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 nego- tiator’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
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 under- aspiring 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
4 Allan, N. (2010, January 25). America’s most expensive real estate deal goes bust. The Atlantic Wire. Theatlanticwire.com 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.
5 Grosskopf, B., Bereby-Meyer, Y., & Bazerman, M. (2007). On the robustness of the winner’s curse phenomenon.
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 counter- party, 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 ( B est A lternative T o a N egotiated A greement). 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 IS TIME SENSITIVE Your BATNA—once properly identified—is time sensi- tive. 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
6 Schaper, D. (2010, November 12). Not so fast: Future for high-speed rail uncertain. National PublicRadio. Npr.org 7 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 egal- itarianism 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.
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
DO NOT LET THE OTHER PARTY MANIPULATE YOUR BATNA The other party has an incen- tive 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.
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, B. (2010, May 10). IMF approves Greek bailout, urges against debt default. The Wall Street Journal. Wsj.com 14 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
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 actu- ally 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: 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. Step 2: 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 alterna- tive 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 re- duce 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.
Step 3: 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.
Step 4: 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
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 particu- lar 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%, mean- ing 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.
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.
15 Lovallo, D., & Kahneman, D. (2003). Delusions of success: How optimism undermines executives’ decisions. Harvard
Business Review, 81 (7), 56–63.
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