HC1: Introduction
Definitions of negotiations:
‘A process in which two or more parties exchange goods or services and attempt to agree
upon the exchange rate for them’
or more broadly:
‘Negotiation is an interpersonal decision-making process necessary whenever we cannot
achieve our objectives single-handedly’
Target/aspiration point: price you would be happy with.
Reservation point: price at which you are indifferent between getting the deal or not getting the deal
(worst acceptable outcome).
Bargaining zone/zone of possible agreements: range between reservation points of both
negotiators.
Whilst determining an aspiration point, three problems might arise:
1. Underaspiring negotiator: Settles for too low; often, first offer is accepted immediately
2. Overaspiring negotiator: Wants to settle for too high; refuses to make concessions
3. ‘Grass is greener’ negotiator: Doesn’t know what he/she wants to settle for, only that it’s
more/different than what the other party is willing to offer (reactive)
In a negotiation you should:
Before you start negotiating, you should determine your reservation point (price at which
you are indifferent between getting the deal or not getting the deal).
Consider the consequences of failing to reach an agreement, and know your alternatives.
Determine your BATNA (Best Alternative To a Negotiated Agreement) and quantify it.
The purpose of a BATNA is to protect against accepting an agreement you should reject and rejecting
an agreement you should accept.
The ‘falling in love’-rule states that you should never fall in love with one job, house etc. You should
always keep multiple options open and constantly try to improve your BATNA.
,HC2: Game theoretic approach to negotiations - part 1
Game theory is the art of understanding the situation (= game) you are facing, interpreting and
revealing information and putting yourself in others’ shoes so as to predict and influence what they
will do.
Simultaneous Move Games: Situations in which players have the same decision “deadline.”
Sequential Move Games (time component): Situations in which players move in turns.
Game theory studies strategic environments that involve several players who make choices. It makes
the following assumptions:
Rationality (maximizing your own payoff)
Reasoning about others’ choices
Common knowledge of rationality
Common knowledge of the game
The rule for solving sequential move games is to: look forward and reason backward.
This leads to the Nash equilibrium, which is when no player wants to deviate to another strategy
given the rest of the players are playing the equilibrium strategy.
There is an advantage to making the last take-it-or-leave-it offer, however this advantage diminishes
as there are more turns in the game. BATNAs also affect the negotiation process.
HC3: Game theoretic approach to negotiations - part 2
People can make (credible and non-credible) promises, commitments and threats during a
bargaining process. Non-binding communication is called ”cheap talk”.
Commitment devices can be used in many strategic situations, if it’s possible to force an outcome
(s)he favors by irrevocably committing to a certain plan of actions before the game is played. These
usually involve some form of limiting that own player’s choices. The difference between cheap talk
and commitment devices is that a binding action is taken (e.g. installing an automated program to
reject certain offers in an ultimatum game).
In ultimatum games it has been shown through experiments that people have other-regarding
preferences (such as: altruism, fairness concerns and shame), that they show strategic offers and
that they follow social norms and habits. It has also been shown that participants (player A’s) in
ultimatum games learn to use the process of backward induction through experience. Evidence of
ultimatum game experiments show that half of player B’s reject offers that are less than 20% of the
pie, this is explained through them being influenced by their emotions, instinct, and hormones. But
also player B’s learn through experience to use backward induction in ultimatum games.
Know for complex bargaining game (management vs union):
Define which party makes the last offer (uneven number = party making first offer/even
number = the other party)
Compute the precise shares for the last decision nodes in the tree (with backward induction)
Equilibrium prediction (= profit - outside options / split this in half and add the respective
outside options)
, HC4: Slicing the pie
The bargaining zone/surplus was identified as being the overlap between parties’ reservation point
(see below).
The process of “splitting the pie” is about getting the most of the bargaining surplus for yourself in a
negotiation process. the mixed-motive nature of negotiation says that negotiating requires balancing
between co-operation (cooperating with the other party to reach a settlement) and competition
(competing with the other party to maximize surplus).
There are several pie-slicing strategies that can be used to maximize your own share of the surplus in
a negotiation process, namely:
1. Assess and improve your BATNA: it’s important to think about your BATNA before
negotiating to: know your bottom line and to temper the influence of the counterparty. Also
improving your BATNA before you negotiate can lead to better deals.
2. Determine (but do not reveal) your reservation point : it’s also important to determine your
reservation point, based on your BATNA and to never reveal it. There can be situations in
which revealing/signaling your reservation price is smart, such as when the negotiating time
is up and you are about to walk away and also when you have a great BATNA and would be
happy if it is matched. Also never lie about your BATNA, it is unethical and can lead to nasty
confrontations (it can ‘safe face’ and prevents damage to your reputation). Another problem
that might occur is that the bargaining zone could become very small and might even
become negative if you lie about your reservation point and adjust it downwards.
3. Estimate other party’s BATNA and reservation point : It helps to know the other party’s
BATNA before you go into the negotiation process, you can do this by researching the
characteristics of the other party.
4. Set high but realistic aspirations : your aspiration point defines the upper limit in
negotiations, therefore it is good to set high aspirations, seeing as they also generally lead to
better outcomes. However, it is important to never make extreme offers because they might
offend the other party (chilling effect). The goal setting paradox says that if you focus on
your reservation point you do worse in negotiations but feel better and if you focus on your
target/aspiration point you do better in negotiations but feel worse.
5. Make the first offer (if you are prepared): If you are prepared to do so it is beneficial to be
the first to make an offer, seeing as the first offer is an important anchoring point (Final
offers correlate 0.85 with final outcomes). Also it is important to not make premature
concessions after your first offer.
