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Solution Manual for The Mind and Heart of the Negotiator 5th edition by Leigh Thompson CHAPTER 2 Preparation: What to Do Before Negotiation OVERVIEW This chapter is best discusse

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Solution Manual for The Mind and

Heart of the Negotiator 5th edition by Leigh Thompson

CHAPTER 2

Preparation: What to Do Before Negotiation

OVERVIEW

This chapter is best discussed after students have prepared for and completed their first negotiation of the course (I suggest a simple, distributive negotiation in a multiweek course) Much class/lecture time should be spent on the concepts of the BATNA and reservation price If the instructor is using a group or team-based approach, student groups can engage in a 15-minute discussion of the factors that were criti-cal for preparation The instructor can compile a master list of each group’s ideas This list can be comp-ared with Exhibit 2-4 at the end of the chapter As several biases are identified in this chapter, the instr-uctor can point to instances of these biases occurring in the actual negotiations that students completed For a homework assignment, students can be asked to use the preparation tips in preparing for a real, out-of-class negotiation

LECTURE OUTLINE

A Most negotiators view negotiation as a fixed-pie (fixed-sum) enterprise, in that

they believe whatever is good for one person must be bad for the counterparty

B People who have fixed-pie perceptions usually take one of three suboptimal approaches when preparing for negotiation:

1 Resign themselves to capitulating to the counterparty (soft bargaining)

2 Prepare for attack (hard bargaining)

3 Compromise in an attempt to reach midpoint between opposing desires

(often regarded to be a win-win negotiation, but in fact, it is not)

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CHAPTER 2 2-2

The Fixed-Pie Perception

• Most negotiators usually take one of three

suboptimal approaches when preparing for

negotiation:

• Resignation to capitulating to the other side

(soft bargaining)

• Preparation for attack (hard bargaining)

• Compromise (often regarded to be a

C Common assumption is that concessions are necessary by one or both parties to

reach agreement

II.THE MIXED-MOTIVE DECISION-MAKING ENTERPRISE

A Effective preparation for a negotiation encompasses three general abilities:

1 Self-assessment

2 Assessment of the counterparty

3 Assessment of the situation

A What do I want?: Target/aspiration

1 Underaspiring negotiator (winner’s curse)

2 Overaspiring or positional negotiator

3 Grass-is-greener negotiator (reactive devaluation)

B What is my alternative to reaching agreement in this situation?

1 Best Alternative to a Negotiated Agreement (BATNA)

2 BATNAs and reality

3 Your BATNA is time-sensitive

4 Do not let the counterparty manipulate your BATNA

C Determine your reservation point (Exhibit 2-1)

1 Step 1: Brainstorm your alternatives

2 Step 2: Evaluate each alternative

3 Step 3: Attempt to improve your BATNA

4 Step 4: Determine your reservation price

D Be aware of focal points

E Beware of sunk costs

F Do not confuse your target point with your reservation point

G Identify the issues in the negotiation

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I Identify equivalent packages of offers

1 Packages should all be of equivalent value or attractiveness (also see Appendix 1)

2 Premature concessions

3 Identifying packages of offers does not make you appear to be a positional negotiator

J Assess your risk propensity

1 Risk aversion

2 Reference points define what people consider gains or losses

3 Three sources of risk in negotiation

a) Strategic risk b) BATNA risk c) Contractual risk

K Endowment effects

1 Reference points

L Am I going to live to regret this?

1 Counterfactual thinking

M Violations of the sure thing principle

N Do I have an appropriate level of confidence?

1 Overconfidence effect

CHAPTER 2 2-3 CHAPTER 2 2-4

• What is my alternative to reaching agreement in this • Identify the alternatives for each issue

• Do not confuse your target point with your reservation • Violations of the sure thing principle

CHAPTER 2 2-5

Developing a Reservation Point

Step 1: Brainstorm Your Alternatives Imagine that you want to sell your house Your target point—$275,000 What will you do in the event that you do

not get an offer of $275,000? Consider as many alternatives as possible

Step 2: Evaluate Each Alternative Order the various alternatives in terms of their relative attractiveness, or value If an alternative has an uncertain

outcome, such as reducing the list price, you should determine the probability that a buyer will make an offer at that price Suppose that you reduce

the list price to $265,000 Based on research, you assess the probability of an offer to be 60% The best alternative should be selected to represent

your BATNA

Step 3: Attempt to Improve Your BATNA In this case, you might contact a rental company and develop your rental options, or you may make some

improvements that have high return on investment (e.g., new paint) Of course, your most attractive BATNA is to have an offer in hand on y our

house

Step 4: Determine Your Reservation Price The least amount of money you would accept for your home at the present time You assess the probability of

an offer of $250,000 or higher to be 95% You think there is a 5% chance that you will not get such offer and will rent it The probabilities always sum

to exactly 100% We have considered all possible events occurring No alternative is left to chance You can assess your expected probabilities of

selling your house:

