A Worse Deal than You Think?

By on / Negotiation Skills

Most negotiators leave the bargaining table believing they were better at pushing the other side to its limit than was actually the case, according to recent experimental studies by Richard P. Larrick of Duke University and George Wu of the University of Chicago.

The researchers tell the story of Jill, who places an ad to sell her used car for $2,800 but is willing to go as low as $2,300. After haggling with a prospective buyer, Jill sells the car for $2,450. Later, when a friend asks Jill how much she thinks the buyer would have paid, she says, “Given the fuss he was making, I don’t think he would have gone above $2,500.” In Jill’s version of the story, the zone of possible agreements, of ZOPA, overlapped by about $200 ($2,300-$2,500), and Jill got 75% of the value in this zone.

Now consider the story from the buyer’s perspective. What would he have estimated the ZOPA to be? How low did he think Jill was willing to go? Larrick and Wu argue that the buyer probably did not know that Jill would have gone $150 lower to close the deal. Otherwise, he would have held out for less!

Negotiators often think they were more successful bargainers than they were. They also tend to believe that the overall pie was smaller than it actually was and that they received a greater percentage of the pie than they did. “If negotiators always think they are claiming 70% of the surplus,” Larrick and Wu say, “they will rarely stop to scrutinize their skills.” On the other hand, long-term relationships may thrive if both parties believe they did very well.

Finally, the authors speculate that negotiators also overestimate the degree to which they have found all the mutually beneficial trades in a negotiation, even when more are possible. This intriguing work identifies a pattern of misperception that may affect how people learn – or fail to learn – from their past negotiations.

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3 Responses to “A Worse Deal than You Think?”

  • John Adam K.

    I rarely learn the true ‘bottom line’ either side would be willing to offer or take.

    In one case involving a head-on collison between a truck and a car, the mother suffered brain damage with an IQ loss from 85 to 65, a husband with a green stick injury and their 3 children also hurt, I found out what they were thinking.

    After the case settled, I was told the lead PA came in willing to settle for $4.7M however his junior partner convinced him to hold out for $5.1M. On the other side the Attorney Claims Adjuster for the Trucking Company was willing to go as high as $6.0M. So the ZOPA was $1.3M with the P’s losing $900,000.00 and the D’s over paying by $400,000.00.

    As a side note there were two other married couples in 2 other cars also involved in the accident. They were represented by a different lawyer. He originally had the first matter but withdrew and chose to handle the other claims which settled for approximately $500,000.00.

    We Mediated the second group about a year after the first.

    We learned from the second attorney that about 3 weeks after the money was paid in the first case, the husband took his 19 year old girlfriend and his 3 kids and returned to Mexico leaving his wife alone. Also, the PA had taken a 50% fee on that case.

    During the second Mediation we got to a point where the P’s were at $450,000.00 and the D’s were at $400,000.00. While I was in caucus with the D’s the PA knocked on the door. He said we all knew where we were heading but because these P’s are also Mexican it was necessary to stop at that point. The wife’s injuries were the substantial part of the claim and if she settled the case that day at the table she would disrespect her husband. This would result in her being severely beaten by her husband that night.

    This PA suggested that the D’s give him 2 weeks to bring his clients into his office and slowly work things out.

    We all agreed and as a result that case settled.

    The other couple which were Irish got theirs settled at the table without incident.

    Reply
  • – What are the ways for Jill to learn that she could have done better?
    – If she is satisfied with a deal, why the judgement is that she should have done better.

    It seems that the initial problem is in the fact that she significantly undervalues her car and sets a quite low reservation value – is there a way to deal with the concern of low reservation value?

    And she got lucky with the buyer, because he is supposed to be willing to pay $350 than her reservation value. What is the way for her to figure out that he is willing to pay more than she expects?

    thank you for your comments.

    Reply
  • Moussa O.

    It applies both ways, on the upside and downside. when you believe that you will make a certain impact on the other party on the negotiation table, it turns out to be less than your expectations. On the other hand, if you are a bit pessimistic on the outcome of the negotiation and you believe that you will only have a poor impact on the other party, most of the times it turns out to be better than your expectations.
    For some reason real life fluctuations are much smoother and flatter than our personal perceptions.

    Reply

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