Definitions of negotiations:
‘A process in which two or more parties exchange goods or services and attempt to agree
upon the exchange rate for them’
or more broadly:
‘Negotiation is an interpersonal decision-making process necessary whenever we cannot
achieve our objectives single-handedly’
Target/aspiration point: price you would be happy with.
Reservation point: price at which you are indifferent between getting the deal or not getting the deal
(worst acceptable outcome).
Bargaining zone/zone of possible agreements: range between reservation points of both
negotiators.
Whilst determining an aspiration point, three problems might arise:
1. Underaspiring negotiator: Settles for too low; often, first offer is accepted immediately
2. Overaspiring negotiator: Wants to settle for too high; refuses to make concessions
3. ‘Grass is greener’ negotiator: Doesn’t know what he/she wants to settle for, only that it’s
more/different than what the other party is willing to offer (reactive)
In a negotiation you should:
Before you start negotiating, you should determine your reservation point (price at which
you are indifferent between getting the deal or not getting the deal).
Consider the consequences of failing to reach an agreement, and know your alternatives.
Determine your BATNA (Best Alternative To a Negotiated Agreement) and quantify it.
The purpose of a BATNA is to protect against accepting an agreement you should reject and rejecting
an agreement you should accept.
The ‘falling in love’-rule states that you should never fall in love with one job, house etc. You should
always keep multiple options open and constantly try to improve your BATNA.
,HC2: Game theoretic approach to negotiations - part 1
Game theory is the art of understanding the situation (= game) you are facing, interpreting and
revealing information and putting yourself in others’ shoes so as to predict and influence what they
will do.
Simultaneous Move Games: Situations in which players have the same decision “deadline.”
Sequential Move Games (time component): Situations in which players move in turns.
Game theory studies strategic environments that involve several players who make choices. It makes
the following assumptions:
Rationality (maximizing your own payoff)
Reasoning about others’ choices
Common knowledge of rationality
Common knowledge of the game
The rule for solving sequential move games is to: look forward and reason backward.
This leads to the Nash equilibrium, which is when no player wants to deviate to another strategy
given the rest of the players are playing the equilibrium strategy.
There is an advantage to making the last take-it-or-leave-it offer, however this advantage diminishes
as there are more turns in the game. BATNAs also affect the negotiation process.
HC3: Game theoretic approach to negotiations - part 2
People can make (credible and non-credible) promises, commitments and threats during a
bargaining process. Non-binding communication is called ”cheap talk”.
Commitment devices can be used in many strategic situations, if it’s possible to force an outcome
(s)he favors by irrevocably committing to a certain plan of actions before the game is played. These
usually involve some form of limiting that own player’s choices. The difference between cheap talk
and commitment devices is that a binding action is taken (e.g. installing an automated program to
reject certain offers in an ultimatum game).
In ultimatum games it has been shown through experiments that people have other-regarding
preferences (such as: altruism, fairness concerns and shame), that they show strategic offers and
that they follow social norms and habits. It has also been shown that participants (player A’s) in
ultimatum games learn to use the process of backward induction through experience. Evidence of
ultimatum game experiments show that half of player B’s reject offers that are less than 20% of the
pie, this is explained through them being influenced by their emotions, instinct, and hormones. But
also player B’s learn through experience to use backward induction in ultimatum games.
Know for complex bargaining game (management vs union):
Define which party makes the last offer (uneven number = party making first offer/even
number = the other party)
Compute the precise shares for the last decision nodes in the tree (with backward induction)
Equilibrium prediction (= profit - outside options / split this in half and add the respective
outside options)
, HC4: Slicing the pie
The bargaining zone/surplus was identified as being the overlap between parties’ reservation point
(see below).
The process of “splitting the pie” is about getting the most of the bargaining surplus for yourself in a
negotiation process. the mixed-motive nature of negotiation says that negotiating requires balancing
between co-operation (cooperating with the other party to reach a settlement) and competition
(competing with the other party to maximize surplus).
There are several pie-slicing strategies that can be used to maximize your own share of the surplus in
a negotiation process, namely:
1. Assess and improve your BATNA: it’s important to think about your BATNA before
negotiating to: know your bottom line and to temper the influence of the counterparty. Also
improving your BATNA before you negotiate can lead to better deals.
2. Determine (but do not reveal) your reservation point : it’s also important to determine your
reservation point, based on your BATNA and to never reveal it. There can be situations in
which revealing/signaling your reservation price is smart, such as when the negotiating time
is up and you are about to walk away and also when you have a great BATNA and would be
happy if it is matched. Also never lie about your BATNA, it is unethical and can lead to nasty
confrontations (it can ‘safe face’ and prevents damage to your reputation). Another problem
that might occur is that the bargaining zone could become very small and might even
become negative if you lie about your reservation point and adjust it downwards.
3. Estimate other party’s BATNA and reservation point : It helps to know the other party’s
BATNA before you go into the negotiation process, you can do this by researching the
characteristics of the other party.
4. Set high but realistic aspirations : your aspiration point defines the upper limit in
negotiations, therefore it is good to set high aspirations, seeing as they also generally lead to
better outcomes. However, it is important to never make extreme offers because they might
offend the other party (chilling effect). The goal setting paradox says that if you focus on
your reservation point you do worse in negotiations but feel better and if you focus on your
target/aspiration point you do better in negotiations but feel worse.
5. Make the first offer (if you are prepared): If you are prepared to do so it is beneficial to be
the first to make an offer, seeing as the first offer is an important anchoring point (Final
offers correlate 0.85 with final outcomes). Also it is important to not make premature
concessions after your first offer.