Reduce the price of your home to $265,000 Psale = 60%

Reduce the price of your home to $250,000 Psale = 35%

Rent the house Prent = 5%

An overall value for each of these “risky” alternatives is assessed by multiplying the value by its probability:

Value of reducing price to $265,000 = $265,000 x 0.6 = $159,000

Value of reducing price to $250,000 = $265,000 x 0.35 = $87,500

Value of renting the house = $100,000 x 0.05 = $5,000

Add all the values of the alternatives to arrive at an overall evaluation:

= 0.6($265,000) + 0.35($250,000) + 0.05($100,000) = $159,000 + $87,500+ $5,000 = $251,500

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IV SIZING UP THE OTHER PARTY

A Who are the other parties?

1 Hidden table

B Are the parties monolithic?

C Counterparties’ interests and position

D Counterparties’ BATNAs

CHAPTER 2 2-6

Preparation: Assessing the Other Party

• Who are the other parties?

• Are the parties monolithic?

• Counterparties’ interests and position

• Other negotiators’ BATNAs

A Is the negotiation one-shot, long-term, or repetitive? (Exhibit 2-2)

B Do the negotiations involve scarce resources, ideologies, or both?

1 Consensus conflict

2 Scarce resource competition

C Is the negotiation one of necessity or opportunity?

D Is the negotiation a transaction or dispute situation?

E Are linkage effects present?

F Is agreement required?

G Is it legal to negotiate? (Exhibit 2-2)

H Is ratification required?

I Are there time constraints or other time-related costs?

1 Time pressure and deadlines (Exhibit 2-3)

2 Time-related costs

3 Time horizon

J Are contracts official or unofficial?

K Where do the negotiations take place?

L Are negotiations public or private?

M Is third-party intervention a possibility?

N What conventions guide the process of negotiation (such as who makes the first offer)?

O Do negotiations involve more than one offer?

P Do negotiators communicate explicitly or tacitly?

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Q Is a power differential a factor between parties?

R Is precedent important?

CHAPTER 2 2-7 CHAPTER 2 2-8

• Is the negotiation one-shot, long-term, or repetitive? • Are contracts official or unofficial?

• Where do the negotiations take place?

• Do the negotiations involve scarce resources,

• Are negotiations public or private?

ideologies, or both?

• Is the negotiation one of necessity or opportunity? • Is third-party intervention a possibility?

• Is the negotiation an exchange or dispute situation? • What conventions guide the process of negotiation

• Do negotiations involve more than one offer?

• Is agreement required?

• Do negotiators communicate explicitly or tacitly?

• Is it legal to negotiate?

• Is there a power differential between parties?

• Is ratification required?

• Is precedent important?

• Are there time constraints or other time-related costs?

A Effective preparation places the negotiator at a strategic advantage at the

bargaining table

B Three general areas of preparation—self, counterparty, context, or situation

C Summary of preparation (Exhibit 2-4) should be used before negotiation

KEY TERMS

BATNA Acronym for a negotiator’s Best Alternative To a Negotiated Agreement

consensus conflict Conflict that occurs when one person’s opinions, ideas, or beliefs are incompatible

with those of another

contractual risk A situation in which settlement outcomes are determined with uncertainty at the time of

settlement

counterfactual thinking The act of thinking about how things might have turned out differently

fixed-pie perception The belief that the counterparty’s interests are directly and completely opposed to

one’s own

focal point Salient number, figure, or value in a negotiation that appears to be valid but is actually

arbitrary and/or has no basis in fact

hidden table The negotiations that take place behind the scene between a principal and his or her

constituents

linkage effects A phenomenon that refers to the fact that some negotiations will affect other negotiations;

i.e., resolutions in one situation will have implications for a future situation

monolithic party A member of a group that acts as a single unit; i.e., there is no divergence within the

group

Mixed-motive enterprise A negotiation involving both cooperation and competition

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overconfidence effect Refers to unwarranted levels of confidence in people’s judgment of their abilities,

