephone Paralinguistic, Linguistic Computer Linguistic
7
Paralinguistic
Refers to the non-verbal elements of communication used to modify meaning
and convey emotion
Pitch
Tone
Volume
intonation
8
E-mail Biases-Thompson Ch. 12
Temporal Synchrony Bias Negotiators behave as if they are
communicating synchronously but are not
Much turn taking, back and forth dancing, schmoozing facilitates trust and rapport
Less of it in email negotiations
Burned Bridges Bias Politeness rituals are missing
Threats, demands, ultimatums are more frequent
9
Squeaky Wheel Bias Counter-normal social behavior more likely
More focus on the task content and less on etiquette
Flaming much more likely
Sinister Attribution Bias E-communicators (and Bloggers!) have a
greater tendency to attribute diabolical
intentions or malevolent motives (Kramer (1995))
10
11
Information Technology, Negotiating Power and Risk
POWER! The weak get strong Traditional status cues are missing
Status cues are harder to read
The absence of cues causes people to respond more openly and less hesitatingly
PARANOIA! Uncertainty increases paranoia. Along with a decline in social posturing and
sycophancy comes a decline in politeness and
concern for others feelings. Bluntness emerges.
12
Negotiation in the Technological Age
Who dominates a discussion? Member status is an excellent predictor of
who dominates in a face to face group
discussion
Status cues are amazingly superficial--who sits where, dress, facial expressions
High status people tend to talk more than low status
13
Email & Text Messaging-- Great Equalizers!
Static and dynamic cues about status
are minimized
Group dynamics can change dramatically:
In risky choice situations, groups that meet face to face are generally risk averse for gain choices and risk prone for choices
that involve losses Groups that decide risky choices by email
are more often risk prone !
IT Effects on Negotiation Outcomes (Thompson Exhibit 12-3)
E-Negotiation Enhanced vs. Not
vs. Face-to-face Enhanced E-Negotiaton
Impasse Rates Brief personal disclosure
over email reduces
impasse rate
Integrative More multi-issue Brief prior telephone call
Behavior offers improves joint outcomes
14
E-Negotiation
vs. Face-to-face
Expanding Mixed Results
The Pie
Pie Slicing Computer mediated leads to
more equal pie slices than
face-to-face
15
E-Negotiation Enhanced vs. Not
vs. Face-to-face Enhanced E-Negotiaton
Distributive Negotiators concerned
Behaviors about group reputation use more aggressive strategies
that lead to worse outcomes
than negotiators focused on
their own reputation
Trust Less rapport Brief prior telephone call
& Rapport increases cooperation &
relationship quality
16
17
Keys to Successful e-mail/text IM Negotiation
Make your message concise and clear! Dont overestimate other peoples ability to
understand your message
It is hard enough in face-to-face negotiation
Fit your message on a single screen Screen loading (long messages) annoy us A greater number of small exchanges is preferable
Permits rectification of misunderstandings: you can rectify misperceptions quickly
18
Keys to Success (contd)
Watch your Temper!
Face-to-face groups have behavioral norms that inhibit flaming
The absence of social context creates a feeling of anonymity
People react to one another with less politeness, empathy and inhibition if they cannot sense the others social presence
19
Flaming To speak incessantly and/or rabidly on some
relatively uninteresting subject or with a
patently ridiculous attitude
To attempt to denigrate others character, intelligence and grammar
Be careful!
Its easy to send a message that is misunderstood: Humor doesnt always work
20
Keys to Success (contd)
If possible, deliver bad news or negative feedback face-to-face Ambiguity, doubt and uncertainty afflict e-mail
exchanges
Often, frustration arises.
Frustration may seemingly be offset by an attempt to control by issuing threats
21
. e-mail negotiations often move at an unpredictable pace, since people can respond (or not respond) when they like. In group negotiations, those
who check their e-mail most frequently can end up controlling the
discussion. Those who never have a chance to contribute may choose not
to abide by the agreement, to the detriment of the group.
When facing an important e-mail negotiation with someone youve never met, do whatever you can to meet in person beforehandor, if that isnt possible, talk on the phonewith the goal of building rapport. In her research, professor Janice Nadler of Northwestern University found that
when pairs of participants engaged in a short, informal phone call prior to
negotiating the hypothetical sale of a car, they were four times more likely
to reach agreement than pairs who didnt have the chance to schmooze in advance. Even a little friendly banter at the start of an e-mail message can
help negotiators work together more creatively.
