Sunday, February 14, 2010

Lessons in negotiation Part 1

This semester, I am taking a class called "Power and Negotiation" at MIT. Last class was a very interesting one and I thought I would summarize the lessons learned. First, the acronyms and basic definitions:

RP = Reserve Price. The minimum price one's willing to pay to achieve desired outcome. For example, my reserve price for selling my used text book will be based upon the value of the book on Since is my other option if the current negotiation does not come through, it is also my "Best Alternative To Negotiated Agreement" or BATNA. Therefore, by definition, BATNA = RP. I know, complex math there.

AP = Aspiration Price. This is the price that I would like for my textbook if my negotiations are successful. For instance, if a new American edition of the textbook costs $200, has an international edition for sale at $50, my aspiration price for my book maybe $100.

With the definitions out of the way, these were my takeaways from the class for successful negotiations:

1. If the value of the deal is clear to both parties, be the first person to make an offer. In my example of textbooks, the buyer had access to the same market price information I did. In this case, it's to my advantage to name the asking price.

2. If the value is unclear, allow the other party to name the price. For instance, if buying an antique car which can't be priced easily, have the other party name a price first.

I am not completely clear on the rationale behind this advice, and is something I am hoping will become clear in future classes.

3. When going into a negotiation, do your homework and know your RP and AP going in.

4. Don't let yourself be anchored to a price named by the counter-party or by your own BATNA.

5. Don't let your reservation price determine the aspiration price or your negotiation strategy. The aspiration price should strictly be determined by market research only.

6. Don't fall into the "happiness trap". People who get anchored by their RP are happier because they set low thresholds and allow this to determine the success of their negotiations. Don't fall into the trap!

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