Research by Howard Raiffa, a leading scholar in negotiation theory, bridged a gulf between a bargaining strategy premised on the assumption of rational actions and the less predictable behaviours of real people in the real world
Building on his work, negotiators can devise a variety of calculations and tactics to reconcile these two modes: the core insights of game theory with the lessons of behavioral psychology. No formula is comprehensive, but a consistent approach will improve the efficiency and benefits, both ways, of any bargaining process.
- Theory concerns problems where the protagonists in a dispute are super-rational, where the ‘rules of the game’ are so well understood by the ‘players’ that each can think about what the others are thinking about what he is thinking, ad infinitum.
- Real business cases are a quagmire of uncertainties, private anxieties, and divergent concerns.
In his book, The Art and Science of Negotiation, Howard Raiffa describes a scenario typical of negotiations between firms:
“Mr. X, the vice-president for operations of Firm A, knows he has a problem, but he’s not quite sure of the decision alternatives he has and he’s not sure that his adversaries (Firms B and C) even recognize that a problem exists. If Firms A, B, and C behave in thus-and-such a way, he cannot predict what the payoffs will be to each and he doesn’t know how he should evaluate his own payoffs, to say nothing about his adversaries’ payoffs… Mr. X has a hard time sorting out what he thinks about the uncertainties and about the value tradeoffs he confronts, and he is in no frame of mind to assess what Mr. Y of Firm B and Mr. Z of Firm C are thinking about what he’s thinking. Indeed, Mr. X is mainly thinking about idiosyncratic issues that would be viewed by Y and Z as completely extraneous to their problems.”
No negotiated transaction can achieve maximum utility, because the economist’s idea of a perfectly “rational economic man” is illusory. The disparate preoccupations that Raiffa ascribes to negotiators often obscure the larger competitive pressures which bear on companies. Efficient Negotiation involves devising a series of appropriate, customised analytical steps to develop a more accurate grasp of these forces, whether at micro- or macro-levels.
As industries and markets evolve, the relative position of the various actors will change – among companies, but also for other actors such as regulators and consumers. The strengths and weaknesses of a company are contingent on both internal factors (their competitive position, scale, costs, and so on) and external factors (including market size, technological change, consumers).
A useful check list of these factors can be found in the work of another renowned Harvard professor. Factors described in Michael Porter’s ‘Five Forces’ model offer a conceptual framework for mapping the interests of the parties in a business negotiation:
Efficient Negotiation involves devising an agenda for evaluating the priorities of all the parties, premised on a calculation of your ownand others’ interests. By fine-tuning your calculation of the relative gains and losses of each interest group, the Five Forces model provides a set of criteria for both theoretical calculations and an empirical assessment of competitive pressures.
To these tangible and measurable criteria, the negotiator must add an assessment of ‘soft’ forces, eg: culture, idiosyncracies and personality. These factors are recurring attributes of all negotiations, everywhere.
For example, in 1967, Howard Raiffa was appointed first director of the International Institute for Applied Systems Analysis, a multilateral scientific project established by President Lyndon Johnson to foster cooperation between American and Russian scientists:
“I learned about different national negotiating styles, and above all about the importance of timing: one had to keep a fluid agenda and wait for the propitious time to introduce a contentious issue… I learned how difficult it is to accomplish anything substantial in open meetings when each side has to go on record for the people back home. I learned that money comes from different pockets and that five million dollars taken from the left pocket of a country might be easier to get than five thousand dollars from the right pocket…I learned the need of others to feel that they are part of the inner circle. I learned that ‘gentlemen’s agreements’ that are not documented are fragile; that a party may be sincere about such an agreement when made, but that they may not be able to withstand internal pressures from objectors at home; and that because negotiators are embarrassed when they have to back away from promises made, they often become more amenable to other compromises.”
Raiffa’s experience with government scientists during the Cold War might also serve as a summary of the negotiating environment in which multilateral regulators and authorities such as the World Trade Organisation operate today.