Set ground rules for your e-mail negotiations. If consensus is a worthy goal for your group, you might agree to wait 24 or 48 hours for everyone to have
time to weigh in on a decision. When finalizing an agreement, arrange a
conference call or a face-to-face meeting to make sure everyone is on
board. In the Program on Negotiation Newsletter The Negotiation Insider November 9, 2010 Adding Value to e-Negotiation (web access)
22
Effective Email & Text Messaging Strategies
MBA course at Northwestern
Approximately 50% of pairs reached the Pareto efficient frontier. This group
used:
Multiple offers of the same value in a single message
Invited suggestions to decrease hostility and encourage mutual exploration
Shared information about priorities Thompson and Kurzberg Information technology and the negotiator
Northwestern working paper
23
What went wrong? Groups that did not do as well:
Indulged in offer avoidance: wrote long paragraphs with sweeping general
statements that did not contain crisp clear
offers
Let past issues resurface
Loaded the screen with irrelevant information
Made accusations of lying, misrepresentation
Short fuse: Take it or leave it not supported by a good BATNA
Nelson Contracting
Logrolling, Relative Importance & Dealing Off the Top!
24
Wikipedia on Logrolling
A practice common in the US Congress in which two or more legislators agree for
each to trade his vote on one bill he cares
little about in exchange for the others vote on a bill that is personally much more
important to him.
Logrolling is especially common when the
legislators are relatively free of control by
their national party leaders and are trying
to secure votes for 25
bills that will concentrate sizable benefits on their own home districts while
spreading most of the costs out over
taxpayers in the rest of the country. Local
projects such as Federally funded dams,
bridges, highways, housing projects, VA
hospitals, job training centers, military
bases and the like are often pushed
through by logrolling.
See Pork Barrel Legislation, Appropriation Bill
26
27
Contingent Contracts
Bets Against the Future!
28
What is a Contingent Contract?
I believe that the odds are 6 to 4 that the Red Sox will finish ahead of the Yankees
in the American League East this season
You say Gordon, you are nuts! The Yankees will dominate the Red Sox.
The odds that the Red Sox will finish
ahead of the Yankees are only 2 to 8.
29
Gordons Assessment
Expected Value to Gordon = $20
30
Your Assessment
Expected Value to You = $60
31
Differences of Opinion Can Create Ex Ante Joint Gains
Differences in Valuation
Diagnosing Deceit
Reducing Risk
Motivating Performance
Bypassing Biases
Leveling the Playing Field
32
Bypassing Biases: Over-confidence
SIC Europe and CED formed a US joint venture
Market each others product in Europe & US?
According to SIC ,CEDs announcement of what it can sell in US is, Much too optimistic!.
According to CED ,SICs announcement of what it can sell in Europe is, Much too optimistic!.
See Bazerman HBR Sept Oct 1999
SIC+CED Contingent Contract
Key per cent ownership on 1st year sales
IF both hit targets or both undersell, each gets
IF one side under-sells & the other hits target, under-seller forfeits a fraction of
equity See Bazerman HBR Sept Oct 1999
33
34
Information AsymmetryLeveling the Playing Field
L-TEK Case Audio Division owns a magnetic technology best
commercialized by its Magnets Division
The two are negotiating technology transfer terms
Magnets has deep market info; claims annual profits of $14-15 M.
Audio Division is enamored with its technology but lacking magnet marketing info, claims $40 M
Magnet discloses its information
Audio suspects Magnet has skewed announced profits downward
Arguments and a long delay ensue See Bazerman HBR Sept Oct 1999
35
Solving the Dispute
Magnets pays an initial sum for the technology; e.g. $5 M
Magnets gets profits up to $15 M
Audio is credited with 50 % of profits above $20 M
IF $40 M happens
Audio gets $5 M + $10 M = $15 M.
If Audio believes its forecast, this looks fair
See Bazerman HBR Sept Oct 1999
36
Put Your Money Where Your Mouth Is!
Uncovering deceit! Your counterpart claims that it is almost
certain that the profits of the company you are
negotiating to buy from him will be At least $10 M.
At $10 M profit both agree the company is worth $18 M.
