SSES Negotiation and Bargaining Workshop

18Oct08

If you have ever come to Istanbul, you’d know that shopping is an experience. It is not only going to a market and paying the price and buying. In most of the traditional bazaars, it’s a common thing to negotiate the price. Many people are very used to it but what about the other ones who have never negotiated before ?

And yet, it doesn’t only happen in daily-life shopping practices, negotiation is everywhere. Whether for your salary or even for your wedding, you need to convince others. The SSES Workshop just had the title : Negotiation and Bargaining. Leaded by the PhD student Erik Wetter, we were in SSES premises at the cold weekend in Stockholm.

Mutual Gains Approach (MGA)

In any negotiation, the best outcome is the one that seems like a win-win situation. Keeping in mind that there will always be possible better agreements, MGA is the safest way to go. Here is the checklist for the MGA:

  1. Always make yourself prepared and analyze all the possible outcomes. Analyze “Best Alternative to Negotiated Agreement” (BATNA) – what you’ll get if there is no deal ?
  2. See the agreement as a total package. Don’t get stuck at the first issue. If it is a salary negotiation for your job, check the retirement payments, holidays etc. don’t overfocus on the salary itself.
  3. Clarify the agendas of the people included. Check who wants what and why.
  4. Identify opportunities, they might create problems or opportunities.
  5. Try to create a win-win situation before distributing the overall value. Try to increase the value before sharing it.
  6. Present alternative packages.

Three Core Concepts :

  • BATNA : Best Alternative to Negotiated Agreement – What you’ll get if there is no agreement / deal
  • Reservation Price : The min. and the max. of your proposed numbers.
  • ZOPA : Zone of Possible Agreement – the bargaining range, the difference between the parties reservation prices.

Human Decisions Are Effected by 8 Mechanisms

  1. Anchoring: Our brain assigns enormous weight to early information and uses it as point of reference. Early information lasts longer. Example : If one of the parties involved in the negotiation first proposes 100$ for the price, that’ll be our point of reference even though the real-price would be only 50$. Anchoring effect can also be seen in the sales of high-margin products, ie. It is easy to sell a 40$ mouse to someone who has just paid 2000$ for the computer, then he’d compare it with 2000$ and think it’s a small amount of money.

POP QUIZ :

  1. You can buy a book for 10$ here or for 5$ in a shop which is 100 meters away from here. Would you mind going there and buying it ?
  2. You can buy a laptop for 1995$ here for 1990$ in a shop which is 100 meters away from here. Would you mind going there and buying it ?

Although the amount you save is totally the same in both examples, most people would prefer to go the next shop in the first example but they wouldn’t bother going to the other one in the latter one.

2. Prospect Theory : Based on the same objective information people are inclined to make different choices depending on how the information is presented. In a situation where a positive gain is more likely to happen, people are tended to play it safe. On the other hand in a situation where a negative loss is more likely to happen, people are tended to gamble.

For example, when given a choice between getting $1000 with certainty or having a 50% chance of getting $2500 they may well choose the certain $1000 in preference to the uncertain chance of getting $2500 even though the mathematical expectation of the uncertain option is $1250. This is a perfectly reasonable attitude that is described as risk-aversion. But Kahneman and Tversky (2002 Nobel Prize winners in Economics) found that the same people when confronted with a certain loss of $1000 versus a 50% chance of no loss or a $2500 loss do often choose the risky alternative. This is called risk-seeking behavior. This is not necessarily irrational but it is important for analysts to recognize the asymmetry of human choices. ( Peter Bernstein, Against the Gods: The Remarkable Story of Risk, John Wiley & Sons, New York, 1996.)

3. Reciprocity : When someone does something good for you – even though it is a small thing – it’s hard to refuse them when they need you. This explains most of the marketing campaigns where companies give out free stuff to people. Then people are more inclined to buy their products next time.

4. Commitment and Consistency : Having competitions of writing essays about why Coca-Cola is the best company makes people think as if it was the truth. Then this thinking turns into adaptation of attitudes. Especially if the commitment is voluntary, active or public, it turns into consistency more easily.

5. Social Proof : In an environment where you are not certain about what to do, you’d be more prone to imitate others’ actions. Ie. If you’d see all the people on the street running away, you’d also run away without reasoning it. In negotiations, referring to industry standards, market shares let you have a social proof. Remember the  advertisements that start like “100.000 people can’t be wrong”.

6. Liking : We are more prone to be influenced by persons we perceive as similar to us in any regard. When you see someone from your neighborhood but have never spoken to, in an environment where you don’t know anyone else, you’d be prone to be influenced by him more than the others. In negotiation, try to find common points of reference to get this effect. This is called “Tjena tjena effekt” in Swedish.

7. Authority: Application People organize in hierarchies and tend to obey the ruler in most cases. Age, physical fitness, uniforms, clothes all indicate the status of your opponent in a negotiation. Also 3rd party techniques (ie. recommended by Swedish dentists), being recommended by an authority always make your cards more powerful in a negotiation.

8. Scarcity : Having a limited-edition or exclusive titles in your offer makes it more valuable than it’d be otherwise. This can be seen in clubs of Stockholm where people wait outside in the queue even if there’d be a lot of places inside. This feeling of being exclusive makes people come again and again.

Summary (from Erik Wetter’s Slides ) :

  • Prepare : Analyze the situation, BATNA
  • Probe : For underlying interests
  • Propose: Try to create alternative packages

Beware of :

  • Positions : It’s easy for you or the other party to get stuck
  • Prestige: Is always a deal-breaker. Don’t make the other party lose face.
  • Politics: Are there other dynamics that affect the other party’s behavior ?

Random NOTES :

  • Low level of stress is good to keep focused, but high-level leads to more instinctive bahaviours.
  • If you are going to China to get an agreement in a week, they’d wait for the last day to finish it and make you see around for the first 6 days in order to get your stress level high and make wrong decisions.
  • Don’t escalate with the people who tend to hard-bargain.
  • Try to find which budget the other party would use to pay the bills. The amount will change if they’d take it from the IT budget or the Consultancy budget. (IT budget is expected to be more.)
  • Keep the small details to the end. Remember the 2000$ computer 40$ mouse example.
  • Follow my blog and comment !

Source : My personal notes from the workshop and Erik Wetter’s handouts.

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