MGTO256 WSC Assignment

Are They Irrational?

We negotiate every day across countless situations. Negotiations occur with a wide variety of exchange partners such as buyers and sellers, employers and employees, and parents and children. When two or more parties have different preferences but need to reach a joint decision, they enter into a negotiation. I will use the following negotiation situation to present my own idea on negotiation. That is, when people negotiate, they do not limit themselves to items which can be measured in terms of monetary value.

Every year, TVB has a big show which celebrates its anniversary. Two big prizes, usually a villa and a car, are awarded to two lucky fellows who can correctly select the right keys during the “Key-Lock Matching Game”. In the TVB anniversary show last year, the two prizes were a villa in Shenzhen and a 2003 Honda Civic Hybrid which had a market value of around $480000 and $180000 respectively.

As one of the on-the-spot audiences, I was chosen to participate in the game and had a chance to compete for the prizes. Fantastically, I won the first prize, the villa. After I calmed down from my over-excitement, I realized that it was in fact very unlikely for me to live in Shenzhen. If I was not going to sell the villa or rent it to somebody else, it would just be a waste. Also, rent in Shenzhen was generally low. To collect $200000 in rental revenue, approximately, it will take over 10 years. Also, procedures involved in leasing the villa then collecting rent from the tenants or seeking buyers were troublesome because of the geographical distance. Employing an agent to solve the problems would only imply additional transaction costs. I started to think that the 2nd prize suited my current needs even better as a car would directly reduce my transportation fees and time spent on daily traveling. Besides, I had been longing to have my own car since I passed my driving examination at the early age of 18.

While I was having these thoughts, Andy Lau, the famous artist approached me with a gentle smile. He suggested, “Let’s exchange our prizes.” He told me that he already was a car owner. So, an extra car to him seemed unnecessary and he would be much happier if he could get his retired parents a villa as a present. He added that he was willing to pay the difference of value up to $290000. I replied that I liked the villa very much. It had the most wonderful garden and the most beautiful view that I had ever seen. Also, parking a car was so troublesome and petroleum nowadays was so expensive. I told him I would only accept his suggestion if his cash offer was no less than $320000. This was to compensate for my preference for the villa and also my anticipated huge expenses on driving a car. I was trying to play Bogey and Chicken with Andy. After hearing my position, to my surprise, Andy smiled and ratified my counteroffer.

Who was the winner in this negotiation situation? It might seem that I won and Andy lost because he paid me $20000 above the market value, which could be regarded as his BATNA. But actually, both of us won. It was an integrative agreement indeed. Firstly, both of us eventually got the prizes we wanted. Secondly, we had saved much time and transaction cost which would have been spent if both of us chose to sell our unwanted villa and car through middlemen. Thirdly, although Andy paid me $20000 above the market value, this helped him resolve the dilemma of selling the car which was relatively useless to him, and which could have had a negative impact on his generous image in media coverage. Now, by just paying a little more, Andy successfully showed his generosity to me and his devotion to his parents. He successfully maintained his good image. Actually, we may interpret Andy’s generous behavior by Prospect Theory which states that individuals compromise more when negotiating over the allocation of profits. In this case, the prizes could be regarded as a bonus to me and Andy. Therefore, Andy was more willing to compromise.

From the above negotiation situation, we learn that people, when negotiating, do not limit themselves to items which can be measured in terms of monetary value. Rather, to a certain extent, they may try to maintain politeness, a good image and dignity, which they regard as important. The Ultimatum Game we participated in a previous lesson, illustrates my idea further. The rule of the game is that the 1st party has the right to choose how much, out of $100, he or she will take, with the rest going to the 2nd party. However, the 2nd party has the right to reject the 1st party’s proposal, ending the game with a situation of either dividing the $100 according to the 1st party’s proposal or both parties getting nothing. If the 1st party chooses to offer the 2nd party a fair and reasonable amount, one reason may be that the 1st party wants to reduce the risk of having his or her proposal being rejected because of unfairness. The 1st party certainly does not want to be rejected because the outcome would be he or she having nothing. To be secure, the 1st party is rational to offer the 2nd party a more reasonable amount. However, it is also possible that the 1st party offering the 2nd party a reasonable amount is simply because the 1st party doesn’t want to leave an impression of greed or selfishness to the others. As a result, the 1st party is willing to keep less for him or herself. We can’t conclude that people performing in this way during negotiation are irrational. Simply, they are just behaving rationally from their own valued set of beliefs.