the likelihood of positive events, and underestimates the likelihood of negative events

party A participant in negotiation Parties can be individuals, groups, organizations, communities, or

nations

positional negotiator A person who determines a set of terms desired in a negotiation, presents those

terms, and refuses to budge on any dimension of any issue

ratification Approval of a contract by a body or group not necessarily present at the negotiation table reactive devaluation The tendency for people to devalue an option previously considered to be more

attractive, merely as a consequence of it being offered by the counterparty

reference point What a person considers to be a gain or loss

reservation point The point at which a negotiator is indifferent between reaching a settlement and

walking away from the bargaining table

risk aversion Preference for a sure thing rather than a gamble that has an equal or greater expected value

scarce resource competition Conflict or competition that exists when people perceive one another as

desiring the same limited resources

strategic risk The relative risk levels of the tactics that negotiators use at the bargaining table

sunk costs Money invested that cannot be recovered

sure thing principle A principle that states that if alternative x is preferred to y, in the condition that

some event, a, occurs, and if x is also preferred to y in the condition that some event, a, does not occur, then x should be preferred to y, even when it is not known whether a will occur

target or target point The ideal or upper limit of what a negotiator expects to get out of a negotiation

Also called the aspiration or aspiration point

time horizon The amount of time between the negotiation and the consequences, or realization, of

negotiated agreements

winner’s curse A situation in which a negotiator makes an offer or requests something that is

immediately accepted by the opponent

SUGGESTED EXERCISES AND OTHER MATERIALS

1 EXERCISE: The Biopharm-Seltek Negotiation

by Leonard Greenhalgh

Biopharm-Seltek is a distributive negotiation over the sale of a manufacturing facility that produces genetically-engineered compounds Negotiators are given information about the costs of their alternatives, but have to determine aspirations, reservation prices, and opening offers themselves There are no teaching notes; however, the teaching notes associated with Coffee Contract (see

suggested cases for Chapter 3) can easily be adapted for this exercise Preparation: 10 min

Negotiation: 20 min Available from Creative Consensus, Inc., P.O Box 5054, Hanover, NH 03755

Phone/fax: (603) 643-0331

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2 EXERCISE: Coffee Contract

by Tony Simons and Thomas Tripp

Coffee Contract is a distributive exercise It concerns the contract for coffee at the Cornell Hotel

School The exercise provides a good context for teaching fundamental negotiation concepts like bargaining zone, reservation prices, and BATNAs, as well as distributive negotiation tactics, open-ings, concession making, and threats Creative students may build in some integrative elements, and even if the students fail to find these creative ideas, the instructor can use them to introduce

integrati-ve negotiations Preparation: 15 min Negotiation: 30 min Available from the Dispute Resolution

Research Center at the Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208 Phone: (847) 491-8068; e-mail: drrc@kellogg.northwestern.edu

by Leigh Thompson and Leaf Van Boven

This is a set of three negotiations between two brokers It is a multiple-time-period, two-party integrative negotiation between two brokers trading four commodities, in which there is risk involved Participants are randomly assigned to the role of Broker Jones or Broker Smith in the trading of various quantities and grades of wheat, rice, copper, and crude oil This is an excellent negotiation exercise for illustrating the impact of risk and uncertainty on behavior and performance over time

Preparation: 15 min Negotiation: 30 min Available from the Dispute Resolution Research Center

at the Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL

60208 Phone: (847) 491-8068; e-mail: drrc@kellogg.northwestern.edu

4 EXERCISE: Energetics meets Generex

by W Trexler Proffitt, Jr

This is a two-party distributive negotiation based on a real California wind energy farm transaction It

is good for illustrating biases including anchoring and availability There is the option to provide an

outside offer during the negotiation that illustrates the power of BATNA Preparation: 10 min

Negotiation: 30 min Available from the Dispute Resolution Research Center at the Kellogg School

of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208 Phone: (847) 491-8068; e-mail: drrc@kellogg.northwestern.edu

5 EXERCISE: Les Florets

by Stephen B Goldberg

A simplified version of Texoil (see below) set in France Preparation: 30 min Negotiation: 45-60

min Available from the Dispute Resolution Research Center at the Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208 Phone: (847) 491-8068; e-mail: drrc@kellogg.northwestern.edu

6 EXERCISE: Texoil

by Stephen B Goldberg

This is a qualitative negotiation over the sale of some property The case has no overlapping bargain-ing zone unless the parties uncover some of each other’s interests It is a very good case for teachbargain-ing about interests, what information should and should not be shared, and creativity in negotiations

