The Pie
The first principle in negotiation: Figure out what the pie you are fighting over is. It may not be obvious, and the parties may see different pies.
Calculate using both principles below, and advocate the one to your advantage.
Proportional Division
If I owe Jack $100, and Jill $50, but I have only $100, I give Jack 2/3 and Jill 1/3 of the $100, based on the proportion of debt.
Principle of the Divided Cloth
If I owe Jack $100, and Jill $50, the two only dispute over $50, because the “pie” is fixed to a $100. Jack claims all, and Jill claims half. As Jill is willing to concede the remaining $50 to Jack, the only dispute is on the first $50. So split that in half. Jack gets $75, and Jill gets $25.
This is the one advocated for in the course.
Shapley Value for 3 Or More Parties
What if there are 3 people involved? Should we split the pie 3 ways? The instructor argues “Not necessarily”. When there are 2 people, both are needed, so they split evenly. When there are 3 people, it is not necessary for all 3 to be needed to have savings. So we may want to give the party that causes the greatest savings the most amount of the pie (he brings the most value to the table).
To do this, use the Shapley Value.
The Shapley Value is the only (known?) solution that has the following 4 properties:
- There is no money left on the table.
- Who gets what does not depend on people’s names.
- If someone cannot save anyone money, then he/she gets no savings.
- If there are two cost sharing problems, and we combine them, the solution to the combined problem is the sum of the solutions of the individual problems.
BATNA
Another term for BATNA is reservation value.
The real goal of negotiation: How much in excess of the BATNA can you get?
People often settle for less than their BATNA (as ridiculous as it is), because they feel a psychological compulsion to reach some agreement.
Not only should you know your BATNA, you should figure out the other party’s BATNA.
Never Say No
Never say no. Instead, put the other party in the position to say no to you.
When someone offers you, or asks you for, something undesirable, do not simply say No. Come up with a “price” that will make you do the detested thing. Let them say no. You may be surprised how often they will say yes and you will get something out of it!
Someone asks you to give a talk where/when you do not want to. Make some demands and if they say no, then no problem.
Want to quit your job? Come up with a package that you will agree to (even if it sounds unreasonable!), and if they want to have the discussion to get you to stay, tell them what you need. Worst case, you’ll still quit.
On the flip side, if you want something from someone and they do not want to give it, ask them what it will take on their part.
Do this mentally as an exercise even if you still are saying no. If you said no to something earlier today, spend time thinking about what you could have come up with as a counter.
Of course, don’t take the rule to the extreme. If it violates your ethics, say No.
Ultimatums
Try to be in a position to make ultimatums. But use them very sparingly. People do not like ultimatums, and many will take a loss to punish you for violating what they see as their norms.
Take the game of splitting $100 between you and another person. You choose the split, and he has to agree or disagree. If he disagrees, no one gets anything.
People will pay a price if they feel the split is really bad. It need not be 50/50, different people have different thresholds below which they will punish. But the point is, they are willing to take a loss to punish you for violating their norms.
One of the attributes of an ultimatum is that you cannot go back and change your offer!
Make ultimatums if you really feel you can walk away with no deal. It is not a means to make counteroffers to continue the negotiation.
Many people make ultimatums when not in a position of power, and they cannot back it up. It is overused.
Often, an ultimatum makes the other party come up with their own ultimatum. It just makes the situation worse.
People will often push back even when the ultimatum is perfectly reasonable (e.g. 50/50 split). They will feel they are not being given a choice. It affects them viscerally. Always act as if you’re flexible.
It is easy to fall into the trap of making a reasonable offer, and then sticking to it and making an ultimatum out of it. You’re offended that you made a good offer and it was not treated well.
If you’re quitting, don’t phrase your demands as an ultimatum. Say “If you give me x, y and z, I will consider remaining”.
Corollary: Never start with your best offer! In fact, making your best offer and sticking to it when dealing with a union may be considered illegal as it breaches the concept of “good faith” bargaining. Perhaps it can be considered as a refusal to bargain (which will be illegal).
Regretting
Beware of making decisions based on potential regret. It may have its place, but be aware of loss aversion!
Principled Arguments
Making principled arguments may help you, even if you have no need to make any!
Being a Jerk
Video where there were 5 options from a to e. The woman wanted a or b. He wanted c, but d and e were to his favor. He kept insisting on d and e without discussing a or b. Finally, he compromised to a c, which was his real target.
This sours the relationship.
Even if the relationship doesn’t matter (a one time deal), it prevents both parties from coming up with even better options.
I’ll Get Rid of Option A if You Get Rid of Option D
Do not fall for this.
