Negotiation Analytics 30C02000 Jyrki Wallenius

1. Negotiation Analytics30C02000Jyrki Wallenius Lecture 5: Win-Win Negotiations: Behavioral Realities, External Help, Coalitions in Multi-Party Negotiations Original lecture slides: PirkkoLahdelma

2. Today’s objectives Behavioral realities in negotiations Third party intervention To familiarize with the complexity of negotiating with more than two parties • The ideas from 2-party negotiations basically generalize (concessions, use of templates), however there are interesting twists to the problem Discuss what is fair with more than two parties To understand the rudiments of coalitions 2

3. Behavioral realities in negotiations

4. FOTE or POTE? Many previous analyses were based on FOTE (Full Open Truthful Exchange) In real life, negotiations are often carried out in a POTE (Partial Open Truthful Exchange) manner – or sometimes even in an untruthful manner where the trust is killed in the first place

5. Behavioral realities in negotiations The zero-sum bias Social utility Reactive devaluation Negative attitudes Cultural differences in negotiations • Differences within and between • Joint membership • Differences in interests • Differences in negotiation styles The us/them bias

6. 1. The zero-sum bias • In a zero-sum game, one party wins what the other party loses • However, in reality the negotiation is not strictly zero-sum but the players do not realize it • Potential collaboration is not taken advantage of • Players can even destroy value or damage their relationship when sticking with the idea of a zero-sum game

7. 2. Social utility • Socially influenced preference structure • You might • want to be fair • empathize with others • concern about others’ welfare • Hedonistic vs. empathetic scoring in experiments (in latter get 10% points of what your adversary receives)

8. 3. Reactive devaluation – you react by devaluing what the other does • ’Not invented here’ • Suspiciousness toward the propositions of the others • “Where is the hidden agenda?”

9. 4. Negative attitudes • A tendency for double standard • The other side is “mean” • To stress situational factors and blame the other party when explaining one’s own behavior • A lack of knowledge about the other negotiators leads to a conclusion that the other side is just mean

10. 5. Cultural differences in negotiationsDifferences within and between • Culture is a set of norms and practices that are commonly held by the members of a group and perpetuated over time • A group can be e.g. a nation, a religion, a profession, a gender, or a family • There are cultural differences butwithin group differences are sometimes bigger than between group differences

11. 5. Cultural differences in negotiationsJoint membership • We are all members of many cultures simultaneously • You can’t always tell in advance • to which cultures the negotiation party belongs and • which of these cultures dominate in negotiation situations

12. 5. Cultural differences in negotiationsDifferences in interest • Differences in interest are common if parties represent radically different cultures • Differences in interest may exist among members of a single culture, too • The more people differ in interests, the larger the potential for joint gains (the situation is worse if two persons are interested about the same issue, such as salary, but one maximizes, the other minimizes) • However, parties with different interests might also differ in thinking about the role of negotiations and how negotiations should be conducted

13. 5. Cultural differences in negotiationsDifferences in negotiation styles Different norms about • Disclosing information about their interests • The truthfulness of their disclosures • Their use of threats and other hardball tactics • The speed and timing of concessions • The number of concessions that are expected before agreement • The standards by which they judge fairness • Their willingness to accept outside help from mediators or arbitrators

14. 6. The us/them bias • A tendency to prefer to deal with those who come from the same background • An us-versus-them orientation gets negotiators to fall into the traps of • Zero-sum thinking • Engaging in reactive devaluations • Misinterpreting conciliatory gestures • Simplifying uncertainties by emphasizing worst-case analysis • Causing self-fulfilling negative prophecies • Getting trapped into destructive escalatory behavior

15. Third party intervention

16. Types of third party intervention Continuum Non- evaluative • Facilitation • Mediation • Arbitration • Terminology not fully clear Evaluative

17. A nonevaluative external helper • Convenes meetings • Provides logistical support • Brings parties together (a broker) • Chairs meetings • Acts as neutral discussion leader • Sets the agenda • Helps parties have their say • Prepares neutral minutes • Prepares PR documents • Articulates consensus as it develops • Assists with personal problems • Controls emotions • Shuttles back and forth while angry parties are kept apart • Corrects miscommunications • Mitigates the effects of unintended cultural faux pas • Enhances relationships • Establishes a constructive ambience for negotiation

