1. 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
2. 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
2
3. 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
3
4. 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!
4
6. 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.
7
7. 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.
8
8. 100,000
110,000
120,000
130,000
140,000
119,000 129,000 139,000 149,000
SubjectEstimates
Listing Prices
Listing Price
Appraisal Value
Purchase Price
Lowest Offer
The Power of the Anchor to InfluenceValue
Northcraft,Gregory B., and Neale, MargaretA. (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. 9
9. 10
FRAMING
A 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?
10. 11
FRAMING
Plan 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 A
Plan 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
11. 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
12
The CommonView of Negotiation: A
Battle
12. To Get More of WhatYou Want:
BroadenYour 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.
13
13. 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.
14
RethinkYour Perspective
14. ExpandWhat 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 interactions
Develop fluency across different negotiating situations and
counterparts
15
15. Getting an agreement is not the
goal of a negotiation!
What you want from your
negotiation is a good deal!
16
16. 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?
17
17. 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
.
18
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
18. Know What’s a Good Deal
To 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)?
19
19. 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 ?
20White, S. B., & Neale, M. A. (1994). The role of negotiator aspirations and settlement expectancies in bargaining
outcomes. Organizational Behavior and Human Decision Processes.
20. Know What’s a Good Deal
To 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?
21
21. Aspirations
An 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
22
22. Three Secrets to Getting (more of)
WhatYou Want
• Expectations
• Justifications
• Packages
23
24. Expectations Drive Behavior
•First offers
25
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
25. 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.
26
26. Expectations Drive Behavior
•First offers
•Aspirations versus Alternatives
27
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
29. The Power of Justifications
•Their presence is often more powerful than
their quality.
• More powerful the more objective they appear when
scrutinized
30
30. 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?
31
31. Compliance in the Copy Line
32
0
10
20
30
40
50
60
70
5 Copies
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.
32. Compliance in the Copy Line
33
0
10
20
30
40
50
60
70
80
90
100
5 Copies
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.
33. Compliance in the Copy Line
34Langer, 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.
34. 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
35
36. 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
37
37. The Power of the Package
When chunking issues, compose your package to
contain
• At least three issues
• A combination of integrative and distributive issues
38
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.
38. 39
Leveraging Economic and Psychological
Knowledge to Get (More of) WhatYou Want
Competitive Bidding
Moral hazard
Adverse selection
Auction or negotiate
Competitive arousal
Winner’s curse
39. 40
Acquiring a Company
• You represent CompanyA that wants to acquire 100% of
CompanyT for cash.
• The value ofT 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.
40. 41
• If the project succeeds, the value ofT 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, ifT is worth $50/share
value underT’s management, the company would be worth
$75/share under A and so on.
41. 42
• 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.
• FromA’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?
43. 44
Analysis from A’s Perspective Only:
What Is the Optimal Offer?
• The expected value of the firm toT 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).
44. 45
Strategic Analysis – ConsideringT’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 ofT would then be $30.
• SinceT is worth 50% more to A, A’s expected value ofT 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
46. 47
Learning from Experience is Difficult
Learning 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, MargaretA. (1999) Experience, expertise and the forecasting performance of security analysts. Journal of Accounting and
Economics, 28. 51-82.
47. 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
48
48. Auctions Work!*
Competitive Arousal, eBay
Auctions, and Chicago Cows
49
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 Cows
City 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!
49. 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 50
It’s Another Story ifYou’re the Buyer!
50. 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!
51
51. 52
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
52. 53
•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?
53. 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%
54Malmendier, U., Moretti, E., & Peters, F. (2012).Winning by losing: Evidence on the long-run effects of mergers. NBERWorking Paper
No.W18024, National Bureau of Economic Research. Malmendier, U., & Lee,Y. (2011).The bidders’ curse. American Economic Review,
101, 749-787.
54. Winning by Losing?
55
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.
55. 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! 56
56. 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. NewYork: Random House
• Cialdini, R. B. (2009). Influence. NewYork: 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
57
57. And if you want to learn more . . .
• Stanford Innovation and Entrepreneurship
Certificate – Negotiation: How to Get (More of)
WhatYouWant (online course).
http://create.stanford.edu/courses/negotiating.php
• GSB Executive Education Open Enrollment
Programs:
• Influence and Negotiation Strategies
• Executive Program forWomen Leaders
• ManagingTeams for Innovation and Success
• Stanford LEAD Certificate: Corporate Innovation 58