Let’s say you like Option D but hate Option A. You are not going to agree to Option A anyway, so why should you give something up to see it go? And perhaps the other party does not expect to get A anyway.
This often ends up with several other options. People often counter this by needlessly coming up with many crappy options, just so that they can remove some if asked to.
Ultimatums When No Deal is Worse Than All Options
If any deal works for the other party better than no deal, ignore their ultimatums. Or if they say something like Option A, B or Bust, then hypothetically offer more than the better of A and B and ask if they would take it. At some point point out they are not so intransigent.
If Someone Fights With Fire
Don’t fight back with fire. Extinguish it. If they play silly games (a penny above the ideal value), don’t go to the other extreme. Point out the person is playing games and ask them to try again.
If they say Option A or B or Bust, don’t counter with Option C or D or bust.
If someone lies to you (e.g. they have a better offer when they don’t), don’t call them a liar. Say you hope they’ll consider your offer on its merits. This way they don’t feel bad if they need to come back to you.
Splitting 50/50?
If A (buyer) thinks there is a 10% chance of drug being approved, and B (seller) thinks there is 60% chance, use those probabilities! Don’t split 50/50.
If You Have an Option That is Better For Everyone and it is Rejected
Don’t just insist on it. Ask the other party to explain the problem with the option.
Using a Lawyer/Agent to Negotiate For You
If you do this, always keep in mind how (s)he is being compensated. If they seem to want to settle and you don’t, it may be that his/her gain in going your way is minuscule compared to the risk. So change the compensation package. Example: Agent gets 3% if sells for $270K, but 20% on anything higher than that. If you want it to sell for 300K, agent only gets an additional $900. But with the new deal, agent can get $6K
Planning
The first step is to figure out what is important to you! Don’t just assume it is money!
Added Value
The added value one party provides is defined as the amount the pie shrinks if he is not part of the deal.
It is the most one should expect to get.
Your perceived (by other parties) added value is what matters.
Card Game
A red and black card together is worth $100. Say I have all the black cards, and 26 people each have a red card. My added value is $2600. Each other person’s added value is $100 (combined it is $2600).
Note: I do not “hold all the cards”. Each person has some value.
I offer $5 for a red card.
It is rejected.
So I tear up a black card. Now my added value is $2500, and each person’s added value is 0 (understand this!). Now other party may be willing to take $5.
By reducing the pie, I have made my situation better!
Another lesson: If red carded people start forming a coalition, their added value increases (not just $0).
Monsanto vs Holland Sweetener
In the late 80’s, Monsanto’s patent on aspartame was expiring. Holland Sweetener wanted to enter the market.
What is their added value?
They cannot expand the market (Monsanto had done it all).
They cannot cut costs (Monsanto was more efficient).
Their added value, really, was 0.
But they went in anyway.
What happened? They did not perform well. However, Pepsi and Coke were able to get a cheaper deal from Monsanto due to their presence. While their added value was 0, they did manage to reduce Monsanto’s value.
What should have Holland Sweetener done? They should have approached Coke and Pepsi before and proposed a deal with them. Either pay for part of their operations, or buy at a slightly lower price, or share some of their Monsanto cost savings with them.
Instead, they almost went bankrupt, and only in the end did they go to Pepsi/Coke to get money to stay in the market. But that way their leverage is lower. They should have negotiated before entering the market.
Why not just ask Monsanto money not to produce? It is illegal! You can pay money to come in to the market, but not to stay out of it.
The important lesson: People will pay for you to participate if they value your participation! If they are not paying, that means they are not interested, and you should reconsider whether you want to participate! Perhaps they simply want you to do the preplanning work so that they can get a lower price from someone else.
Most of the times, you are not paid in cash, but are paid in other forms (e.g. information or access to people).
The other key lesson: Having 0 added value does not mean you should give up. If your participation hurts others, you can get something out of it! But do this early, not after participation.
Rubenstein Bargaining
Consider the scenario: There is a pie to divide. Assume single bargaining (not multiple options). First person makes an offer on how to divide. If the other person rejects, the other one can make an offer the following day, and so on.
Waiting a day is costly. Time is money. So a deal now is better than the same deal in a day. We represent that by shrinking the pie by a factor of \(\delta\) (50% reduction means 0.5).
The proposer has an advantage. The second party, on any given day, should accept anything more than \(\delta/\left(1+\delta\right)\), and reject anything less than that.
Note that if \(\delta\) is close to 1, the ratio becomes close to 0.5.
Note: If waiting is less costly to one side than the other, adjustments should be made. Also, this models the fact that the patient one has an advantage (the depreciation is low for him).
