Bargaining: Dividing the Pie Without Getting Angry

00:01 Hi and welcome to distributive bargaining learning to negotiate without confrontation.

00:07 In today's lecture, we will learn to recognize a distributive bargaining situation.

00:13 Not only will you be able to recognize it you will be able to throw yourself into that negotiation and be able to do it mechanically.

00:21 You will learn tips on concessional bargaining and you will also get a sense of how to do distributive bargaining professionally without having to be confrontational.

00:33 Now I know what you're thinking, you're thinking the ultimate goal in a negotiation is to create a win-win situation by expanding the pie, as a matter of fact in this course, there's an entire lecture dedicated to this kind of negotiation.

00:49 However, sometimes there isn't just a win-win situation and everybody wants to know how much exactly am I going to take home how big a piece of pie am I to get and take home? And we don't want to do it by a getting angry or aggressive with other people.

01:07 We want to do it professionally.

01:09 Now, how do you recognize a distributive bargaining situation? Well, the first thing you have to think about is that most distributive bargaining situations consider that their only limited or fixed resources.

01:24 People see the world as very static.

01:27 Perceptions are incompatible.

01:30 And neither side wishes to reduce their expectations.

01:35 Usually a distributive bargainer will look at the negotiation and be very tactical making sure that they are developing a strategy to win as much as they can for themselves.

01:48 The whole process is a convergence through a series of offers and counteroffers made up of concessions.

01:57 The ultimate goal is the maximum absolute profit.

02:02 As I said many times before power is essential for this type of negotiations.

02:09 Now you may be wondering what kind of fundamental strategies are involved here.

02:14 Well, usually there are four main fundamental strategies first, people push for the maximum close to what is called the resistance point.

02:26 Second, you want to change the subjective understanding of how much somebody wants something we call that the subjective utility.

02:38 Third, we try to understand what is a person's resistance points and get them to modify it, push it back, allow us more room to claim value.

02:52 And lastly, we try to convince the other side's that whatever we are offering is the best option on the table, and they should take it.

03:01 Now let's have a look at the phases of a bargaining process.

03:06 They look a little bit like inter space negotiations, but actually there are quite different.

03:12 Like interest-based negotiation, there is a planning stage.

03:16 In the planning stage things happen very similarly.

03:19 Were gathering information, we're evaluating the other side, we're trying to understand the relationship.

03:26 Unlike interest-based negotiation in the planning stage of a bargaining process we're also trying to understand power how much can we influence? How much will we be influence? And what are going to be constraints on our power? Once we have calculated our offers and are expected counter offers.

03:47 We are ready for the opening session.

03:51 In the opening session of a bargaining process.

03:54 It is a much more formal process than maybe an interest-based negotiations because an interest-based negotiation people are focused in understanding what the general interest are.

04:07 In a bargaining process, we are focused on listening very attentively to what the value of the offer on the other side is being made.

04:17 We're also trying to understand exactly where is the resistance points or the bottom line of the other side.

04:26 Once we have done a formal opening and we have understood all the positions of all the parties we are ready to move into the phase of offers and counteroffers.

04:39 Unlike an interest-based negotiations where people do not have offers and counteroffers, here the parties will know they are expected to make concessions.

04:50 These concessions will slowly converge at a midpoint between the offers.

04:56 An interest-based negotiations, we would do a lot more discovery to make sure we do not fall into a offer and counteroffer phase.

05:06 In any case these offers have to be reviewed.

05:10 And once we have reviewed them we need to go into what we call the signaling phase.

05:14 For example, John, I think you can do better than that.

05:20 Mary, This is my last and final offer.

05:25 These kind of things are the way people signal how much they can move on a concession or how much they're not ready to move on the concession.

05:34 Once we have done all of the bargaining.

05:37 We begin to look at how to create a package agreement.

05:41 One that meets the interest of all sides but is also at a midpoint that we can call a compromising package.

05:49 In the end, each side has to evaluate whether they will enter into an agreement or whether we have reached a stalemate and we have to change the dynamic of the process.

06:02 So you might be wondering at this point, What does the distributive bargaining situation looks like? Well before I give you an example, I'd like to talk to you a little bit about the basic elements that in the practice.

06:17 Number one before you even meet the other side, you need to set yourself some goals.

06:23 What do I want to achieve with this? Those goals will be impacted by what we call the bargaining mix.

