Entries Tagged as 'Negotiation'

Would you take less than 30%? Most Would Not.

Part of being an effective mediator is having a good understanding about how people make decisions.  After all, a mediator is assisting people in making decisions.  We all like to think we are making rational decisions.  However, that is not always the case (despite our best efforts to the contrary).

Professor Daniel Ariely (Duke University and MIT) conducts extensive research on human behavior and has written a fabulous book on this topic, Predictably Irrational.  He looks at how free! really isn’t free and how morality disappears when we’re emotionally (or sexually) aroused.

In game theory, there is a game called the Ultimatum Game.  One person is given an allotment of money, say $1000, and is told to offer a certain portion of it to another person.  If the other person accepts, they both get that amount of money.  If the second person declines, neither party gets the money.  Rationally, the second person should accept anything offered to them as any dollar they receive is more than they had previously. Studies done by Professor Ariely and his collegues have shown that most people will not accept less than 30% of the total pot.

There are a number of theories as to why the second player would act seemingly irrationally.  One is that the second player is making a “fairness” judgment:  it’s not fair that the first player is getting more than 70% of the money thus they should get nothing (while the first player gets nothing either).  Another is that the second player is setting themselves up for a better payout just in case there is a second round of the game (while there is no guarantee that there will be).

To test this further, the experimenters went to a bar where they were likely to find drunken (and hence “more rational” people who focus more on short term goals, versus the longer term goal of a better second round).  They found that most drunks would turn down deals for less than 50% of the money.

There is an interesting parallel to negotiations (and mediation discussions).  Parties to a negotiation often will get lost in the emotions of the conflict and instead of seeing their own best interests are taken care of, they become more interested in “hurting” the other party even though it hurts them as well.  If fighting over a fixed pot of money, anchoring (the first offer made by each side) becomes that much more important.

Katrina Victims Files claim for $3 Quadrillion

From AP News….

NEW ORLEANS – Hurricane Katrina’s victims have put a price tag on their suffering and it is staggering — including one plaintiff seeking the unlikely sum of $3 quadrillion.

The total number — $3,014,170,389,176,410 — is the dollar figure so far sought from some 489,000 claims filed against the federal government over damage from the failure of levees and flood walls following the Aug. 29, 2005, hurricane.

Of the total number of claims, the U.S. Army Corps of Engineers said it has received 247 for at least $1 billion apiece, including the one for $3 quadrillion.

“That’s the mother of all high numbers,” said Loren Scott, a Baton Rouge-based economist.

For the sake of perspective: A mere $1 quadrillion would dwarf the U.S. gross domestic product, which Scott said was $13.2 trillion in 2007. A stack of one quadrillion pennies would reach Saturn.

Some residents may have grossly exaggerated their claims to send a message to the corps, which has accepted blame for poorly designing the failed levees.

“I understand the anger,” Scott said. “I also understand it’s a negotiating tactic: Aim high and negotiate down.”

Daniel Becnel, Jr., a lawyer who said his clients have filed more than 60,000 claims, said measuring Katrina’s devastation in dollars and cents is a nearly impossible task.

“There’s no way on earth you can figure it out,” he said. “The trauma these people have undergone is unlike anything that has occurred in the history of our country.”

The corps released zip codes, but no names, for the 247 claims of at least $1 billion. The list includes a $77 billion claim by the city of New Orleans. Fourteen involve a wrongful death claim. Fifteen were filed by businesses, including several insurance companies.

Little is known about the person who claimed $3 quadrillion. It was filed in Baker, 93 miles northwest of New Orleans. Baker is far from the epicenter of Katrina’s destruction, but the city has a trailer park where hundreds of evacuees have lived since the storm.

Katrina, which is blamed for more than 1,600 deaths in Louisiana and Mississippi, is considered the most destructive storm to ever hit the U.S. It caused at least $60 billion in insured losses and could cost Gulf Coast states up to $125 billion, according to the National Oceanic and Atmospheric Administration.

Most of the claims were filed before a deadline that coincided with Katrina’s second anniversary, but the Corps is still receiving them — about 100 claims have arrived over the past three weeks — and is feeding them into a computer database.

The Corps said it isn’t passing judgment on the merits of each claim. Federal courts are in charge of deciding if a claim is valid and how much compensation is warranted.

“It’s important to the person who filed it, so we’re taking every single claim seriously,” Corps spokeswoman Amanda Jones said.