Tools For Breaking Deadlocks
Settlement Escrows
We don’t want to waste time if the most I’m willing to offer is less than the least he will take. So we reveal our limits to a 3rd party. All the 3rd party does is reveal that a deal is possible or not. He doesn’t reveal the limits of each side.
Virtual Strikes
A strike has one serious victim: The general public. So one solution is to have a virtual strike. The workers continue to work but aren’t paid. The company continues to sell the product but does not keep the money. They donate it to a good cause (but not hold it in an escrow account).
This way, both parties pay for the strike, but the public is not hurt.
Texas ShootOut
I split the cake, you choose.
What if the item is indivisible?
Then I state a price. The other side either pays me the price to have the item, or they choose the money and I pay and keep the item.
Mediation vs Arbitration
The two are very different.
A mediator tries to get the two to an agreement. An arbitrator will act as a judge and make a ruling.
If you are past-looking and do not care about poor relations in the future, pick an arbitrator. If the future relationship matters, work with a mediator.
Asymmetry in Knowledge
If you are negotiating with someone who has much more knowledge than you (e.g. shopkeeper selling stuff), do not name a price. Delay and get more information from elsewhere before making an offer.
Jerusalem rug story: He was being charged $500. The shopkeeper offered to have him walk around the market with the rug. Soon another store asked how much he paid. He said $500. The store said it was a cheap price and he’s willing to sell. He declined and walked on. Another owner asked how much he paid, and he said $300. Same thing happened. A third one came by and he said $200. This time, the storekeeper offered to buy from him! So he knew the value is in between $200 and $300. He went to the first person and paid $275.
Psychological Priming
Before negotiating, just think about times you had been assertive in the past. It often helps.
Think of cases when you were successful.
Think happy thoughts.
Be energetic when going in.
Being Rejected
If someone says “No”, try to find out why. Perhaps ask them. Don’t just walk away. You may be able to address their concerns or offer alternatives.
If they were offended by your offer, find a way to de-escalate. Suggest taking a break.
Lying in a Negotiation
Don’t put the other party in a position where they may lie. Which means don’t ask questions they may be tempted to lie to.
Attitudes & Other Advice from an Expert
Do care about what you’re negotiating for, but not too much that you must have it! Be prepared to walk away without feeling poorly if you can’t have it.
People usually underestimate their own power, and overestimate the other party’s.
We evaluate others based on their performance, but we evaluate ourselves based on our potential (what we could have accomplished).
People don’t take things you say seriously. But show the exact same thing to them in print, it is suddenly more credible. Same principle applies when you go to a store and there is a printed price tag.
Concessions tend to occur near deadlines, so don’t worry if progress is slow initially.
Don’t irritate the opponent, because by the time the deadline approaches, they may be sick of you.
Try to signal humility. Don’t try to appear smart. Ask them for help.
From easiest to hardest:
- In person
- On phone
- Via Mail/Email
Over email, try to personalize it so you stand out as being different from other emailers. Or differentiate your offer from others.
If you want a raise, don’t bring it up a week before the salary dates are set. Start talking about it 6 months in advance. Ask 3 months later, and ask how your performance is. Then 2 months later.
If you are asked to do work and it is for lower than you’d like, and you don’t think you can negotiate for more now, state that you will do the job at that price, but ask if they’ll consider the possibility of a bonus if they are happy (no commitments asked for!)
Say you want to buy something from someone (e.g. a house), and their price is too high. Don’t try to convince them that their house is too expensive. Tell them they have a great house, and they hope they get their money’s worth, but it is beyond your budget. Then say “Can you help us here?”
Never start with your best offer. It is an ultimatum. People reject it even if it is better than what they expected.
If you get low ball offers, ask them to justify it. But do not go to the other extreme.
Don’t pick too round numbers. Don’t say 480. Say 482.
Aim high, but never more than you come up with a justification.
Money is cool, but relationships matter more in the long run. Life is filled with stuff. Don’t try to accumulate more than you can handle. It’s not worth much to anyone but you!
Nibbling: If someone is nibbling at you, pretend it’s a joke but don’t give in.
Attitudes & Other Advice from an Expert 2
Try to be close to the other party. It makes them flexible in negotiations if you can relate to their personal life.
Really listen closely to what they are saying and ask probing questions related to them.
He advocates agreeing on big issues first, and putting them away to prevent them from coming back in the rest of the negotiations (opposite of the Shell book). They should be off the table. His rationale is that in a complex negotiation, if the parties are free to revisit the material already discussed, then the negotiations can drag on indefinitely. He suggests dealing with the big principles first. If you don’t have agreement on those, you don’t have a framework to move forward with.
If a deal isn’t going through, don’t get mad and act poorly. The deal may come back (even if after a few years).