Lecture 7 Negotiation with applications to real estate

Question 1

When do negotiations occur?

Answer 1

When two (or more) parties try to reach a mutually beneficial agreement

Question 2

Backward induction

Answer 2

The process of reasoning backwards in time from the end of a problem or situation, to determine a sequence of optimal actions

Question 3

Why would you reject given money?

Answer 3

• Preferences for fair (equal) outcomes
• Reciprocity - punish unkind behavior

Question 4

BATNA

Answer 4

Best Alternative To a Negotiated Agreement
What is my best outcome if we fail to reach an agreement?

Question 5

What is the reservation point?

Answer 5

The point at which you are indifferent between agreement and impasse

Question 6

Why should you think of a BATNA?

Answer 6

1. Lowers the risk of accidentally accepting a too low offer
2. Lowers the risk of rejecting an offer that is above your BATNA, this often happens when emotions get in the way

Question 7

What are the components of negotiation?

Answer 7

Claiming Value & Creating Value

Question 8

Claiming Value

Answer 8

Bargaining zone - the zone between your and counterparty’s reservation point.
One issue negotiations

Question 9

Creating Value

Answer 9

Identifying and adding issues which are valued differently by different parties can create value during negotiating

Question 10

Zero-sum bias

Answer 10

When an individual thinks that one person’s gain would be another’s loss. Thinking it is all “value claiming” and ignoring “value creation”

Question 11

Reactive devaluation

Answer 11

Devalue any concession made simply because it is offered by an adversary - “if you are willing to offer this, it must be bad for me”

Question 12

Self-serving bias

Answer 12

Tendency to attribute successes to (internal) personal factors and failures to (external) situational factors beyond control
To conflate what is fair with what benefits oneself (and those around you) - definition often used in negotiation

Question 13

Does knowing about the self-serving bias help?

Answer 13

No

Question 14

Anchoring

Answer 14

People tend to be overly affected by an initial anchor, even if this anchor is normatively irrelevant, without realizing this effect

Question 15

When do we use anchoring?

Answer 15

When we actually don’t know what to bid, if we don’t know the initial value

Question 16

The scale-granularity account

Answer 16

precise numbers create a finer-grained mental scale that leads people to adjust away from the anchors in smaller steps [cognitive explanation]

Question 17

The attribution-of-competence account

Answer 17

Precise numbers suggest a more confident and competent counterpart [psychological inference]

Question 18

Should you always start bidding high and precise?

Answer 18

No, not if it is still open who you are negotiating with when setting your opening bid, you may be able to attract more interested parties by starting with a low price, who may find themselves in a bidding war leading to a higher price

Question 19

Is underpricing always a bad idea, even in competative markets

Answer 19

YES

Question 20

What is a reason for not going precise?

Answer 20

If people are likely to bid more than you ask, you do not want them to anchor

Question 21

How does contribution affect the claims?

Answer 21

Positive contributions drive initial claims
Negative contributions drive concessions