Negotiation And Principles Of Fairness

by Matthew on June 27, 2011

Voluntary negotiation and principles of fairness have been on my mind a lot recently and I really think you need to learn negotiation skills. Even in a relatively free market where parties voluntarily may enter into particular transactions, there are still plenty of sentiments that some of these negotiated arrangements are “unfair” or “unjust” in some way. From an economist’s perspective, as long as the transaction was entered into voluntarily, the parties involved believe they are better off than they would be otherwise so the transaction is a net positive. The ability to engage in voluntary transactions is a key component of liberty and different people have different ideas about what kinds of transactions are fair, so legal restrictions on voluntary exchange can be perilous. Still, why can some voluntary exchanges still seem exploitative?

Last week’s EconTalk podcast with Mike Munger was an excellent insight into why this is. It also helps to understand how your negotiations can be perceived by outsiders. I’d recommend listening to the entire podcast, but the main point is both simple and extremely insightful. In a sense, as you increase your leverage through traditional negotiation strategies, the more likely you are to be accused of being “unfair.” Here’s why.

During a negotiation between two parties (let’s say Party A and Party B), both sides are attempting to come to a meeting of the minds whereby both parties agree to a common transaction. When working through negotiations, each party needs to consider: 1) the benefit to the proposed transaction, and 2) their next best option if this negotiation fails…the so-called “Best Alternative To a Negotiated Agreement” (BATNA), also called “Plan B.” If, during a negotiation you have another transaction nearly just as good lined up as a fallback, this gives you leverage. Said another way, the less you really need one particular transaction, the better leverage you have over the other party. You can probably see how emotions can really skew things because people will decide they really need one particular car/house/whatever and won’t be willing to walk away, instead focusing only on their emotional desires instead of developing an alternate plan that is a good as possible.

Good negotiation includes trying to develop the best possible Plan B for yourself while finding out as much as possible about the opposing party’s Plan B. The better your own Plan B, the better your leverage. The better the other party thinks your Plan B is, the better your leverage. E.g., if your car has broken down and you decide you absolutely must purchase a car this weekend, you would still probably be best advised not to mention this to the dealership when you go to look at cars. :)

I developed the slide below to show a common negotiation situation. This is just an example; the lines may be different for each transaction.

Each party has an actual Plan B which is significantly less desirable to them than the proposal on the table. In addition, they each have a perception of the other party’s Plan B. I believe that in many cases the actual desirability of each party’s Plan B is only knowable to that party themselves since they are the ones deciding desirability. This means that the opposing party and outsiders can only guess at the value of the alternative. Not only that, but an inexperienced negotiator may not know how to increase the perceived value of their Plan B to others. What we end up with is being stuck analyzing transactions based on outside perceptions of each party’s alternative option to a transaction.

The larger the gap between the parties’ Plan B, the more unjust the transaction may seem. One example from the podcast is a guy in the desert dying of thirst and along comes a food truck. The food truck driver, seeing an opportunity to make some extra money, offers the following deal: 3 tacos for $5 and water at $1,000/bottle. If the dying man has the money, he may indeed “voluntarily” choose to spend thousands of dollars to keep from dying of thirst. On the other hand, something about arbitrarily charging a man dying of thirst $1,000 for a bottle of water doesn’t sit well with most people’s sense of fairness. The dying man’s Plan B is to die of thirst. The taco truck driver’s Plan B is to forgo the transaction and lose a single sale.

Obviously that’s an extreme example, but it illustrates a way that others may perceive “fairness” when looking at a transaction. Keep this in mind as you engage in negotiations because the nature of negotiation is to work on increasing your own leverage, thereby (it would seem) increasing the risk of the transaction being perceived as unfair.

For me, this mechanism of looking at transactions is helpful especially for trying to predict how an outsider may view a voluntary transaction. As new businesses grow, reputations will be made based on these perceptions, regardless of the ultimate voluntary nature of the final transaction itself.

What do you think? Is Munger correct about the source of our perceptions of fairness? Does this mean that any effort to increase your own negotiation leverage is “unfair?” Is it fair to the point where you feel the leverage is equal on each side? How can you really know when the leverage is equal, or can it ever actually be equal? Does fair even matter?


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