You reply, OK. If profits are at or above $10 M we will pay you a bonus of $1 M. If not, you
reduce the purchase price of $18 M by $5 M See Bazerman HBR Sept Oct 1999
37
Reducing Risk Catalogue Retailing
Long lead times for retail goods
Consumer demand patterns may shift dramatically between catalogue entry of product and arrival at consumers homes.
Retailer agrees to purchase N units
Producer delivers a fraction f of N prior to catalogue mailing; 1-f is backup
After an agreed on time period for observing sales, retailer has option on the remaining (1-f)N
Option is at an agreed on price
If retailer cancels remainder, she pays an agreed on penalty to the manufacturer
See Bazerman HBR Sept Oct 1999
Jessie Jumpshot
Restrictions & Instructions
38
39
Jessie and the Sharks each have an opinion about the size of merchandizing profits if the Sharks win the title and if they lose the title:
The case numbers are to be regarded as FIXED.
You negotiate salary, bonus, merchandizing profits only
No other Side Payments are allowed. No negative salaries, bonus or merchandizing profits
Restrictions
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Lecture 6
Reminder Pick up confidential info for Stakes of
Engagement from the Black Folder Box
Debrief Jessie Jumpshot
Fair Division
Rothman Art Collection
1
Themes
Creating value by exploiting differences in Probabilities
Values
How to construct an efficient frontier
What is Fair?
How do divide up indivisible goods gracefully
2
3
Jessie Jumpshot
Creating Value with Contingent Contracts
Raiffas Full Open Truthful Exchange or How to Calculate
Contracts that are Un-dominated From Lectures on Negotiation
By Howard Raiffa
(1996)
4
The Problem
Janet and Marty must divide 20 items
Contexts: Dividing an estate
Dividing a partnership
Getting a divorce
5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 J J M M M M J M M J M M M M J M J M J M
Number of Contracts = 220 = 1,048,576
6
Full Open Truthful Exchange
Parties trust each other and are willing to exchange truthful information about their preferences for a list of items.
They must decide how to divide them.
7
First Steps
List all items
Each party allocates points measuring the desirability of each item
For ease of interpretation: Each possesses 100 points to allocate
Points are non-zero and sum to 100
8
Items Janet Marty
1 1 2
2 1.5 1
3 8 5
4 1.5 3
5 9 7
6 2 3
7 3 8
8 14 30
9 0..5 1
10 0 1
11 7 4
12 0.5 0.5
13 25 18
14 0.5 1
15 10 5
16 4.5 3
17 3 0.5
18 8 4
19 0.5 1
20 0.5 2
Janet & Marty Must divide 20 Items
Each allocates 100 points among 20 items
100 100 9
Objective
Find all un-dominated allocations or contracts An allocation is un-dominated if there does not
exist an allocation preferred by both parties
Un-dominated allocations are called efficient or Pareto Optimal after the economist Vilfredo Pareto.
10
Pareto efficient allocations or contracts separate the wheat from the chaff: Separates contracts for which both can do better
from those for which it is not possible to improve both parties payoffs.
Shows where value can be created! Enables parties to focus on claiming value
once we identify all agreements that are not dominated.
WHY?
11
Steps
Compute the ratio of scores for Janet and Marty: if Janet assigns 8 points to item 3 and Marty assigns 5 points, the ratio is 8/5 = 1.60.
12
13
Figure removed due to copyright restrictions. See Figure 26 from Raiffa, Howard. Lectures on Negotiation Analysis, Program on Negotiation at the Harvard Law School, 1998.
Sort the list with the largest ratio for Janet/ Marty at the top and the smallest at the bottom: Ratios in column 4
14
Begin by allocating all items to Marty, so Janet has a score of 0 and Marty a score of 100.
The largest ratio, say, 6 means that for each point increment we add to Janet for the item at the top of the list, we only decrease Martys score by 1/6: Allocating item 17 to Janet gets her 3 points
and reduces Martys points by only .5
15
Extreme Efficient Contracts
If we continue down the list in this fashion, we generate a set of extreme efficient contracts!
Plot the extreme efficient contracts. You are now on your way to deciding what
constitutes a fair division of items. No one of these allocations (contracts) are dominated.
