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Chapter 11 - Tradeoffs and Concessions. The Art and Science of Negotiation. Harvard University Press (pp.148-156) .
Chapter 11 - Tradeoffs and Concessions. The Art and Science of Negotiation. Harvard University Press (pp.148-156) .
148
TRADEOFFS AND CONCESSIONS / 151
150/ TWO PARTIES, MANY ISSUES
tOly. You are concemed about three factors: cost, time to comple-
easier to work with. In the case of AMPO versus City we could have
tion, and quality. From preliminary discussions you limit the
evaluated City's reactions for nonmonetary issues in terms ol'
ranges of these factors to, respectively, $3.0-4.5 million, 250-400
equivalent salary concessions, and thereby monetized these non-
days, and a "best" value of 1 to a "worst" value of 5 (on an ordinal
monetary concems. This might, in fact, have been the more "natu-
ral" approach. But the introduction of abstract scores for City scale). You would most prefer a cost of $3.0 million, a time of 250
served a useful purpose: they will be easier and more comfortable days, and the best quality (an index of 1). But you realize that it' s
to handle when we de al with subsequent examples like the Panama highly unlikely you will be able to negotiate such a de al.
Canal Treaty and the Camp David negotiations. Assume that your tradeoffs between the levels of any two factors,
In the laboratory experiment, we assumed that City and AMPO keeping the level of the third factor fixed, do not depend on the
assigned a specific point score to each outcome level on each issue level of this third factor. For example, your tradeoffs between cost
and then added these to get an entire contract evaluation.We'll call and time do not depend on quality, as long as the level of quality is
this an additíve scoring system-although there was one small de- he Id fixed. So it' s legitimate in this case for you to seek an additive
viation from this system. Remember that if City held AMPO to zero scoring system. You agree for nOlmalization purposes to give the
additional vacation days for all officers, City achieved a boIius of 10 best contract ($3.0 million, 250 days, quality 1) a score of 100 points
points. In this case we simply could not add up City' s score for and the worst contract ($4.5 million, 400 days, quality 5) a score of
these two issues. The bonus introduced what is known as an inter- zero points. This is like an exam with three questions, in which the
action effect between the vacation issues. If we combined thetwo scorer must decide how much weight should be given to each ques-
separate vacation issues into a single composite issue, then we tion and how many points should be given to each paItially correct
would have strict additivity among the nine resulting issues. answer. You decide to score individual factors in the same way
(100 = best, O = worst), and to combine the scores with propor-
Considering just two issues-starting salary and number of ser-
tional weights that sum to 1. For example, suppose that you give a
geants-suppose that the other seven issues (treating vacations as a
weight of.5 to factor e (cost), a weight of.3 to factor T (time), and a
composite issue) are already fixed. We're now investigating trade-
weight of .2 to factor Q (quality). Suppose that the internal compo-
offs between starting salary and sergeants only. In the scoring sys-
nent scoring is as shown in Figure 25. A contract that gives you $4
tem we are using, notice that any tradeoff comparisons between
million, 350 days, and quality 2 would then receive-multiplying
levels on these two issues do not depend on the levels of the re-
weight times score for each factor-a total score of (.5 x 50) + (.3 x
maining seven issues: the tradeoffs between starting salaries and
25) + (.2 x 80), or 48.5 points.
sergeants can be said to be preferentially independent of the levels
How should you detennine the weights of the factors (reflecting
of the remaining issues. Indeed, it can easily be seen that with an
the impoItance of each) and the component scoring within each fac-
additive scoring system, the tradeoffs between the levels of any two
tor? Following are some observations that should provide insights
issues are preferentially independent of the levels of the remaining
into these questions. 1
issues. It can also be seen (but not so easily!) that the converse is
StaIting from the worst case ($4.5 million, 400 days, quality 5), if
true: if there are more thantwo issues, and ifthe tradeoffs between
you have the choice of improving one factor from the worst to the
the levels on any two issues are preferentially independent of the
best level, let' s suppose that you would most prefer to improve the
remaining issues, then an additive scoring system is appropriate.
cost factor first, the time factor second, and the quality factor third.
