Business System Analysis & Decision Making - Lecture 12 Zhangxi Lin ISQS 5340 July 2006

Chapter 10: Negotiation Cognition Outline of the chapter The Mythical Fixed Pie of Negotiations The Framing of Negotiator Judgment Nonrational Escalation of Conflict Negotiator Overconfidence Self-Serving Biases in Negotiations Anchoring in Negotiations Vividness in Negotiations

The Mythical Fixed Pie of Negotiations What is “Fixed pie” assumption? A fundamental, intuitive bias in human judgment that distorts negotiator behavior. When individuals approach negotiations with a fixed-pie mentality, they assume that their interests necessarily and directly conflict with the interests of the other side. Social norms lead us to interpret most competitive situations as win-lose It causes the “incompatibility bias” – that one’s own interests are incompatible with the other party’s. Example: Responses to the arm reduction proposal

The Framing of Negotiator Judgment Positive framing vs. Negative framing The effect of the selection of perceptual anchor on framing. In the example of wage negotiation Last year’s wage Management’s initial offer Union’s estimate of management’s reservation point Union’s reservation point The publicly known bargaining position In order to avoid the adverse effects of framing, negotiators should always be aware of their frames and consider the possibility of adopting alternative frames. A negotiator should always create anchors that lead the opposition toward a positive frame. A mediator should convince both parties to view the negotiation in a positive frame

Nonrational Escalation of Conflict The escalation begins when both parties enter a negotiation with extreme demands. If negotiators become committed to their initial public statements, they will nonrationally refuse to even consider concessions. Inappropriate stubbornness is likely because of “too much invested to quit”. The negative outcome of the escalation of conflict The baseball player’s strike The owner lost $375 million and $326 million in 1994 and 1995 respectively The players lost money, status, and bargaining power Sebenius and Wheeler (1994) offered a potentially advantageous strategy for resolving the disagreement: Continue the baseball season, but do not allow the teams to receive revenue or players to receive their pay. Revenues and forgone pay would go into a pool until a resolution was reached. (Why? What is the insight here?)

Negotiator Overconfidence Definition: The tendency that negotiators place too much confidence in their own assessments. Negotiators tend to be overconfident that their position will prevail if they do “give in”. If a more accurate assessment is made, the negotiator is likely to be more uncertain and uncomfortable about the probability of success and is more likely to accept a compromise. An appropriately confident negotiator exhibiting more concessionary behavior will be more likely successful. “When in Doubt, be overconfident”

Self-Serving Biases in Negotiations Definition: The tendency that people define what is fair in ways that favor themselves. “Tragedy of commons” – Herdsmen’s problem When asymmetry exists, negotiators are likely to exhibit self-serving biases in their judgments about the fairness of resource distribution. Asymmetry: Parties’ contribution to the problem vs. their willingness to cooperate with proposed solutions. (Eventually an information asymmetry problem)

Anchoring in Negotiations More extreme offers lead to better deals for those making such offers, but they also increase the likelihood of an impasse. First offers have a strong anchoring effect when great ambiguity exists. Your opponent’s first offer will have little effect on you if you focus on your own alternatives and your own objectives. While we learn a lot in the process of negotiation, we should avoid learning from the potential manipulative effect of the other side’s first offer.

Vividness in Negotiations The most common failure in assessing one’s own preferences is the tendency to overweight vivid concerns and underweight more important, nonvivid concerns. (view “Tucker”) Example: selling the extended warrantee with a new car

Conclusions Both Chapter 9 & 10 offer an overview of the decision perspective to negotiation Chapter 9 – basic analytic structure Chapter 10 – the questions that Raiffa’s work left unexamined Author’s suggestion: a successful negotiator will use descriptive models to anticipate the likely behavior of the opponent and identify errors to avoid in his/her own negotiation behavior.