1. Negotiating Rationally

2. Framing
You are a wholesaler of refrigerators. Corporate policy does not allow any flexibility in pricing. There is flexibility in the expenses you incur (shipping, financial terms, etc.), which have a direct effect on your profitability. You are negotiating an $8,000 sale. The buyer wants you to pay $2,000 in expenses; you want to pay less. When you negotiate the exchange, do you try to minimize your expenses by reducing them from $2,000, or maximize net profit (price less expenses) by increasing it from $6,000?

3. The Campeau-Federated Merger
In 1987, Robert Campeau, then one of Fortune’s ”50 most interesting people”, sought to acquire the nation’s most profitable department store, Bloomingdale’s, both for its value and its drawing power for the shopping malls he planned to build. On January 25, 1988, he initiated a hostile takeover bid for Bloomingdale’s parent company, Federated Dept. Stores.
A highly public bidding war ensued between Campeau and Macy’s over what was to become the largest and most visible retail merger in history. By March 25, WSJ reported that “we’re not dealing in prices anymore but egos. What’s been offered is top dollar, and beyond what anyone expected.” As this was going on, however, Federated’s value was decreasing as managers defected and as plans concerning upcoming purchases and promotional expenditures collapsed.

4. Campeau-Federated Merger
On March 31, with Macy’s on the verge of winning the bidding war, Campeau approached them with an eleventh-hour offer to cede victory if Macy’s would sell him Bloomingdale’s and Burdines. Macy’s refused!
Campeau retaliated by topping Macy’s already high offer to roughly $500 million. With this irrational act, Campeau won the battle, but lost the war. In January, 1990, he declared bankruptcy.
“I won the auction, but I don’t want the prize”

5. Winner’s Curse
Your company transfers you to a new city (or you accept a job with a new firm in a different city) that you don’t know well. The real estate market in the new city is favorable to buyers. You wish to avoid moving twice, so you decide to buy a house. While you know very little about the real estate in this new city, a friend has recommended a “very good” real estate agent. After looking at eleven houses in two days, you make an offer on a house. It is immediately accepted. Did you make a good purchase?

6. Please draw four (and only four) straight lines that connect all nine dots shown here without lifting your pencil from the paper . . . . . . . . .

7. The Mythical Fixed-Pie Effect
People often make an assumption that frames the problem, but keeps them from finding a solution. This is the most critical barrier to creative problem solving. People make false assumptions about problems to fit them into their previously established expectations, but successful creative solutions often lie outside these self-imposed assumptions.
EXAMPLE: South Carolina Congressman Floyd Spence, in reference to a proposed SALT treaty: “I have had a philosophy for some time in regard to SALT, and it goes like this: the Russians will not accept a SALT treaty that is not in their best interest, and it seems to me that if it is in their best interest, then it can’t be in our best interest.”

8. The Prisoner’s Dilemma
Imagine that two accomplices in a crime have been interrogated separately. The police are confident that even if neither prisoner confesses or squeals on the other, they can convict both prisoners on minor charges and put them in prison for two years. However, the police really want at least one conviction on a higher charge and have offered each prisoner a deal. If either gives evidence that would lead to the conviction of his/her accomplice on higher charges, charges will be dropped and s/he will go free while the accomplice gets a ten-year sentence. If both squeal, then they will each get six-year sentences. Thus, for each prisoner, if his/her partner squeals, s/he could end up with the ten-year sentence while the partner goes free. What should the prisoners do? What would you do?

9. Prisoner’s Dilemma (cont’d)
The two prisoners are confronted with a situation in which they are both better off collectively if they stay silent (cooperate) than if they both squeal (defect); however, individually, each one is better off defecting, regardless of what the other party does.
Similar social dilemmas abound:
The budget dilemma
Southern California drought
Public television
Ordering lunch

10. Prescription for dealing with social dilemmas
Rule #1 - Don’t be envious
Rule #2 - Don’t be the first to defect
Rule #3 - Reciprocate both cooperation and defection (“Tit for Tat” strategy)
Rule #4 - Don’t be too clever. (Your strategy must be clear if you want your opponent to understand your message.)

11. Rational negotiation tactics
Always determine your BATNA (“Best Alternative To a Negotiated Agreement”) prior to the negotiation process.
BATNA provides a precise lower bound for the minimum requirements of a negotiated agreement.
Similar to the negotiator’s reservation point - the point where a negotiator is indifferent between a negotiated agreement and impasse
Always try to determine your opponent’s BATNA.

12. Rational negotiation tactics (continued)
Determine the interests of each party
Example: Prior to the Camp David agreement between Israel and Egypt, both parties described their interests as ownership of the Sinai peninsula. Both countries tried to negotiate for control of the peninsula, a situation in which it appeared that the two sides had directly opposing goals. Egypt wanted return of the Sinai in its entirety, while Israel, which occupied the territory since 1967, refused to return the land. Efforts at compromise failed. Neither side found the proposal of splitting the Sinai acceptable.

13. Creating Integrative Agreements
One-issue negotiations are distributive by definition (i.e. there really is a fixed-pie). If additional issues are added, however, the search for ways to increase the amount of total benefit available to the parties becomes possible by capitalizing on differences in the parties preferences. Thus, the degree of integration attained by an agreement can be defined as a measure of the relative efficiency of the negotiated agreement in allocating the available resources. If another agreement exists that both parties would prefer, the existing agreement is pareto inefficient. An agreement is pareto efficient when there is no other agreement that would make any party better off without decreasing the outcomes to another party.

14. Build Trust and Share Information
The easiest way to find the optimal integrative agreement is for both parties in a negotiation to share all information. It then becomes a straightforward (and often arithmetic) task to determine the outcome that maximizes joint benefit.
Why doesn’t this happen? How do we solve this?

15. Ask Lots of Questions
In some cases (actually, most cases) full information sharing doesn’t occur. In some situations, there may be information that works against the negotiator if the other party obtains it. The simple strategy of asking many questions can provide a negotiator with significantly more information - even if the opponent refrains from answering many of the questions posed. Information can be gained from what is not said as well as what is said.

16. Give Away Some Information
Consider the situation in which there is low trust between the parties, and the opponent is not answering informational questions in a useful way. Giving away some information may help break this deadlock. While you don’t want to give away your BATNA, you can offer information of comparatively minor importance. This may help direct the negotiations in a way to direct identify and implement trade-offs.

17. Make Multiple Offers Simultaneously
In many cases, a negotiator won’t have all the necessary information when they are required to propose an offer. The common tactic in such a situation is to propose only one offer; if it is turned down, however, then the negotiator has not learned much. Try throwing more than one option on the table and ask the other party to pick the one that is closest to their desired offer.
Why does this work?

18. Search for Post-settlement Settlements (PSS)
After an initial agreement is reached, there may be ample opportunity for contract modification. If an agreement is reached and the participants are not confident that they have reached a Pareto efficient outcome, they may hire an outside consultant to propose a better solution. Both parties agree to be bound by the initial agreement if no better agreement is found by the third-party consultant. However, if a better agreement is found, the two parties will share the surplus.
How might this be both advantageous and problematic?