Max H. Bazerman and Daniel Kahneman, J.
Please answer two quick questions:
1.When negotiating, do you want the other side to be reasonable?
2. Is it a good idea to be reasonable in negotiations?
Everyone we ask says yes to the first question, but answers diverge in response to the second. Academics lean toward yes, but businesspeople and lawyers often hesitate. In legal disputes, contested insurance claims, and similarly adversarial negotiations, they point out, the other party is likely to open w with an inflated claim or a lowball offer. If the other side's position is unreasonable, these practitioners 1 suggest, it makes little sense to be g reasonable yourself.
Suppose a customer claims that a problem with a product you sold ™ him resulted in a $10 million loss to 2 his business. After careful analyst sis, your legal team concludes that g the fair value of his claim is just d $5 million. How do you respond?
A common reflex is to come back with, say, $1 million. The familiar and dysfunctional negotiation dance that follows can be costly for all involved. The parties may eventually converge on a figure close to $5 million, but only after spending a lot of time and money to get there—and harming their relationship in the process.
It would be to everyone's advantage if parties routinely came to a negotiation with a reasonable offer in hand: If starting positions are realistic, the offers will be more or less aligned, and any negotiation that follows should be relatively civil, speedy and fair. But how can a negotiator who wants to be fair from the start ensure that his or her counterpart will be reasonable a s well?
This question inspired us to propose the final-offer arbitration challenge, a new negotiation strategy for reaching fair agreements efficiently, even when dealing with seemingly unreasonable opponents. Leveraging an approach first applied in labor negotiations in the 1960s, the strategy allows one side to encourage reasonableness on the part of the other by making a demonstrably fair offer at the outset and then, if the other side is unreasonable, challenging it to take the competing offers to an arbitrator who must choose one or the other rather than a compromise between them. We conceived the final-offer arbitration challenge in the course of our work with the global insurance company AIG. As we'll describe, the strategy could be used in negotiations well beyond insurance.
The challenge in action
Insurance companies pay billions of dollars every year to settle claims, employing hundreds of people to evaluate and negotiate tens of thousands of cases. There is good reason to believe that their employees' decisions are not always optimal, resulting in overpayment on some claims and needlessly costly negotiation over others. AIG's CEO, Peter Hancock, who was familiar with Daniel Kahneman's Thinking, Fast and Slow, invited TGG, the consulting firm with which Kahneman is affiliated, to explore solutions. Kahneman recruited Max Bazer-man to examine the company's approach to negotiation. What began as a brief engagement became a large-scale, long-term project to sharpen AIG's ability to efficiently resolve claims and reach reasonable settlements...