Let' s look at one particular technique for obtaining scores for the
This reflects the ordinal ranking of the weights. Suppose, fmther-
additive case, using a fictitious situation that is just complicated
more, that you would be indifferent between improving the cost
enough to illustrate the complexities 1 wish to address. Suppose
that you, the manager of an expanding business, are entering into
1. For a systematic discussion, see Keeney and Raiffa (1976).
negotiations with a building contractor for the construction of a fac-
TRADEOFFS AND CONCESSlONS / 153
factor alone and improving both the time and quality factor together,
Score
reflecting the fact that.5 = .3 + .2. Using the exam analogy: getting (J
the cost question perfect and the other questions completely wrong oCIl
....
would be as desirable as getting the cost question completely wrong S'
o
and the others completely right. ~
(1)
:3 p
The cost jactor. The more you spend, the more important it is oq'
that you save a given increment of money. Reducing your costs ...::r- o'
::l
CIl
'"
from $4.5 million to $4.0 million is just as important as reducing o....., ~
your costs from $4.0 million to $3.0 million, which accounts for the en Q.. o
'<
oq'
::r-
<b
~
8
dices, except that quality index 2 is doser in value to quality index .....
(JO
...,. S'
(!)
1 than to quality index 3. :3 Q..
(JJ
Roughly, the way to go about constructing any scoring system is ...O' c.., pj
'<
~
'"o
to formulate sorne rough guidelines, and then to tune the system by g:. .¡:..
manipulating numbers and curves and by testing the implied re- Ol
(!) 8
sults. There are fancier and more systematic methods, but the task
should be approached in the same way one would grade an exam ......sr'
(')
o Score
with several questions. If you are sol el y responsible for giving a '"
...., ....
grade and you don't have to explain your grading to anyone else or 8
......
to the student, then you might want merely to respond intuitively ::l to
~ Q..
I aJ
o
and impressionistically to the entire exam. But if you want someone (1)
oq'
<b
><
el se to do the grading for you, then sorne scoring system, even if it :r o
....., (JJ
is not perfect, can be a great help. A case can also be made for ..o
¡:: ~
adopting sorne formal system of grading even if you are not ac- to ~
.... '<
.¡:..
countable to anyone and do not plan to delegate authority to an to:>
I
agent. A formal scheme of your own devising might help you de- '"
cide how to grade each question separately and how to combine the ",'o
scores of different questions.
An additive scoring system sometimes falls far short of what is
reasonable. This may be a result of the interdependence between
factors, an extreme example being the case where preference rank-
ing of levels within one factor depends on the level of another fac-
TRADEOFFS AND CONCESSIONS /155
154/ TWO PARTIES, MANY ISSUES
400 days, quality 5). The value scores of the best and worst eon-
toro For example, the better the military defenses of an ally of Coun- tracts are, respectively, 100 and O, and therefore the gamble has an
try X, the better offCountry X will be; however, X's preferences for expeeted value return of -50. But regardless of what the numbers
the ally's military defenses (the more the better) might reverse (to imply, you might strongly prefer the certainty of the contract with a
the less the better) if the level of their friendship slips below sorne score of 48.5 to the uncertainty of the gamble with the higher ex-
critical point. pected score of 50. This is not surprising, beeause the scoring sys-
Factors may also be interdependent when there is a need for bal-
tem was constructed on the basis of nongambling tradeoff options:
ance or equity. Suppose that you are a negotiator, acting in a benev-
the derived numbers do not reflect any attitudes toward risk. Here
olent way so as to favor two groups (A and B) internal to your side. is where the advantages of utility scoring become apparent. Such
For any contract you negotiate, you are primarily concerned with
techniques enable one to find suitable scoring procedures that not
the benefits to groups A and B. For political reasons you must make
only reflect preferences under certainty, but that appropriately use
sure, however, that the benefits to A are commensurate with those expected utility calculations as guidelines forchoices between lot-
accruing to B. The value of an increase in benefits to A may depend teries with well-specified probabilities.2
critically on the level ofbenefits to B; indeed, ifbenefits to B are at
In negotiations, probabilities may become relevant in several
a very low level, the increase in already high benefits to A may be ways. The consequences associatred with an agreed-upon final con-
deemed undesirable. An additive scheme that scores the benefits tract might involve uncertainties not under the control of the nego-
independently for A and for B and adds these together misses the tiators. Differences in probability assessments might be exploited
need for balance. in terms of contingency contracts. But even in idealized cases
In cases such as these, a nonadditive scoring system can be used. where there are no external uncertainties outside the control of the
Nonadditive systems are not too difficult for current state-of-the-art negotiators, each negotiator is uncertain about what his adversary
measurement, but they are too difficult and too involved to be di s- ultimately will do. Should Steve hold out for $350,000 in the Elm-
cussed heTe. Suffice it to say that often there may be many factors tree House sale, instead of settling for $300,OOO? Should a union,
under consideration, but only a few will be interdependent; nego- which can secure a given contract from management, refuse to
tiators can derive advantage from grouping them together and treat- accept the contract and submit to the uncertainties of voluntary
ing them as one composite factor in an othelwise additive scheme. arbitration?