06:30 These are all the issues that are going to be negotiated throughout the process.

06:35 The goals will be defined by the strategies we deploy and the strategies will be impacted by the tactics we use.

06:44 In other words, in order to reach our strategies to fulfill our goals, we will have to devise mechanical tactics in each phase that push us closer and closer to our goal.

06:57 Once we've done that, we will think about what is our starting point, what is our target point? What is our resistance point? And in the end, where is the settlement range.

07:11 In other words, where is the zone of possible agreement? Now here's an example that I'd like to present to you, which most of us either have been in ourselves or know someone who has been through it.

07:26 The buying and selling of property.

07:29 We have a seller who has thought about selling his apartment or is home for €460,000 euros.

07:38 We also have a buyer who is seeking to buy a home for about €380,000 Euros.

07:47 Yes, it's a pretty far gap between the two sides, but is it? The actual target point of the seller is €430,000 Euros.

08:02 The target point of the buyer is about €400,000 Euros.

08:08 Now if you look at this gap the gap just went from 460 to 380 to 430 and 400.

08:16 Seems a little smaller, but let's look again.

08:20 If we look at the resistance point of each side, we will see that the resistance point of the seller is actually 400.

08:31 The resistance point of the buyer is €430,000 Euros.

08:38 The negotiation range of the seller is between €400,000 and €460,000 Euros.

08:47 The negotiation range of the buyer is between 380,000 and 430,000.

08:55 That means the overall range is between 380 at the low end and 460 at the high end.

09:04 The bargaining range will actually be between the two resistance points between 400 and 430.

09:12 Now most people when they start out to negotiate, they'll say oh 380, 460, if we make a compromise and land right in the middle, we're going to come up at 420.

09:25 That's where I should go. That's where I would be happy.

09:29 But actually the clever distributive bargaining negotiator would realize that the midpoint between 400 and 430 is not 420, but actually 415.

09:40 5,000 Euros could make the difference between buying and selling our apartment.

09:47 Now, let's look a little bit at how do we do concessional bargaining? Let's go to the bases and core of all negotiation strategy.

09:56 Now I'd like to mention somebody who has impacted all negotiations throughout the world, John Nash.

10:03 He was a scientist developing theories of negotiations.

10:08 And he said, there is a set of outcomes determined by the political and economic environment of every negotiations.

10:18 Solutions cannot be worse than the status quo.

10:23 And he said something that nobody understood, It must be on the Pareto Frontier.

10:29 I will come back to that in the next slide.

10:32 He also said, there a payoff for saying no what we call non agreement.

10:39 Problems and solutions have values in an equation and he actually thought that all players are rational.

10:46 We know all players are not rational but Mr. Nash felt they were.

10:51 He said the focus is on players, strategies, outcomes, structure, and finding that equilibrium.

11:00 The Nash equilibrium is based on the Pareto optimal agreement.

11:05 Mr. Nash said, if there is a set of strategies where no player can benefit without the other side changing their strategies, the set of strategies and the payoffs will be in equilibrium.

11:20 What does that mean for the Pareto Optimum? If you look at the graph on the screen you will see that there is a correlation between the buyer and the seller.

11:33 Actually, there are series of options that all have the same value which will be determined for example in the apartment example by price, type of payment, time for payment, maybe some extras on the side, all of these packages will create a final comprehensive negotiation agreement.

11:54 Now to make concessions, which people always expect you have to know a few things.

12:01 First of all if no concessions are made people will be skeptical about the agreement.

12:08 Number two people often feel cheated if no concession can be made.

12:14 Number 3, there is always someone who will say, when they did it they did it better.

12:21 So be prepared to answer that question.

12:26 Then I take it or leave it offer is also seen as skeptical.

12:30 And lastly, if it seems that there no room for negotiation people tend to walk away.

12:38 Why should I go there? If they're not willing to negotiate we've all heard this before.

12:45 I'd like to give you a couple of tips to take with you on concessional bargaining.

12:49 Number one is the principle of proportionality each concession should decrease with time.

12:56 In the end, all concessions should be balanced.

13:00 And in order to do that, you need to discuss the subjective and objective value of the things, you might think this apartment is worth a lot because you've lived there for 20 years.

13:12 Yet the person coming in cannot understand that subjective value.

13:17 Number two, be aware of Trojan horses.

