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Incentives and Behavior Prof. Dr. Heiner Schumacher KU Leuven 16. Bargaining Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 1 / 22

Introduction Literature Fisher, Roger, William Ury, and Bruce Patton (2011): “Getting to YES,” Penguin Books, London. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 2 / 22

Introduction Bargaining takes place in many domains of the economy: within companies, between companies, between …rms and customers, between …rms and workers, within in the family, between countries, etc. In this chapter, we will try to answer a practical question. What type of bargaining leads to success? To answer this question, we will consider the work of the law professor Roger Fisher (and colleagues) who specialized in negotiation and con‡ict management (“Getting to YES”). Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 3 / 22

Introduction Overview Getting to YES: Separate the People from the Problem Getting to YES: Focus on Interests, Not Positions Getting to YES: Invent Options for Mutual Gain Getting to YES: Insist on Using Objective Criteria Getting to YES: Develop your “BATNA” Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 4 / 22

Getting to YES: Separate the People from the Problem In a bargaining situation, you typically have two interests: the substance of the bargaining problem and the relationship. Bargainers are human beings with emotions, values, di¤erent backgrounds and viewpoints. Therefore, the relationship tends to become entangled with the problem (“the kitchen is a mess”). The trick how to solve this problem is to treat people in a nice way, while at the same time remaining tough on the bargaining problem (e.g. do not make substantial concessions). Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 5 / 22

Getting to YES: Separate the People from the Problem Perceptions One problem is that di¤erent people may have di¤erent perceptions about the bargaining problem. To avoid problems, you therefore should use the following measures. Understand the other side (recall the availability bias). Discuss each other’s perceptions. Do not blame the other side for your problems. Act inconsistently with the other side’s perceptions. Give them a stake in the negotiation process. Only make proposals that are consistent with the other side’s values. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 6 / 22

Getting to YES: Separate the People from the Problem Communication Listen actively and acknowledge what is being said (this may sound trivial, but it may be di¢cult under stress). The cheapest concession you can make to the other side is to let them know they have been heard. Speak to be understood (do not speak to third parties). Important decisions are typically made when only two persons are in the room. Speak about yourself, not about them. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 7 / 22

Getting to YES: Focus on Interests, Not Positions Since the parties’ problem appears to be a con‡ict of positions, and since their goal is to agree on a position, they naturally tend to think and talk about positions. In many cases, they reach no agreement. The di¤erence between interests and positions is crucial (think of the bargaining between a buyer and a seller of a house). Behind opposed positions lie shared and compatible ones, as well as con‡icting ones. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 8 / 22

Getting to YES: Focus on Interests, Not Positions Identify Interests Ask why the other party takes a certain position. Realize that each side may have multiple interests. The most powerful interests are basic human needs (security, economic well-being, a sense of belonging, recognition, control over one’s life). Make a list of interests before entering the bargaining process. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 9 / 22

Getting to YES: Focus on Interests, Not Positions Talking about Interests Make your interests come alive (use concrete examples, show the legitimacy of your interests). Acknowledge the interests of the other party. Put your problem before making a proposition. Be concrete, but ‡exible (treat each option you formulate as simply illustrative). Successful negotiation requires being both …rm and open. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 10 / 22

Getting to YES: Invent Options for Mutual Gain Expand the pie before dividing it! There can be several obstacles that inhibit the inventing of more options: premature judgment, searching for the single answer, the assumption of a …xed pie, and thinking that “solving their problem is their problem”. In the following, we discuss ways to avoid these obstacles and to invent options for mutual gain. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 11 / 22

Getting to YES: Invent Options for Mutual Gain Separate inventing from deciding In the bargaining process, you will most likely not have the creativity to come up with new options. So it is essential that you are creative before negotiations start. Getting to YES suggests brainstorming sessions without the other party, where the best ideas are selected for the subsequent negotiation. A brainstorming session with the other party may also be helpful. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 12 / 22

Getting to YES: Invent Options for Mutual Gain Broaden your options If you have one good option, develop a theory why it is a good option. Then develop a new option based on the theory. Examine the problem through the eyes of experts from di¤erent disciplines (psychologists, economists, lawyer, etc.). Invent agreements of di¤erent strength. Fractionate your problem into smaller and more manageable units. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 13 / 22

Getting to YES: Invent Options for Mutual Gain Look for mutual gain Look for shared interests. Look for di¤erent preferences (di¤erent beliefs? di¤erent time preferences? di¤erent risk preferences?). Ask the other party for its preferences. Look for items that are low cost for you and high bene…t for the other side. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 14 / 22

Getting to YES: Insist on Using Objective Criteria Almost always there will be a con‡ict of interests (the seller wants a high price, the buyer a small one). This remains true even if we invented many new options for mutual gain. So how can we resolve this con‡ict of interests without damaging the relationship? The solution is to negotiate on some basis that is independent of the will of either side - that is, on the basis of objective criteria (“principled negotiation”). Principled negotiations produce wise agreements and strengthen relationships. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 15 / 22

Getting to YES: Insist on Using Objective Criteria Develop objective criteria Again, prepare yourself in advance. What is a fair standard? It could be market prices, court decisions, moral standards, tradition, professional standards. What is a fair procedure? Look at alternative basic means of settling di¤erences (include third parties, ‡ip a coin, “one cuts, the other chooses”). Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 16 / 22

Getting to YES: Insist on Using Objective Criteria Negotiating with objective criteria Frame each issue as a joint search for objective criteria. Reason and be open to reason as to which standards are most appropriate and how they should be applied. Never yield to pressure, only to principle. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 17 / 22

Getting to YES: Develop your “BATNA” What if the other side is more powerful (richer, better connected, larger sta¤, etc.)? Your method of negotiation must make sure two things: …rst, to avoid an agreement that should be rejected; second, to help you make most of your assets. You can achieve both goals if you develop your “BATNA” – the Best Alternative To a Negotiated Agreement. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 18 / 22

Getting to YES: Develop your “BATNA” Protect yourself In a stressful situation you may give in too early and thereby accept an o¤er that you will regret later. Many people therefore de…ne a bottom line (e.g., accept no o¤er for a house below USD 260.000). The bottom line limits your ability to bene…t from what you learn during negotiations (because it cannot be changed). Also, it limits imagination (recall inventing options for mutual gain). Also, it may be subject of wishful thinking and therefore too high. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 16. Bargaining 19 / 22