16
17
Figure removed due to copyright restrictions. See Figure 27 from Raiffa, Howard. Lectures on Negotiation Analysis, Program on Negotiation at the Harvard Law School, 1998.
EXTREME EFFICIENT CONTRACTS
0
10
20
30
40
50
60
70
80
90
100
0 20 40 60 80 100
JANET
MA
RT
Y
Add'l
Items
to Janet JANET MARTY
0 100
17 3 99.5
15 13 94.5
18 21 90.5
11 28 86.5
3 36 81.5
16 40.5 78.5
2 42 77.5
13 67 59.5
5 76 52.5
12 76.5 52
6 78.5 49
4 80 46
9 80.5 45
14 81 44
1 82 42
19 82.5 41
8 96.5 11
7 99.5 3
20 100 1
10 100 0
18
Extreme Efficient Contracts that Maximize
the Minimum that a Party Gets
If party 1 gets S1 and party 2 gets S2 finding Max Min {S1 , S2} is clearly not a linear problem! Finding the set of efficient contracts that
maximize the minimum any one party gets can be turned into a simple linear programming problem by a clever trick 19
Formulation
n
i
ipartytopointstotalijzijciS
otherwiseequalsandjpartytogoesiitemifijz
partytoiitemofvaluepointtheisic
partytoiitemofvaluepointtheisic
1,
01
22
;11
20
sijztheonsConstraintLineartoand
plus2ic
i2iz2Sand1ic
i1iz1S
thatsuchMax
findthenandvariablenewaDefine
itemsofnnumbertheequalssijzallofsum
and2iz11iz,exampleFor
sijztheonsConstraintLinear
n
1i2ic2iz2Sand
n
1i1ic1iz1S
tosubject
}2S,1S{MinMax
PROBLEMLPANTONTRANSLATIO
21
Fair Division Schemes
Nave, Steinhaus, Vickery
22
Fair Division Problem
An Estate consisting of four indivisible items are to be shared equally by three children
Each child assigns a monetary worth to each item
23
What is FAIR? (Brahms & Taylor 1999)
Proportionality
Envy Freeness
Equitability
Efficiency
24
Proportionality
If division is among N persons, each THINKS he/she is getting at least 1/N
25
Envy Freeness
No party is willing to give up the portion it receives in exchange for someone elses share For two parties, this = Proportionality
For more than two parties, Envy Freeness is STRONGER than Proportionality
Someone may still be getting more than you!
Envy Freeness is Proportional but not conversely
26
Equitability
Each party THINKSaccording to her/his individual preferences--that she/he received the same fraction of total value
Coupled with envy-freeness, each of two parties
would think that both exceed 50% of value, in their preference terms, by the same amount
27
Efficiency
There is no other allocation that is better for one party without being worse for one or more other parties.
28
Impossibility Theorem (Brahms & Taylor)
NO allocation scheme ALWAYS satisfies
Equitability
Envy Freeness
Efficiency
29
(Rijnierse and Potters in Brahms & Taylor)
Items Ann Ben Carol A 40 30 30 B 50 40 30 C 10 30 40
30
40-40-40 is both Efficient and Equitable
However, it is not Envy Free! Ann envies Ben for getting B which is worth 50
points to her
Allocating B to Ann and A to Ben (Carol still gets C) is Efficient but is neither Equitable nor Envy Free
Each now gets a different number of points
Ben now envies Ann
31
Dividing Indivisible Goods
Estate Planning
32
Monetary Worth To Children
Individuals
Items 1 2 3
A $10,000 $4,000 $7,000
B 2,000 1,000 4,000
C 500 1,500 2,000
D 800 2,000 1,000 33
Side Payments?
