Post No.: 0843
Furrywisepuppy says:
The technique of ‘one cuts the cake, the other chooses which slice’ is fine for things that can be split into two. But not everything can be.
In these cases, ‘one should get the object, and the other should get cash in lieu of their share in the ownership of the object’. So, as an example, if a jointly-owned painting is at stake during a divorce settlement – one party should state a price that they’re willing to accept for surrendering their share of the painting (which should be 50% of what they think it’s worth in total), and the other party should then decide whether they want to either pay this amount in cash to buy the other part of the painting from, or take this amount in cash to sell their part in the painting to, the first party. (This process is sometimes referred to as a ‘Texas shootout’.) The second person should ‘buy’ the first person’s share of the painting if he/she thinks the cash offer is less than what he/she thinks 50% of the painting is worth, or ‘sell’ his/her share of the painting to the first person for that value if he/she thinks the cash offer is more than what he/she thinks 50% of the painting is worth.
However, in both these scenarios there can be a problem. If the cake is made up of icing and sponge and the party who cuts the cake is indifferent between sponge or icing but knows the other party prefers sponge and hates icing, then he/she could cut the cake in such a way that the chooser should choose a slice that has 55% of the sponge and just 5% of the icing, leaving the cutter to get the remaining 45% of the sponge and 95% of the icing! Or if one party values the painting at £100 and knows the other party values it at £500, then if the first party makes the offer then they could set it at £200, whereby the second party should accept the painting because they believe it’s worth £500 in total, or £250 for half; meaning that the first party will get paid £200 in cash for something they really valued at £100 in total, or £50 for half! So you can take advantage of knowing the other party’s preferences.
If the party who goes first really splits things equally in half because he/she doesn’t know the other party’s preferences, then the party who chooses which slice to get, or decides whether to buy or sell the object, will get ≥50% of the total from their own perspective, hence you’ll want to go second in these situations. But if you know the other party’s preferences more than they know about yours, you’ll want to go first so that you can split things strategically. But don’t push it too far because the other party might pick the option you didn’t expect them to take, out of spite, or you could’ve gotten their exact value wrong – hence leave a bit of margin for error if you’re trying to goad the other party into taking a particular option.
Never forget the time value of money (discounting future payoffs i.e. £1 today is worth more than £1 tomorrow), as well as other costs from delays in making an agreement that shrink the pie over time (like delays in settling union strikes).
‘Rubinstein bargaining’ is a game theory strategy that takes into account future values to work out present values.
Imagine we have a game where there’s a grass pie (not for me but hey, or hay) that shrinks by a fixed percentage every hour, and a gopher and prairie dog must agree on the split of this pie as this is happening. The gopher makes the first proposal on the first hour, then the prairie dog can either accept this or make a counter-proposal on the next hour, which the gopher can either accept or make a counter-counter-proposal on the following hour, and so forth.
So, in this game, if 50% is the figure that the pie shrinks by for every hour that passes then the size of the pie that the gopher has to split in the first hour would be 100%. But if this deal is rejected by the prairie dog, then the size of the pie that the prairie dog has to split in the second hour will be 50% of the original pie. But if this deal is in turn rejected by the gopher, then the size of the pie that the gopher has to split in the third hour will be 25% of the original pie. And so on.
Therefore you can see that it incentivises the parties to strike a deal sooner rather than later because the pie shrinks the longer they take to agree on a deal – yet they’re each individually incentivised to try to seize a larger proportion of the pie for themselves too.
With the above rate of shrinkage, the first mover has the advantage and can demand a larger split for themselves, like maybe a 65:35 split. However, as the rate that the pie shrinks gets slower and slower (e.g. it only shrinks by 1% per hour) then the split should converge closer to a 50:50 split, and the first mover advantage becomes less and less important.
Do note though that delays in giving counter-proposals (e.g. waiting for two or more hours between proposals) will in effect increase the shrinkage of the pie between proposals, hence if offers can be made with little delay between them, one should expect the pie to be split closer to 50:50 too. Things can therefore change if one party can be more patient than the other because their cost for waiting is lower. Here, the more patient party should be able to secure more of the pie. Pressures for quick results can therefore work against the pressured party.
