Hand out Neale & Lys Talk 2.0

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REFINED NEGOTIATION: THE SCIENCE OF GETTING (MORE OF) WHAT YOU WANT BY INTEGRATING PSYCHOLOGY AND ECONOMICS Margaret A. Neale Stanford Graduate School of Business Thomas Z. Lys Kellogg School of Management 1

Transcript of Hand out Neale & Lys Talk 2.0

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REFINED NEGOTIATION: THE SCIENCE OF GETTING (MORE OF) WHAT YOU WANT BY INTEGRATING PSYCHOLOGY AND ECONOMICS

Margaret A. Neale Stanford Graduate School of BusinessThomas Z. Lys Kellogg School of Management

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Why Economics?• Economists study peoples’ pursuit of their self

interest, while understanding that their counterparts will do the same.

• When you are trying to get (m ore of) what YOU want, your counterparts are trying to get (more of) what THEY want!

Develop strategies and tactics that incorporate not only your perspective but also the perspective of your counterpart.

Negotiation is a sequential, strategic interaction, so to get (more of) what you want you must think strategically

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Strategic and Non-strategic Interactions

• Payoffs of counterpart are independent

• No need to analyze payoffs and incentives of counterpart

• Payoffs of counterpart are interdependent

• Analysis of payoffs and incentives of counterpart is crucial

Non-Strategic Strategic

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Negotiations are Sequential Strategic Interactions

•You make a proposal, your counterpart responds, you respond, and so on until agreement is reached or impasse declared.

• Important Rule: Look ahead and reason back!

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Example: The Truel

Mr. Whiteaccuracy = 33%

Mr. Blackaccuracy = 100%

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Mr. Greyaccuracy = 50%

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Why Psychology?• Psychologists study peoples’ systematic

deviations from rationality.• When you are trying to get (more of) what YOU

want, understand that • you are subject to systematic biases and influences • your counterparts is also subject to systematic

biases and influences • To get (more of) what you want, choose

strategies and tactics that incorporate both the rational and nonrational, but systematic, behaviors of your counterpart.

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Why Psychology?

• Anchoring (and Insufficient) Adjustment• Judgments of value tend to be anchored on

irrelevant or inappropriate information• Framing

• People are risk averse when confronting potential gains and risk seeking when confronting potential losses.

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100,000

110,000

120,000

130,000

140,000

119,000 129,000 139,000 149,000

Subj

ect E

stim

ates

Listing Prices

Listing PriceAppraisal ValuePurchase PriceLowest Offer

The Power of the Anchor to Influence Value

Northcraft, Gregory B., and Neale, Margaret A. (1987). Experts, amateurs, and real estate: An anchoring‑and‑adjustment perspec tive on property pricing decisions. Organizational Behavior and Human Decision Processes, 39, 84‑97.

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FRAMINGA large car manufacturer has recently

been hit with a number of economic difficulties and it appears as if three plants need to be closed and 6,000 employees laid off. The vice-president of production has developed two plans to avoid this crisis.

Which plan would you select?

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FRAMINGPlan A: This plan will save one of the three plants and 2,000 jobs.Plan B: This plan has a 1/3 probability of saving all three plants and all 6,000 jobs, but has a 2/3 probability of saving no plants and no jobs.

76% of participants choose Plan APlan a: This plan will result in the loss of two of the three plants and 4,000 jobs.Plan b: This plan has a 2/3 probability of losing all three plants and all 6,000 jobs, but has a 1/3 probability of losing no plants and no jobs

87% of participants choose Plan b

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This battle mental state creates a negative frame through which negotiators

• Assess their counterparts’ behavioral intentions

• Sets the tone for the interaction• Escalates conflict where winning becomes

more important than the quality of what is won

The Common View of Negotiation: A Battle

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To Get More of What You Want:

Broaden Your Definition

Negotiation is the process where two or more people decide what each is willing to give and hopes to get in their interaction and, through a process of mutual influence and persuasion, exchange proposals and agree on a common course of action.

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Collaborative problem solving rather than a battle

• Negotiations are interdependent – you and your counterpart must voluntarily agree to an outcome.

• Create solutions where you are better off than the status quo (or your alternatives) and your counterparts may be better off, but certainly not worse off, than their alternatives or status quo.