Player Allocated
to:
Worth Side
Payments
Total
1
A 10,000
2 D 2,000
3 B & C 6,000
34
Naive
Player Allocated
to:
Worth Side
Payments
Total
1
A 10,000 -4,000 6,000
2 D 2,000 +4,000 6,000
3 B & C 6,000 6000
Sum = 18,000/3 = 6000 35
NAIVE
Accounts only for item value assigned by person who values that item the most
36
Steinhaus
Player Allocated
to:
Worth Side
Payments
Total
1
A 10,000
2 D 2,000
3 B & C 6,000
Sum =18,000 37
Imagined Disagreement Point Each gets 1/3 of each item (at his/her evaluation) Items 1 2 3 A $10,000 $4,000 $7,000 B 2,000 1,000 4,000 C 500 1,500 2,000 D 800 2,000 1,000 $4,333 $2,833 $4,667 Sum of 1/3 Values = $11,033
38
Allocation of Excess Initially each gets 1/3 of each item (at his/her evaluation)
Child Disagreement
Payoff
Share of
Excess
Total
1
4,433 2,022 6,455
2 2,833 2,022 4,855
3 4,667 2.022 6,689
Sum of 1/3 of each item = 11,033 Pareto Optimal Sum = 18,000
EXCESS = 6,067 39
18,000
Steinhaus
Player Allocated
to:
Worth Side
Payments
Total
1
A 10,000 -3,544 6,455
2 D 2,000 +2,855 4,855
3 B & C 6,000 +689 6,689
0 18,000 40
Vickery Auction High Bidder Wins at 2nd Highest Price
Player Allocated
to:
Worth Side
Payments
Total
1
A 10,000
2 D 2,000
3 B & C 6,000
41
Vickery Auction Side Payments
Child
Auction
Payment
Share of
Receipts
Side
Payment
1
7,000 3,833 -3,167
2 1,000 3,833 +2,833
3 3,500 3,833 +333
Sum =11,500 1/3 of 11,500 to Each 42
Vickery Auction
Engenders HONESTY!
Does not pay to distort values assigned to individual items
43
1
-4,000
6,000
-3,545
6,455
-3,147
6,833
2
+4000
6,000
+2,855
4,855
+2,833
4,833
3
0
6,000
+689
6,689
+333
6,333
Side Payment
Side Payment
Side Payment
Total Total Total
NAIVE STEINHAUS VICKERY
44
PROBLEM!
None of these schemes DIRECTLY take into account individual (artistic) preferences of participantsonly monetary values
45
Nash-Raiffa Arbitration Scheme
Informal Summary
46
Nash Theorem
xx
xx
xxX
x
ealternativofmetoUtility)(MU
ealternativofyoutoUtility)(YU
esalternativpossibleallof Set},N,....,1{
ealternativnnegotiatioorcontractA
47
Assumptions
Utility Invariance: If two versions of the same bargaining problem
differ only in units (scale) and origins of participants utility functions then arbitrated solutions are related by the same utility transformations
48
Pareto Optimality: Given an arbitrated solution, there exists no other
arbitrated solution for which both parties are better off
49
Symmetry If an abstract version of the game places
participants in completely symmetric roles, the arbitrated value will give them equal utility payoffs
50
Independence of Irrelevant Alternatives Suppose two games have the same status quo
(BATNA) points and that the trading possibilities of one are included in the other.
If the arbitrated solution of the game with the larger set of alternatives is a feasible trade in the game with the smaller set of alternatives then it is also the arbitrated solution of the latter.
51
Nash-Raiffa Theorem
The allocation scheme that satisfies the four assumptions stated is unique.
The unique solution is found as follows:
52
]MU)(MU[]YU)(YU[Max
satisfying*isSolution
agreementsfeasibleallofsetThe
.meforQuoStatusThe"DealNo"ofUtilityMU
.youforQuoStatusThe"DealNo"ofUtilityYU
xxXx
Xx
X
53
Nash Arbitration Scheme
Fair Division of An Art Collection
The Rothman Art Collection
54
Agreed Upon Objectives
Equal Fair Market Value
Honest revelation of preferences
Allow for emotional meaning attached to items
Avoid strategic thinking
Avoid post-decisional regret
Take into account complementarity and substitutability
55
Protocol 1) Explain the process
2) Compose a list
3) Split list into manageable size categories
4) Present a few categories at once. Ask
parties to state their preferences in any way that is comfortable:
Encourage them to star important items, rank items, give opinions about trade-offs
56
5) Follow up statements about preferences.
Ask questions in a way that provides information without encouraging misrepresentation.
6) Keep all information presented to you strictly confidential.
57
7) Construct a preliminary allocation in which items are distributed such that: All parties do about equally well on their own subjective scales and Fair market values of the participants allocations are roughly equal
58
Key to Success: Differences in Relative Preferences
Give each brother more than he expected while treating each equally in $ allocated.