Game theory underpins many of the strategies employed in negotiations. If you’re in a prisoner’s dilemma situation with another player on a quiz show, and there’s a prize pot to share, and you each have the option to split or steal this pot; where if you both choose to split it then the pot will be equally divided, if you both attempt to steal it then no one will get anything, and if one player attempts to steal it and the other chooses to split it then the player who steals it will take the entire pot – and moreover you’re able to confer with each other before you both make your decisions – then emphasise the bigger-picture risks for their reputation if they choose to steal, like their friends, colleagues or clients who are watching the show will never be able to trust them again if they choose to steal! Even more clever or ballsy would be to state outright that you will steal the pot but will write them a cheque for half the prize total afterwards, and therefore the other party’s only sensible option is to split, otherwise they’ll be guaranteed to go home with nothing! In other words, stress to them that a chance for something is better than guaranteeing themselves nothing. But then actually choose to split the prize pot with them too!
I’ll round this post off with some assorted negotiation tips…
Ensure you’re in the strongest possible position to negotiate before you start negotiating. For instance, wait until you reach your destination, then step out of the taxi and get a hold of your luggage before you try to negotiate the price with the driver – this is an even stronger position for you than negotiating a deal before you first enter the taxi; albeit it’s riskier because once you reach your destination, the taxi driver might lock you in the car until the payment is settled!
Charge clients according to the value you add to them, not a mere cost-plus price or hourly rate for your work. For instance, if you’re a distinctive voice actor and your inclusion in a videogame will improve that game’s sales by £200k, then you’re within your rights to ask for 10-30% of that, rather than just the hourly rate for your work. However, this will depend hugely on whether someone else could do what you do – in this case, if the developer could go to another capable voice actor who’s willing and able to accept doing that job for less.
In some situations, like when you’re trying to get your book Woofering Heights published, where there’s a chance of future royalties to be gained from the sales of your book and you firmly believe it’ll be a big seller – you might either defer all advances from the publisher or even pay the publisher some money upfront (if you have those funds available) in order for you to claim a larger royalty percentage on these future book sales. But you must leave some incentive for the publisher to care to print, distribute and market your book (beyond contractual reasons) i.e. they must still make a profit per book sold to encourage them to sell as many of them as they can.
If you’ve had to agree on a price for securing a contract but you think it’s on the low side, then ask the other party to consider the possibility of a no-obligation, non-contracted bonus if you do a magnificent job? If they would like to hire you again then the idea of that bonus option will be in their minds. You might not get cash but something else in-kind? Possible salary raises or bonuses that have been mentally primed for a long time are more likely to be granted than last-moment requests.
Strikes between firms and their employees that affect public services are unfair on the public – but if the employees continue working and the firm keeps producing but neither party gets paid during the time when a wage and/or working condition agreement remains elusive, then this will incentivise both parties to reach a deal with each other as soon as possible. This ‘virtual strike’ will not work if the money is simply held in an escrow account ready to be picked up after a deal is done though because this will apply little real pressure to settle, and settle urgently – the wages and revenues for the employees and firm, respectively, must be foregone, like given to a charity or the customers receive the services for free.
Some sellers will try to make you feel embarrassed for trying to haggle down the price on a price tag, but if you’re with someone who’s authorised to offer discounts in the store and it’s a big ticket item, or if you notice a slight defect like a scratch on the product, then, in a soft tone, explain that you want to buy it and they want to sell it but you’ve only got so much to pay for it. Phrase it like you’re asking for help, like perhaps you promised your spouse you’d get them this item for a special day but you can only afford a certain figure.
(Almost) everything is negotiable, particularly if it already has a price. Notwithstanding, just because you could in principle negotiate anything and everything – sometimes it’s not worth it (e.g. for the sake of a few pence in a one-off transaction) or sometimes it’s unethical, immoral, unconscionable or against something considered religiously sacred. Different people feel differently about trying to knock down the prices of items sold in charity shops, or when as a tourist abroad and haggling with a relatively poor local trader who could do with the few dollars more than oneself.
Post No.: 0825 explained that meeting in the middle isn’t always the best solution.
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