How to Create or Capture Value in Negotiation
CREATE OR CAPTURE VALUE IN NEGOTIATION? The Prisoner’s Dilemma
One famous game strategy in social science is the Prisoner’s Dilemma. For those not familiar with it, the Prisoner’s Dilemma has two suspects being interrogated in separate rooms. Their choices are spelled out for them: If neither suspect confesses, each gets 1 year in jail for the minor crime. If both confess, they each get eight years. If one confesses and the other doesn’t, the one who confessed gets off clean while his partner goes to jail for twelve years.
It seems that no matter what the other suspect does, confessing would be the dominant strategy in this game; you are in a better position confessing regardless of what the other suspect does. Therein lies the dilemma—the rational/dominant thing to do results in the worst outcome. Both suspects confessing would result in a sentence totaling 16 years, when they would both be better off not confessing and getting a year each.
David Lax and Jim Sebenius applied a negotiation angle to this dilemma in 1992. Let’s take not confessing as a strategy to cooperate while confessing as a strategy to defect (in the hopes that the other doesn’t confess). In negotiation, the choice to cooperate, that is to create value, would improve the overall result while choosing to defect, capture value, would result in a better result for the individual, but at the expense of the other party. This further translates into cooperating being to create value while defecting is capturing value and the question of whether you should create or capture value arises.
Tit-for-tat is a cooperative strategy that political scientist Robert Axelrod picked in a game strategy tournament as the winning strategy, devised by Anatol Rapoport. It addresses the trap of capturing value that in the long run leads to the worst aggregate outcome. Besides you focusing on creating value, it maximizes the chance that your negotiating counterparty would want to focus on creating value as well.
Tit-for-tat is self-explanatory: you cooperate in the initial negotiation and in the next round of negotiations, you choose to do whatever the other party had done before in an act of reciprocal altruism. When the other party chooses to create value in a negotiation, the next time there is a negotiation you would cooperate and create value as well. In the long run, cooperating wins over defecting—defecting would only give you immediate ‘wins’ but in subsequent rounds, you stand to lose more.
This approach signals your intentions to the other party through confirmation of your words through action. Knowing that the other party will cooperate as long as you cooperate will result in a negotiation strategy of cooperating for as long as possible. Defect, and the other party would defect too.
The underlying assumption here would be that this Prisoner’s Dilemma is iterative (meaning negotiations with the other party would happen time and again). The next step in creating value would then be to make your negotiations iterative.
MAKE THE NEGOTIATION
An obvious answer would be to form long-term bonds with whoever you are negotiating with as this would more likely have areas where you can create value. The longer you negotiate with someone, the better your chances of creating a practice/pattern of value creation.
Another way would be to build your reputation so that word gets around that you are someone who negotiates cooperatively. This might make people more prone to negotiating with you.
Last but not least, an innovative way to turn a single negotiation into an iterative one would be to use the issues on the table to build follow-up negotiations. Instead of laying all the cards on the table at once, break them up into separate issues that can be negotiated separately. There will be too many factors to deal at once, so both parties would have to meet again to further discuss these issues and find a better win-win deal.
is All it Takes
to Know a Little More
The choice to cooperate (that is to create value) would improve the overall result, while choosing to defect (capture value) would result at a better result for the individual, but at the expense of the other party.
It should not only be you trying to create value, but to ensure that you are maximizing the chances that the other party wants to create value as well
Make your single negotiation into an iterative one by breaking your deal up into separate issues that can be negotiated separately.
Sign up for our work-shops and accelerate your performance overnight. Guaranteed!