18. An analytically minded evaluative external helper can • Help each party privately structure its own interests & vision • Help each party grapple with its uncertainties • Discourage positional bargaining and premature claiming tactics • Help the parties jointly brainstorm together • Help them construct a template for negotiation • Provide needed expertise • Conduct qualitative/quantitative within-issue and between-issue analyses • Help parties jointly refine their template by discarding the dominated resolutions • Help each party find its BATNA • Help each party in reality testing • Help the parties share information • Help them seek an efficient, equitable outcome

19. Facilitation • Facilitators work where the conflict is minor. • They tend to be employed to design and run multi-party problem solving processes - basically to prevent adversarial behavior. • They concentrate exclusively on the process, not so much the content, and very rarely work with the parties separately.

20. Mediation • Mediators tend to operate where the conflict is already manifest, and it is more a question of managing it than preventing it. • They usually start by working with the parties separately, as a prelude to bringing them together. • They also avoid getting involved with the substantive problem, although the terminology is not clear

21. Arbitration (usuallybinding) • Arbitrators can only function when the parties hand over responsibility for the decision to them. • This is usually where the conflict is overt, and relatively strong. • They listen to the arguments of the parties – when they are together - and then decide on the best way forward.

22. Why external helpers are not used? • (S)he is not perceived to be neutral • (S)he may not understand the subtleties of the situation; if incompetent, (s)he may escalate the conflict • The parties fear losing control • (S)he may wish to explore linked problems (against wishes) • Confidential information may be leaked • Best solution may be obvious and easily arrived at without an external helper • (S)he may secretly not want to resolve the conflict • There may be disagreement over who selects her and who pays for her services

23. Structure of this course

24. Many parties:What is fair?

25. What is fair in case of many parties? • Fairness is at least partly subjective – not 100% objective • Emotions matter • Perception of fairness may be inconsistent with economic models! • Mathematical/economic models of fairness: • The Maximin-principle • The Nash solution (maximize the product of scores or excesses)

26. Fair division with monetary transfersDivision of an inheritance A father leaves his estate of four indivisible commodities (A, B, C, D) to be shared equally among his three children

27. Division of an inheritanceNaïve procedure • Allocate each commodity to the person who values it most and collect its value for the pool of money to be shared • First child gets A, the second gets D, and the third gets B and C • The pool gets $18.000 • Each child gets one-third of the pool, i.e. $6.000 • The net value for each child is: • 1: A - 4000 • 2: D + 4000 • 3: B + C

28. Division of an inheritanceAuction • First child gets A at $7.000 (2nd highest price) • Second child gets D at $1.000 • Third child gets B at $2.000 and C at $1.500 • The pool gets $11.500 • Each child gets one-third of the pool, i.e. $3.833 • The net value for each child is: • 1: A - 3167 • 2: D + 2833 • 3: B + C + 333

29. Comparison of naïve & auction procedures • We have two players and one item which can not be divided • Who would get the item and how much should she pay for the other player as a compensation? • Player 1 values the item at x • Player 2 values the item at y • Let’s suppose that x< y and therefore, player 2 gets the item • Player 2 pays for Player 1: • Using an auction: x/2 (half of the opponent’s offer) • Using a naïve procedure: y/2 (half of her own offer)

30. Fair division with points (without monetary transfers)Division of an inheritance A parent leaves his/her estate of 10 indivisible commodities to be shared equally among the three children To beresolvedwith Excel Solver

31. Fair division without monetary transfersDivision of an inheritance

32. Fair division without monetary transfersDivision of an inheritance Negotiations are carried out in a FOTE manner – as above Negotiations are carried out in a POTE manner • The preferences are only partially revealed – negotiators reveal the truth but not the whole truth • In the example in Raiffa’s book, the negotiators reveal the preferences to some extent but not fully • The negotiators may use voting; they vote about the acceptability of a suggested contract; if not acceptable, a new contract is introduced and voted for

33. CoalitionsIn negotiationswiththreeormoreparties, ifyoudecidenot to come to an agreementwithall of youradversaries, youmightstillforge an agreementwith a subset of theotherparties.