13:21 Some people make an early technical concession because they plan to make a bigger demand for a larger concession towards the end of the negotiation.

13:32 Always make sure that when you get something you give something immediately in return.

13:39 Number three, logrolling.

13:42 Make sure that concessions are packaged and that people feel there was a give and a take.

13:49 And finally, you must have a formal end to your concession of bargaining.

13:55 Make sure that your last concession is large enough to demonstrate finality, but not so large that people feel you have a lot more to give.

14:06 Be prepared as well that even in the every last second when you think you have an agreement, smaller parties or weaker parties will come with one last demand, you have to decide for yourself whether that last demand is a concession you're willing to take.

14:26 Now many people ask me Juan, how do you assess the resistance point of the other side when they won't tell me? Well, there are a few things you can do about this.

14:36 Number one is direct or indirect information.

14:40 For example, what is the market rate? Are their loan guarantees? What kind of information can we get that does not involve having to directly ask the other side.

14:52 Number two, what are the priorities and motivations of the other side.

14:57 For example, is having a garage important to the new perspective owner or a roof terrace, or maybe the seller needs to get rid of the apartment very quickly that leads us to our third criteria.

15:14 Urgency is the lease of the prospective buyer up in his former apartment.

15:20 That means the person is under pressure to actually buy quickly.

15:25 And lastly, what do third parties actually say about the negotiation, we know for example in buying and selling apartments and houses that banks always want to have a say at the value of the apartment or the house.

15:41 Therefore there are ways for you to evaluate the resistance point.

15:46 I'd like to give you one more tip, and that is the subject of anchoring.

15:52 Many people always ask, Should I be the first one to say something in a salary negotiation? I don't want to lose my job.

16:02 Well, if this is your first job right out of college, I would say basically you're at the mercy of the employer.

16:09 However people as they gain experience in salary negotiations will tell you that it's always good to first, know exactly what the market price of your job is and second to do something which is called anchoring.

16:26 Anchoring is the number in which a distributive negotiation always revolves around.

16:32 Statistics show that the first number to be verbalized in a negotiation will be closer to the final agreement than the second number.

16:43 Keep that in mind the next time you're doing a salary negotiation.

16:47 Now, how do you avoid confrontations? Well one thing is during the opening sessions to go back to what we've mentioned before as win sets.

16:58 If the target point or the resistance points of the two sides to not overlap in any way shape or form.

17:06 Actually having a distributive bargaining might be more challenging than we thought.

17:12 Trying to force somebody to move those resistance points unduly, or to greater sums were actually not achieve a zone of possible agreement.

17:23 You do not have to get angry at the other side.

17:26 Here are some tips on avoiding a confrontation, then pretty much common sense.

17:32 Number one, remember that everyone expects a concession.

17:37 So create space in your negotiation for offers and counteroffers.

17:44 Number two, If the other side makes a concession, make sure to balance it out people expect fairness.

17:54 Number three, understanding does not mean that you agree with someone, therefore when you can empathize with the other side without agreeing take the opportunity to show the other side you actually care about them.

18:12 Number four, recognize large concessions by the other side and thank them.

18:19 Think about what you're going to do and if you have to say no to a demand from the other side, make sure that you give them some kind of explanation why you said no.

18:30 Very important is Is not to take back concessions that were already made and keeping a record of what was agreed so that we don't have to renegotiate the package.

18:42 In closing, I hope that you are now able to recognize a distributive bargaining situation, that you are able to throw yourself into a negotiation without feeling uncomfortable or insecure and that you're able to negotiate in a distributive bargaining situation.

18:59 I hope that you have taken these tips on board.

19:02 And you'll use them the next time you do concessional bargaining.

19:05 And lastly, that you've developed a sense that positional bargaining or confrontational bargaining is not the same as distributive bargaining.

19:15 In closing, what I would like to say is, if you remember that most people want to be successful and cannot agree to things that will hurt their relationship, embarrassed them, or ruin them financially, distributive negotiations, when done professionally and strategically can be a lot of fun and it can be rewarding.

19:35 It is important to remember that the zone of possible agreement is crucial in understanding what is possible in concessions.

19:43 Take time to map out your strategy and do not forget to take time to discuss the entire situation in depth before you begin with demanding concessions.

19:54 Remember, clarity of purpose and quality of relationships should always be your top priority in a strategic negotiations.

20:02 Good luck with your next distributive bargaining situation.