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Aggressive First Offers and the Nash Equilibrium

Recently, in response to my Power Point Presentation on Cognitive Biases (the one labeled Social Psychology Insights) I mentioned that aggressive first offers “anchor” the bargaining range in favor of the first offeror.

Our correspondent and resident blog expert on cognitive biases, Michael Webster of the BizOpNews Due Diligence Blog, responded as follows:

Hmm, anchoring to support aggressive opening bids? Doubtful, despite the academic literature -which in my opinion has little contact with real negotiation.

And nothing about coordination versus nash equilibrium reasoning? Big oversight, in my opinion.

Because I respect (and generally defer to) Michael’s opinion, but because I disagree with him this time, I include here my response and open the discussion to our readers.  To help our readers, I’d like to ask Michael, if he has the time, to provide us with his thoughts about the coordination v. nash equilibrium reasoning that is absent from my Power Point Presentation (an absence I’d like to rectify before giving this presentation on the 13th of November)

Response to Michael:

For once in my blogging-career, Michael, I’m going to differ with you but ask for help on the coordination v. Nash equilibrium reasoning.

It’s difficult to “observe” the effects of anchoring and framing outside of a controlled environment. You need to have a kind of duplicate bridge experience where the bargaining partners are all negotiating the same deal to determine the effects of framing and anchoring. Research shows we’ll all deny that we’ve been effected.

I have, however, participated in these types of role plays with “teams” of seasoned attorney negotiators.

In fact, it was the first of these experiences, on my first day of mediation training through the Straus Institute here in Malibu (at Pepperdine where the fires were yesterday — terrible) that I experienced the power of anchoring first hand.

All twenty attorney teams negotiated a buy-sell contract for about 45-minutes. When we returned to the classroom, we all put our negotiated deals on the blackboard together with the first offer made.

I’d been taught as a young attorney NEVER to make the first offer — folk practice where I come from, i.e., California.  In the role play, without exception, the negotiator who made the first offer in the hypothetical bargaining session got the best deal — often by many magnitudes.

THIS is the moment when I decided I wanted to return to school to learn more about this and everything else having to do with negotiation — rules of persuasion, the effect of cognitive biases, etc.

Since that time, what I’ve read in the academic literature on controlled negotiation studies, not only on students but on judges and attorneys and business people, has concluded that he who makes the first offer sets the bargaining range and gets the best deal.

As to Personal Bargaining Experience.

Since I’ve been mediating full time, I’ve helped lawyers negotiate hundreds of deals. Still, it’s difficult for me to say whether the first offer had a substantial anchoring effect because I don’t know how the negotiation would have turned out had the other side made the first offer or if the first offer had not been more or less aggressive.

More importantly, a REAL negotiation to settle a REAL dispute is so multi-determined that I can’t imagine being able to opine on which of the many factors was determinative (assuming one factor could ever be determinative) of the final deal.

Every deal in my business results from a combination of the vitality of the parties’ legal and factual positions; their financial and personal or business interests; the personalities of the attorneys and the disputants; the willingness of the disputants to share information that will increase the number of options available; the negotiation and “people” skills of the mediator; and, numerous other factors that I often am never advised of, i.e., at the end of one difficult negotiation session, I learned for the first time that two of the three parties had been negotiating the sale of one of their businesses while I was negotiating the settlement of an unfair competition lawsuit.

We weren’t even negotiating the same matter!

Insights?

                        author

Victoria Pynchon

Attorney-mediator Victoria Pynchon is a panelist with ADR Services, Inc. Ms. Pynchon was awarded her LL.M Degree in Dispute Resolution from the Straus Institute in May of 2006, after 25 years of complex commercial litigation practice, with sub-specialties in intellectual property, securities fraud, antitrust, insurance coverage, consumer class actions and all… MORE >

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