How to make an offer the other side cannot refuse | with Lionel Page
Jan 4, 2022
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Guest Lionel Page, Professor of Economics at UTS, discusses his recent research on starting offers in bargaining. Explore the unexpected behavior in making offers, theories on individuals' reactions to inequality, and the influence of the first offer in negotiations. Gain insights into the dynamics of haggling and practical tips for crafting a successful first offer.
People value fairness over pure monetary gain, challenging the assumption of solely motivated self-interest.
Finding the right balance between a favorable first offer and maintaining fairness is crucial in negotiation.
Deep dives
Insights from the Ultimatum Game
In the podcast episode, the ultimatum game is discussed as a classic experiment in which two players negotiate to split a sum of money. Contrary to the expectations of traditional economics, it is found that low offers are often rejected, indicating that people value fairness over pure monetary gain. Additionally, the most common offer in this game is a 50-50 split, suggesting a preference for equitable outcomes. This challenges the assumption that individuals are solely motivated by monetary self-interest.
The Importance of the First Offer in Negotiations
The podcast delves into the significance of the first offer in negotiations. It is revealed that the first offer can influence the other party's perception of the negotiation process and intentions. Offers that are unreasonably low can be perceived as unfair and insulting, leading to a higher likelihood of rejection. On the other hand, offers slightly above half the perceived value often receive acceptance. However, when the first offer exceeds a certain threshold, it can trigger a punitive response from the other party, resulting in counteroffers designed to punish the initial offeror. The key takeaway is that finding the right balance between a favorable first offer and maintaining a fair perception is crucial in negotiation.
Determining the Optimal First Offer
The podcast suggests that the optimal first offer in a negotiation is to start just slightly on the favorable side for oneself without exceeding a threshold of unfairness. According to the experiment described, offering around 6 out of 10 units of value is likely to yield the best results. This offer maintains a reasonable degree of fairness while leaving room for negotiation. However, it is emphasized that finding the right balance of assertiveness and fairness may vary depending on the specific context of the negotiation. Overall, the experiment highlights the importance of the first offer as a strategic tool in negotiations.
In this episode we discuss with Lionel Page, professor of Economics at UTS, his recent research on starting offers in bargaining. We start with talking about the classical ultimatum game and how studies generated a seemingly contradiction to classical game theory. Lionel then explains how he extended the ultimatum game to understand how the value of the initial offer in a bargaining situation affects the outcome of the negotiation.
Lionel Page is professor of Economics at University of Technology Sydney. In his research he focuses on Econometrics, Decision Theory, Sociology and Behavioral Economics. He studies the application to practical problems from areas of financial and prediction markets, education and inequality.
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