A random division by flipping a coin doesnt necessarily yield equal value: One brother receives 1st, 3rd, 5th, 7th
The other receives 2nd, 4th, 6th, 8th,.
If Lorin goes first he gets $39K and Paul gets $31K.
59
60
Artist Selda Gund
This allocation is described in the paragraphs below Table 1 in the Rothman Art Collection
case
($1,000) ($1,000)
Fair Market
Rank Allocation Market Values Fair Market
Item Description Value Lorin Paul Lorin Paul Lorin Paul Value
1 Brown Bear $10 2 2 0 1 $0 $10 $10
2 Lion $9 1 6 1 0 $9 $0 $9
3 Pig $8 12 8 0 1 $0 $8 $8
4 Monkey $6 13 7 0 1 $0 $6 $6
5 Polar Bear $6 5 9 1 0 $6 $0 $6
6 Rabbit $6 9 12 1 0 $6 $0 $6
7 Turtle $6 10 11 0 1 $0 $6 $6
8 Robin $2 8 13 0 1 $0 $2 $2
9 Small Bear $2 7 3 0 1 $0 $2 $2
10 Swallow $9 3 10 1 0 $9 $0 $9
11 Turkey $3 6 5 1 0 $3 $0 $3
12 Dog $2 4 4 1 0 $2 $0 $2
13 Cat $1 11 1 0 1 $0 $1 $1
I
Lorin ranks Lion 1, Paul 6: - Lion to Lorin Market Value to Each: $35 $35 $70
II Paul ranks Cat 1, Lorin 11: Assign Cat to Paul
III
Paul states that he likes Cat and Brown Bear much more than the other 11
paintings .Give Paul Brown Bear
IV Assign Pig, Monkey, Turtle, Robin & Small Bear to Paul
V Assign Polar Bear, Rabbit, Swallow, Turkey, & Dog to Lorin
Lorin gets his 1st,3rd, 4th,5th,6th and 9th ranked painting
Paul gets his 1st,2nd,3rd,7th,8th,11th and 13th ranked painting
5 of top 6
5 of top 8
Typical Problems
Items are really discrete and opinions may be lumpy.
Both may have similar rankings of preferences.
Confusing signals: Paul ranked all items in a group but starred some of them. Some starred items were ranked below unstarred items.
61
A star next to an item low in ranking signals that it was worth, to the evaluator, far more than its associated fair market value.
Complementarity: One brother may insist that a block of painting not be split up while the other wont accept that the entire block go to one party.
62
Diffusing Attention from a Single Painting
Ask for comparisons of four or five groups of paintings with the disputed painting among some of these groups.
63
Strategic Misrepresentation
This system is predicated on each brother having complete information about his own preferences, but only probabilistic information about the other brother.
With only an impressionistic understanding of the other brothers preferences, distorting your own to gain advantage MAY BACKFIRE!
64
The Potential for Strategic Misrepresentation Limits the Usefulness of
Joint Fact Finding
Mediators often ask parties to discuss issues face to face to attain convergence of beliefs.
A skilled analyst can exploit this to her advantage, because she will learn about the preferences of her counterpart.
This would destroy differences in preferences which we use to generate joint gains.
65
Sense of Loss
Even when a brother received more than he expected, he wasnt overly enthusiastic.
Emotional attachment engendered a sense of what was lost.
Reduce expectations with this was an extremely difficult category to dividebut we did the best we could
66
Gaining Closure
Get the brothers to sign off on the first half of the estate before moving on.
This will smooth discussion of the second half if the brothers are pleased with allocations on the first half.
67
Concerns about Finality
Suggest at the outset that we might meet in a year to discuss trades, a Post-Settlement Settlement.
68
MIT OpenCourseWarehttp://ocw.mit.edu
15.067 Competitive Decision-Making and NegotiationSpring 2011
For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.
Lecture 7
POWER
Introduction to Stakes of Engagement
1
THEMES The Rashomon nature of POWER in negotiation
Epic 1950 Film by famed Director Akira Kurosawa about multiple versions of the truth
Subjective value in mixed motive bargaining
Balancing subjective value and objective outcomes Complementary or substitutable?
2
3
POWER
4
POWER in Negotiation More than just a good BATNA
Having one doesnt mean much if you are not prepared to way away from a poor deal
A manifestation of complex situational factors
Power can be turned upside down! Owe the bank $10,000 and you have a problem.