34. Coalitions – game theoretic perspective • Originates from game theory (von Neumann and Morgenstern,1944): “n-person games”, known also as cooperative game theory • Given the full knowledge of the monetary value of the coalitions, the players must decide which coalitions to form, and how to divide the value of each coalition among its members

35. The Scandinavian Cement Company • The Scandinavian Cement Company (SC) • The leading producer of cement • Traditionally shared the market in a cartel arrangement with two other producers: • The Cement Corporation (CC) • The Thor Cement Company (TC) • The cartel arrangement is about to expire • The three companies are contemplating a formal merger • An independent consultant, Loran Chat, is called to assist them

36. The Scandinavian Cement CompanyNet present value of earnings for each merger 61 64 67 69 77

37. The Scandinavian Cement Company SC suggests a merger of all three companies and a division of the synergies (16) in proportion of the firm’s size: Payoffs 32 SC: *16 = 8.4 32+8.4=40.4 32+23+6 23 CC: *16 = 6.0 23+6.0=29.0 32+23+6 6 TC: 32+23+6 * 16 = 1.6 6+1.6=7.6 Total 77.0

38. The Scandinavian Cement Company • TC: ”A coalition of TC and CC would get 39, which is better than 29 + 7,6 (= 36,6). Let’s form a coalition and share 39 by giving 30 to CC and 9 to TC.” • CC: ”TC should get 7,6, not 9. If TC was left alone, it would get only 5. CC should get 31,4.” • TC: ”A coalition of SC and CC would produce 59 to them and 5 to TC; this totals 64. If all three form a coalition, they would have 77 to be shared. It is 13 more than in a coalition of SC and CC. We should share this 13 by giving a half of it (6,5) to TC and the other half to SC and CC to split.”

39. The Scandinavian Cement Company The known constraints: • SC + CC + TC = 77 • SC ≥ 30 • CC ≥ 22 • TC ≥ 5 • SC + CC ≥ 59 • SC + TC ≥ 45 • CC + TC ≥ 39

40. From the constrain 2 SC The core SC From the constrains 1 and 4 SC + CC From the constrains 1 and 7 The set of feasible solutions From the constrain 5 SC + CC From the constrains 1 and 6 CC CC CC From the constrain 3 SC

41. The Scandinavian Cement Company • Loran Chat:”Here is one feasible option: • xSC = 35 • xCC = 29 • xTC = 13 • SC: “No way! I get only 3 more whereas TC gets 7 more.” • CC: “What about a compromise? Let’s combine the original proposal of SC and Loran’s suggestion. The solution lies in the mid-way • xSC = (35+40.4)/2 = 37.7 • xCC = (29+29.0)/2 = 29 • xTC = (13+7.6)/2 = 10.3 Total: 77

42. The Scandinavian Cement Company: The Shapley Value

43. A pure coalition game Three players A, B, and C (choose a role) • Join a coalition which offers you the best return • Decide how to split the joint payoffs while everyone is maximizing their own profit • Allow 10 minutes for negotiations • If two want to arrange a private meeting, reserve 2 minutes for it • Yourpayoffwillbecomparedwith payoffs of others playing thesamerole

44. A pure coalition game • Payoff tables set different requirements for xA, xB and xC (the shares for A, B, and C): xA >= 0 xB >= 0 xC>= 0 xA + xB >= 118 xA + xC>= 84 xB + xC>= 50 xA + xB + xC= 121 • However, there does not exist a solution where all the requirements are met. The core is empty!

45. A pure coalition game Here is another way to share the total value of the coalition of three The Shapley value:

46. Key ideas about coalitions • Important topic in multi-party negotiations • Connection between which parties form a coalition and expected payoffs • Coalition formation: include and exclude • Breaking the emerging coalitions is part of the game • Difficulty of establishing objective criteria for dividing pay-offs • Unpredictability of coalition formation