Rethink Your Perspective

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Expand What is Negotiable Everything: From (Big “N”) Negotiations including Nuclear treaties with Iran to (little “n”) negotiations over routine issues such as those in meetings or family interactionsDevelop fluency across different negotiating situations and counterparts

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Getting an agreement is not the goal of a negotiation!

What you want from your negotiation is a good deal!

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Know What’s a Good Deal

To assess the quality of a proposed deal, you need to know:• What are your alternatives if no

agreement were reached?

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The Importance of Alternatives• Think of your alternative as a safety net• Your alternative influences your willingness to walk

away.• Your willingness to walk away (or at least convince the other

side that you will) is your greatest source of power in a negotiation.

• The better your alternative, the more value you can claim and the more aggressive and assertive you will act

• Alternatives can anchor you to what you believe is a reasonable outcome

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Pinkley, R. L., Neale, M. A., & Bennett, R. J. (1994). The impact of alternatives to settlement in dyadic negotiation. Organizational Behavior and Human Decision Processes, 57(1), 97-116. Morris, M. W., Larrick, R. P., & Su, S. K. (1999). Misperceiving negotiation counterparts: When situationally determined bargaining behaviors are attributed to personality traits. Journal of Personality and Social Psychology, 77, 52-67

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Know What’s a Good DealTo assess the quality of a proposed

deal, you need to know (at a minimum!):• What are your alternatives if no

agreement were reached?• What is your reservation price (bottom

line)?

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Reservation Prices• Reservation price is a bright-line standard

between agreement and impasse• One of the most strategic pieces of information

• Does it make sense to reveal your bottom line?• If you do, it may be the most you will get!• If you do, will your counterparts believe you?

• Revealing your true reservation price increases the likelihood of impasse.• And it is the person to whom the reservation price is revealed who is

more likely to walk away!

• Is there a better way ? White, S. B., & Neale, M. A. (1994). The role of negotiator aspirations and settlement expectancies in bargaining outcomes. Organizational Behavior and Human Decision Processes.

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Know What’s a Good DealTo assess the quality of a proposed deal,

you need to know (at a minimum!):• What are your alternatives if no

agreement were reached?• What is your reservation price (bottom

line)?• What is your aspiration?

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AspirationsAn optimistic assessment of what you could achieve in this negotiation

• Offsets your natural tendency to anchor on your alternatives

• Influences your expectations of what is possible

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Three Secrets to Getting (more of) What You Want

• Expectations• Justifications• Packages

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Expectations

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Expectations Drive Behavior

•First offers

Galinsky, A. D., & Mussweiler, T. (2001). First offers as anchors: The role of perspective-taking and negotiator focus. Journal of personality and social psychology, 81(4), 657-669

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Make the First Offer

Recent research demonstrates that on average those who make the first offer get more than those who receive the first offer and

• That making the first offer influences how much value that negotiator may claim but does not influence how much value they create

• That making the first offer and getting more influences both parties in a post-settlement settlement conference to give the negotiator who made the first offer more.

• That making the first offer results in getting more even when the negotiator has less power than his/her counterpart

• These effects seem to hold across cultures. Even in Eastern cultures, those who make first offers get more.

Gunia, G.C., Swaab R.I., Sivanathan, N., & Galinsky, A.D. (2013). The remarkable robustness of the first-offer effect: Across culture, Power, and Issues. Personality and Social Psychology Bulletin, 1.

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Expectations Drive Behavior

•First offers•Aspirations versus Alternatives

Galinsky, A. D., Mussweiler, T., & Medvec, V. H. (2002). Disconnecting outcomes and evaluations: the role of negotiator focus. Journal of personality and social psychology, 83(5), 1131

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Expectations Drive Behavior

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Aspiration Alternative

OutcomeSatisfaction

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Justifications

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The Power of Justifications

• Their presence is often more powerful than their quality. • More powerful the more objective they appear

when scrutinized

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The Power of a Justification

• May I use the copy machine?• May I use the copy machine

because I am in a rush?• May I use the copy machine

because I need to make copies?

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Compliance in the Copy Line

5 Copies0

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70 request only

request only

Langer, E. J., Blank, A., & Chanowitz, B. (1978). The mindlessness of ostensibly thoughtful action: The role of placebic information in interpersonal interaction. Journal of personality and social psychology, 36(6), 635.

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Compliance in the Copy Line

5 Copies0

102030405060708090

100

request only

request plus good reason

Langer, E. J., Blank, A., & Chanowitz, B. (1978). The mindlessness of ostensibly thoughtful action: The role of placebic information in interpersonal interaction. Journal of personality and social psychology, 36(6), 635.

