Dealing with Differences in Attitudes Towards Risk

By — on / Business Negotiations, Daily

Even when parties at the negotiating table have the same interests, they may disagree on the amount of risk they are willing to take.

For example, a somewhat profitable, publicly traded company may be highly averse to the potential risk of losses that would hurt its profit margins. On the other hand, a privately held, highly profitable company are trying to negotiate a deal which may have a far more aggressive position on risk-taking.

How can these two parties reach an agreement and reconcile their interests?

In his article “What Divides You May Unite You,” in the July 2005  Negotiation newsletter, James Sebenius argues for an arrangement in which the more profitable company accepts more of the pro rata share of the losses in return for a greater share of the profit.

In the example above, both companies strongly preferred to cap the publicly traded company’s downside in exchange for a larger share of the upside for the private company. These two companies successfully created value by assigning more risk to the less risk averse party and compensating that side with higher potential earnings.

Regardless of your tolerance for risk, it is important that you fully examine the interests of both parties in order to identify areas of overlap that may lead to consensus and even greater value in your resulting agreement.

Discover step-by-step techniques for avoiding common business negotiation pitfalls when you download a copy of the FREE special report, Business Negotiation Strategies: How to Negotiate Better Business Deals, from the Program on Negotiation at Harvard Law School.

Related Article: Dealing with Differences in Attitudes Towards Risk

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