Owe the bank $10,000,000 and the bank has a problem
From Micheal Wheeler Negotiation Analysis:An Introduction HBS 2000 p 10
5
Strength can be weakness and weakness can be strength Teheran 1979->Carter administration
negotiations with Revolutionary Guards, religious leaders,.
The Iranians could threaten the United States knowing that its demands would be rationally considered; by contrast, the United States was constantly frustrated by not knowing where to aim its efforts.
Micheal Wheeler Negotiation Analysis:An Introduction HBS 2000 p 11
6
ON CONFLICT Conflict is inevitable, but combat is
optional. -- Max Lucade
Speak when you are angry and you will make the best speech you will ever regret. -- Ambrose Bierce
Don't wrestle a pig in a mud hole. You both get all dirty, and the pig enjoys it. ----Anonymous
The Roles of Subjective Value in Negotiation
Curhan, Elfenbein & Xu (2006)
Subjective Value Inventory (SVI)
A research instrument used to measure feelings and perceptions concerning the instrumental outcome, the process, the self, and the relationship in negotiations.
Curhan, Eifenbein & Xu Journal of Personality & Social Psychology 91, 493-512 (2006)
Global Subjective
Value
Rapport
Instrumental
Self
Process
Relationship
Curhan et al SVI Factor Structure
0.87
0.65
0.86 0.91
0.88
Structural Equation System
RapportZ
ipRelationshX
ProcessX
SelfX
alInstrumentX
ValueSubjectiveGlobalY
4
3
2
1
XXZ
XXZY
43
21
880910
650870860
..
...
Recursive Structure
4
3
2
1
88
0
91
0
0
65
0
87
010
8601
XX
XX
..
..
Z
Y
.
..
Motivation Subjective value is A good in itself
O. Henrys The Gift of the Magi: One dollar and eighty-seven cents. That was all. And sixty cents in pennies
It is a judgmental guide to performance
We often judge how well we did based on how we feel about the negotiation
It is a predictor of future objective value It establishes reputation and social capital
Curhan, Elfenbein & Xu Op. Cit.
Rationale
In many negotiation situations you MUST: Assess the relative importance of objective
stakes and relationships in planning negotiation strategy
Assess perceived disagreement over objective stakes against the importance of a future relationship
Both objective and subjective outcomes are affected by how the relationship evolves during negotiations
Situational Matrix
Balanced Concerns
(Business Partnership,
diplomacy, prenuptial)
Relationships
(Friendship, Work
Team)
Transactions
(Divorce, House Sale,
Market Transaction,
Financial Negotiation)
Tacit Coordination
(Driving, Airplane Seating)
Perceived Conflict over Stakes
HIGH LOW
Perceived Importance Of Future Relationships
HIGH
LOW
G. R. Shell: Bargaining for Advantage: Negotiation Strategies for Reasonable People. NYC Penguin Books 1999
Reciprocity Code of Conduct Norms Individuals owe one another
because of what has been previously given to them
Be trustworthy and reliable
You have no right to ask of others what you cannot be yourself
Be fair to those who are fair to you This sustains most productive bargaining relations
Let others KNOW when you think they treated you
unfairly! Unfair treatment, left unnoticed or unrequited breeds
exploitationfollowed by resentment and collapse of the negotiation
From Shell & Nicholas E. Sabin 2005 PON
16
Dealing with Difficult People
Diplomacy is the art of letting someone have your way
Daniel Vare, Italian Diplomat The fellow who says he'll meet you halfway usually
thinks he's standing on the dividing line Orlando A. Battista
William Urys Getting Past NO! William Ury, Bantam Books (1993) Paperback
17
Urys Strategic Advice Dont React: Go to the balcony
O. Henry again: The Ransom of Red Chief It looked like a good thingwhen this kidnapping idea
struck usduring, as Bill expressed it, a moment of temporary mental apparition; but we didnt find that out until later.
Gentlemen, I hereby make you a counter-proposition, which I am inclined to think you will accept. You bring Johnny home and pay me two hundred and fifty dollars in cash and I agree to take him off your hands. You had better come at night, for the neighbors believe he is lost, and I couldnt be responsible for what they would do to anybody they saw bringing him back.
Very respectfully, Ebenezer Dorset
Getting Past NO (Op