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Compliance in the Copy Line

Langer, E. J., Blank, A., & Chanowitz, B. (1978). The mindlessness of ostensibly thoughtful action: The role of placebic information in interpersonal interaction. Journal of personality and social psychology, 36(6), 635.

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The Power of Justifications

• Their presence is often more powerful than their quality. • More powerful the more objective they appear when

scrutinized

• Mitigate a counterpart’s resistance to unexpected behaviors – explaining why helps.

• Increase the anchoring power of an offer

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Package Proposals

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The Power of the Package

• Make proposals incorporating all issues• Avoid solving-the-easy-issues-first • Use if-then language to yoke concessions

across issues• If the issues were too complex or

numerous, create multi-issue chunks.• Tentatively agree to each chunk• Revisit to make sure that chunks make

sense in the aggregate

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The Power of the PackageWhen chunking issues, compose your package to contain

• At least three issues• A combination of integrative and distributive

issues

Kimmerling, B., Herbst, U., & Neale, M. (2015). The power of the package: An analysis of the packaging strategy in buyer-seller negotiations. Working paper, University of Postdam.

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Leveraging Economic and Psychological Knowledge to Get

(More of) What You Want

Competitive Bidding Moral hazardAdverse selection

Auction or negotiateCompetitive arousalWinner’s curse

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Acquiring a Company

• You represent Company A that wants to acquire 100% of Company T for cash.

• The value of T depends directly on the outcome of an oil exploration project it is currently undertaking.

• If the project fails, the company under current management will be worth nothing - $0/share.

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• If the project succeeds, the value of T under current management could be as high as $100/share.

• All share values between $0 and $100 are equally likely.

• T will be worth 50% more in the hands of A than under its current management. For example, if T is worth $50/share value under T’s management, the company would be worth $75/share under A and so on.

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• T can be acquired by A, providing it is at a profitable price.

• T’s management will delay their decision on your bid until the results of the project are known - and accept or reject your bid before the drilling results become public.

• From A’s perspective, you are deliberating over offers in the range of $0/share (i.e., no offer) to $150/share.

• What price per share would you offer?

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$0 $10 $20 $30 $40 $50 $60 $70 $80 $90

0

10

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30

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# of Responses

Summary of Responses

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Analysis from A’s Perspective Only:

What Is the Optimal Offer?• The expected value of the firm to T

is $50/share, and hence the expected value to the acquirer is $75/share.

• Thus, A can make a reasonable profit by offering something just greater than $50/share.

• Assume A offers $60/share (the most frequently suggested bid).

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Strategic Analysis – Considering T’s Perspective:

What Is the Optimal Offer?• If A makes an offer of $60/share, it will be accepted

60% of the time.• If accepted, T is worth between $0-$60. Since all

values are equally likely, the average value of T would then be $30.

• Since T is worth 50% more to A, A’s expected value of T when A’s offer is accepted is $45.

• Thus, if accepted, A’s $60/share offer results in a loss of $15!

• In fact, by offering $60/share, acquirers will lose money 67 percent of the time

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Average Bids across Twenty Trials

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

$0

$10

$20

$30

$40

$50

$60

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Learning from Experience is DifficultLearning from experience requires accurate and

immediate feedback, which is rarely available, because:

outcomes are commonly delayed and not easily attributable to a particular action;

variability in the environment degrades the reliability of feedback;

there is often no information about what the outcome would have been if another choice had been made; and

most important decisions are unique and, therefore, provide little opportunity for learning

• Negotiation interactions provide notoriously noisy feedback that is hard to interpret accurately.Feldman, J. (1986). On the difficulty of learning from experience . Jossey-Bass, San Francisco, CA.; Jacob,

John, Lys, Thomas Z., and Neale, Margaret A. (1999) Experience, expertise and the forecasting performance of security analysts. Journal of Accounting and Economics, 28. 51-82.

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Auction or Negotiate?Auction • Identifies the counterpart with

the most extreme bottom line by attracting many interested parties

• Requires no direct interaction between buyer and seller

• Single issues that are fairly standardized or can be easily described

Negotiate• When the exchange involves

several issues, especially with large potential for value creation

• When the value of the item is based on proprietary information that loses its value when shared too widely

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Auctions Work!*Competitive Arousal, eBay Auctions, and Chicago Cows eBay

In 42% of the auctions studied, the winning bid exceeded the buy-it-now price

Overbidding was considerable: On average, the winning bid exceeded the BIN price by 10%!