A well-developed theory of utility analysis has been devised to
. VALUE AND UTILITY FUNCTIONS handle both uncertainties and multiple attributes, but the theory,
while operational, is not easy to use and requires a level of co-
Researchers sometimes distinguish between a value scoring herency that few individuals, and still fewer groups, achieve. Most
scheme and a utility scoring scheme (see Keeney and Raiffa, 1976), people, even in simple risky situations, don't behave the way the
but this distinction is not standard. In the case involving cost, time, theory of utility would have them behave. There are a few re-
and quality, the scoring system, as we have seen, allows you to as- searchers who prefer to trust the recommendations of formal utility
sign an overall numerical value to any contracto The scoring system analysis rather than their own intuition, even though this behavior
has been tuned in such a way that contracts with higher scores are would not occur without the existence ofthe theory. A larger num-
prefe rred. No uncertainties are involved. Such a system can be
caBed a value scoring system.
2. Many analysts as sume that a value scoring system-designed for tradeo!l's
Now suppose that you must decide between a compromise con- under certainty-can also be used for probabilistic choice (using expected values).
tract ($4 million, 350 days, quality 2) and a gamble in which, witb Such an assumption is wrong theoretically, but as 1 become more experienced 1
gain more tolerance for these analytical simplifications. This is, 1 believe, a relatively
equal probability, you could end up wíth the best contract ($3 mil- benign mistake in practice (see Bell and Raiffa, 1980).
lion, 250 days, quality 1) or with the worst contraet ($4.5 million,
156/ TWO PARTIES, MANY ISSUES 60
400
ber of analysts who understand the theory simply don't trust it; tht"
point to examples of situations (the Allais Paradox, the Ellsht~'l
Paradox, the experimental results of Kahneman and Tversky f' ~:,:;,
which they, even knowing the theory, would deliberately act out ui ~
rn
>.
accord with it. Sorne are probably confused and will eventually s.c;lC ~ 350
the value of utility analysis. Sorne are not confused, but have d(,t,;"l> á
psycholo'gical concerns; they may anticípate that a given act mig.tJ&1 ~
250 I 85 70 150 30
with very limited rationality. Don't be naive and expect them to l)t>,
have like you may want to behave. However, if they are prone ~. 3.0 3.5 4.0 4.5
the gambler's fallacy; to an excessive zeal for certainty, to an tol' Cost (in millions of dollars)
cessive avoidance of potential ex post regret, to misperceptions >:ti ¡ngure 26. Iso-value curves for Mr. Hee (solid lines) and Ms. Shee (bro-
small probabilities (one could come up with a litany of so-call<:'>: kn lines). Her direction of preference is southwest; his is northeast.
nonrational, descriptive behaviors), then you might be able to t"L'
ploit such behavior in negotiations.
lOOr
TRADEOFFS WITH TWO CONTINUOUS ISSUES
Mr. Hee and Ms. Shee are negotiating over two continuous issllt,,,. 75
~
cost and time. The ranges under discussion are $3.0-4.5 millic.,l, ~
and 250-400 days. He wants high dollars and high days; she want.,
...c:
Vl
low dollars apd low days. Figure 26 indicates by means of indifTc:::,z· ..;
ence (iso-value) curves their respective tradeoffs. He, for exampit:
deems contracts V, Q, and P equally desirable, and thus they are (~.t
~
~
.. 50