Preparation: 30 min Negotiation: 60 min Available from the Dispute Resolution Research Center

at the Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL

60208 Phone: (847) 491-8068; e-mail: drrc@kellogg.northwestern.edu

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MULTIPLE-CHOICE QUESTIONS

1 The winner’s curse occurs when

A a negotiator sets his/her aspirations too high

B a negotiator makes an offer that is immediately accepted

C the counterparty demonstrates retaliative behavior

D no one can be trusted

2 A type of negotiation behavior known as reactive devaluation is demonstrated by

A the grass-is-greener negotiator

B a positional negotiator

C an overaspiring negotiator

D an underaspiring negotiator

3 BATNA (Best Alternative to a Negotiated Agreement) determines the point at which a negotiator is prepared to

A make larger concessions

B keep options open

C walk away from the negotiation table

D identify counterparty’s alternatives

4 One strategy for improving one’s BATNA is to

A discuss it with the counterparty

B follow the “falling in love” rule

C replace it with aspiration point

D change it as a result of the progress of the negotiation

5 The reservation point is mostly related to the

A negotiator’s target point

B negotiator’s BATNA

C bargaining zone (ZOPA)

D negotiator’s opening offer

6 The three sources of risk in negotiation include

A tactical risk, strategic risk, overconfidence risk

B failure risk, BATNA risk, information-sharing risk

C contractual risk, overconfidence risk, failure risk

D strategic risk, BATNA risk, contractual risk

7 The endowment effect is

A the difference between what sellers demand and what buyers are willing to pay

B a tendency for people to value an object more once they own it

C the value we associate with a certain object or outcome

D saving money instead of purchasing goods

8 A dispute occurs when

A parties have to resort to their BATNAs

B parties fail to exchange resources

C a claim is made by one party and rejected by the other party

D we turn down favors and rewards from others

9 Most commonly, third-party intervention takes the form of

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A power differential

B pie-slicing

C partnership

D mediation or arbitration

10 Which of the following statements are not true when it comes to BATNAs?

A They are dynamic and constantly changing

B It is generally wise to reveal them

C They are determined by the negotiator’s available options

D They are a good anchor point for the negotiator

Answer key: 1.B; 2.A; 3.C; 4.B; 5.B; 6.D; 7.B; 8.C; 9.D; 10.B

DISCUSSION QUESTIONS

1 What is the fixed-pie perception, and how does it affect a person’s preparation for negotiation?

2 What are some of the problems that arise in the determination of one’s target or aspiration point in a negotiation?

3 What is the difference between a target point and reservation point, and why is it important not to confuse the two?

4 Why should negotiators break down the issues in a negotiation into multiple issues, rather than engage in a single-issue negotiation?

5 Why is it advisable to assess the self, the counterparty, and any negotiation situation before commencing negotiations? What are some of the questions a negotiator needs to address when assessing the negotiation situation?

Suggested answers:

1 The fixed-pie perception means that whatever is good for one person must ipso facto be bad for the other party Negotiators who have this perception usually adopt one of three stances: resign them-selves to capitulating to the other side, prepare for a battle of wills, or mutual compromise in an attempt to reach a midpoint between opposing desires

2 Identifying a target or aspiration may cause three major problems: setting target or aspirations too low and opening the negotiation by requesting something that is immediately granted; setting the target point too high and refusing to make concessions; not knowing what one really wants—only that one wants what the counterparty is not giving and does not want what the counterparty is offering

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3 Target point relates to an ideal situation, but the reservation point relates to what represents as one’s BATNA Using one’s target point as a reservation point can result in the following fatal flaws: agreeing to a settlement that is worse than what the negotiator could do or walking away from a potentially profitable deal

4 In most negotiation situations, more than one issue is at stake but they may remain “hidden” unless negotiators unbundle them By doing so, negotiators can add value to negotiations, formalize the issues and alternatives by creating a matrix, and determine a variety of different combinations of the issues that all achieve his or her target point

5 The negotiator who has identified a BATNA and set a reservation price and a target point, knows when to walk away, and how much is reasonable to concede The negotiator who has researched the counterparty’s BATNA and interests is less likely to be tricked or confused Some of the questions prior to commencing negotiations are: What do I want?; What are the issues in the negotiation?; What issues are relevant to the other party?; Is agreement required?

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