Chicago CowsCity of Chicago sponsored a public art auction of life-sized fiberglass cows painted by local artists. Sotheby's, the auction house, estimated that the cows would sell for $2000-$4000 each.

Winning bids for the cows exceeded Sotheby's estimate by 575% in the online auction and 788% in the live auction

Malmendier, U., & Lee, Y. (2011). The bidders’ curse. American Economic Review, 101, 749-787. Ku, G., Malhotra, D., & Murnighan, J. (2005) Towards a competitive arousal model of decision making: A study of auction fever in live and internet auctions. Organizational Behavior and Human Decision Processes, 6, 89-103.

*for the seller!

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Competitive arousal – the desire to beat your counterpart even if it means violating your bottom line – increases with

• Presence of rivals or an audience•Stronger in live auction than in virtual auctions•Stronger when more bidders are present•Stronger the more salient the competitors are

• Time pressure –closer to the deadline the more arousal you feel

It’s Another Story if You’re the Buyer!

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To Control Competitive Arousal• Redefine other bidders as individuals with similar

interests as you – not as rivals• Have an agent do your bidding• Rely on members of your team to help diffuse the

pressure that comes from being the sole decision maker

• Reinforce the importance of your actual objective – getting (more of) what you want and what a good deal really is in this situation!

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What about Due Diligence?

Beware the Winner’s Curse!

We will offer at auction an envelope containing an amount of cash for sale.To help you with the bidding, we provide you with an opportunity to conduct due diligence. You know that:

• The information is unbiased • The information contains a random error

(drawn form the range -$3.00 to +$3.00).• Thus, you know that your due diligence results

in identifying the true value plus that random error

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• Assume that your due diligence results reports $6.55

• What is the expected value of the money in the envelope?

• What should you bid for the envelope?

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Winner’s Curse affects Deals Big and Small

• eBay auctions• Mergers

In a study of 82 mergers between 1985-2009, the performance of eventual winners and losers were compared prior to and after an acquisition attempt.

• No difference in pre-acquisition stock market performance• Post-acquisition, the companies who did not win the acquisition clearly

outperformed the companies that won. Over the subsequent three years, losers outperformed winners by 50%

Malmendier, U., Moretti, E., & Peters, F. (2012). Winning by losing: Evidence on the long-run effects of mergers. NBER Working Paper No. W18024, National Bureau of Economic Research. Malmendier, U., & Lee, Y. (2011). The bidders’ curse. American Economic Review, 101, 749-787.

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Winning by Losing?

Malmendier, U., Moretti, E., & Peters, F. (2012). Winning by losing: Evidence on the long-run effects of mergers. NBER Working Paper No. W18024, National Bureau of Economic Research.

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In Summary• Develop fluency in negotiation

• Adapt strategies to fit the differing values and goals of distinct counterparts• Consider when it is strategic to problem-solve and when to do battle.

• Leverage the power of your expectations • Influence the expectations of your counterparts

• Justify your offers• Emphasize how your proposal can help your counterparts achieve their goals

and what they value• Package proposals

• Enhance a collaborative frame and mitigate zero-sum thinking • Be disciplined in your preparation for the negotiation and in your

implementation of your strategic plan. • Know your weaknesses and develop explicit strategies to mitigate your

hedonistic tendencies!

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Want to know more?• Babcock, L., and Laschever, S. (2008) Ask for it: How

Women Can Use the Power of Negotiation to Get what They Really Want. New York: Random House

• Cialdini, R. B. (2009). Influence. New York: Harper Collins.

• Neale, Margaret A. and Lys, Thomas Z. (2015) Handboek onderhandelen: psychologische en economische tactieken om elke situatie naar je hand te zetten. Translated by Ineke van den Elskamp. Amsterdam: Maven Publishing

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And if you want to learn more . . . • Stanford Innovation and Entrepreneurship

Certificate – Negotiation: How to Get (More of) What You Want (online course). http://create.stanford.edu/courses/negotiating.php

• GSB Executive Education Open Enrollment Programs:• Influence and Negotiation Strategies• Executive Program for Women Leaders• Managing Teams for Innovation and Success • Stanford LEAD Certificate: Corporate

Innovation