#89 Making Rational Decisions in Negotiations
In this post we will discuss a framework for thinking about two-party negotiations and suggestions for improving decision making within this context.
Decision Analytic Approach to Negotiations
The following sets of information determines the structure of the negotiation.
Each party's alternative to a negotiated agreement
Each party's set of interests
The relative importance of each party's interests
Before we begin any important negotiation we must determine our Best Alternative To a Negotiated Agreement (BATNA). BATNA provides a lower bound for determining the minimum outcome we require of a negotiated agreement. If the offer from the other party is better than your BATNA accept it. If not, reject it. In addition to identifying our BATNA, we must identify our interests and the relative importance of each interest.
To analyze a negotiation, it is necessary to identify the interests of the other party. The other party usually state their position (or asks), we need to understand the motives behind these positions i.e. interests.
It is not enough to know the other party's interests. We should know how important each issue is to you and have a sense of how important each issue is to your counterpart. The best agreements are reached by trading off relatively unimportant issues for more more important ones.
The BATNA, each party's set of interests, and relative importance of each party's interests will help with two primary tasks of negotiation - creating and claiming value. One issue negotiations involve the claiming of value. Most important negotiations are more complex, involving many disputed issues. Through the process of identifying and adding issues, the parties have the potential to create value.
While trading issues is the most common way to create value in a negotiation, you can create value by betting on disagreements about the future - also known as contingent contracts. Bets can be extremely useful in short-circuiting debates over the likelihood of future uncertain events. Contingent contracts allow parties to bet on their own biased beliefs.
The tools of value creation
It is difficult to create value when you lack key information about the other side's interests and positions. Below are six strategies for collecting that information. Strategies that are higher on the list work best when you trust the other side, Strategies that are lower on the list when your relationship with the other side is competitive or hostile.
Build Trust and Share Information: The easiest way for parties to create value is for the two negotiators to share information with each other about their preferences - specifically, the values that they place on different issues
Ask Questions: By asking questions, you increase the likelihood of learning critical information that will allow you to find wise trades. Before you start to negotiate, assess the information that you need from the other side, then ask the questions necessary to collect this information
Strategically Disclose Information: Reveal information of comparatively minor importance that focuses on the trades you are willing to make. The goal is to share information incrementally, back and forth
Negotiate Multiple Issues Simultaneously: While negotiating issues simultaneously it is easier to find favorable, value creating trades across issues
Make Multiple Offers Simultaneously: Making multiple offers will help you understand the other party's preferences and needs. You can ask the other party which offer they like the most, what do they like about an offer, what they do not like about it. It also signals that you are willing to be accommodating
Search for Post-Settlement Settlements: After a contract is signed, consider asking the other side whether she would be willing to take another look at the agreement to see if it can be improved
Summary
Preparation is crucial to obtaining the desired results in a negotiation. A high quality preparation requires you to reflect on a number of simple but important questions. Some questions to consider:
What is your BATNA?
What is your reservation price?
What are the issues in this negotiation?
How important is each issue to you?
What do you think the other party’s BATNA is?
What do you think their reservation price is?
How important do you think each issue is to them?
Are there viable trades that create value?
Are you and the other party in disagreement about future events? If so, is a bet viable?
How will you go about identifying the information that you do not currently know?
This post is a summary of a chapter from the book - Judgment in managerial decision making by Max Bazerman and Don Moore