For most of this course, I've been arguing there's no such thing as power in a negotiation, that when two parties are trying to split a pie, they need each other equally. If you like, it takes two hands to make a handshake. But there is a circumstance in which you can have power and negotiation, and that comes from the ability to make an ultimatum. Let's consider the simplest possible version of an ultimatum game. One side makes an offer to the other, the other side can say, yes or no, that's it. No counter offers, just yes or no. If yes they have a deal, if no, then no deal. We'll first discuss this ultimatum game in a familiar setting, namely, our airline cost-sharing problem. Recall the triangle route from San Francisco to Houston to New York and back cost $2818. In contrast, the two round trips add up to $3818. Thus the savings created by the triangle route that is the pie is $1000. Let's give New York the ability to make an ultimatum to Houston. A single take it or leave it offer. What should New York do? To figure that out, put yourself in Houston's shoes or boots. On its own Houston would have to pay $1332. Saving something is better than nothing, and so Houston says yes to paying a thousand, 1100, 1200, 1300. Even if New York proposes that Houston pays $1,331, then that's a dollar better for Houston. If the choice is between saving a dollar or saving zero, a rational Houston would say yes. My first point is that the ability to make an ultimatum gives you power. Instead of dividing the pie 50/50, New York can get 999 out of 1000, or 99.9% of the pie. My second point is that New York shouldn't try to be this greedy. In less than a New York minute, Houston might say no. It would only cost them $1.00 to, out of spite, make New York lose $999. That doesn't mean New York has to split the pie evenly 50/50. If New York offered to save Houston $333 and keep $667 for themselves, that should be a big enough incentive for Houston to say yes, even though they might think the division is unfair, which it is. Let's take a survey. If you were in the role of Houston, and New York proposed that you pay $999, would you say yes or no to this deal? There are no counter offers or other creative options. Just yes or no. If you say no, you end up paying $1332, so it cost you $333 to say no. A different version of this ultimatum game has been played thousands of times in labs across the world. An experimenter offers two subjects a $100 if the two of them can agree on how to divide it up. So the pie is $100. One side gets to make a proposal and the other can only say yes or no. For example, the proposer can offer a 90/10 split. If the receiver says yes, then he or she gets $10, while the proposer gets 90. If he or she says no, they both get zero, and that's it. In theory, a fully rational receiver should say yes to a dollar. Anticipating this, the proposer can offer just a dollar, but I don't recommend this strategy. Dozens of studies have shown that most people would reject offers that small. How generous should you be? Here's your chance to find out. We're gonna have you play this game a few different ways. First, I'd like you to play the game with the other students in the course. After that, you'll get a chance to play the game with me. I'm not gonna tell you which side of the game you'll be playing so I'm asking you to input two numbers. The first is how much you would offer as the proposer, and the second is the smallest number you'd be willing to accept as the receiver. For example, and I'm not suggesting you pick these numbers, you could write down 80 and 60. And this means as the proposer you'd offer 80 to the other side, keeping 20 for yourself, and as the receiver, you would accept any offer of 60 or more. Again, I pick these numbers only to illustrate how the game works. In particular, offering 80 to the other side seems more than generous, and turning down all offers below 60 seems unreasonable. Okay, time to input your numbers. Do you really want to turn this offer down? It's okay if you do, but I want to make double sure. I'll give you one more chance to input your two numbers. First though, a confession. As you might have guessed, this wasn't a real pair up. I just pretended the other side offered you a dollar less than your minimum. I was checking to see that if in the heat of a real deal, you really wanted to turn down something, and end up with nothing. Now we'll play the game for real. Well, almost for real. I don't have a budget to give each pair of students that succeed $100, so please do your best to act as if real money is on the line. So here we go with the ultimatum game, v2. Please input your two numbers again. You can pick the same numbers as before, or change them based on what you've learned. Would you have accepted your own offer? If yes, congratulations! If no, this is a bit peculiar. Here you are, punishing someone else for making an offer that's no more aggressive than what you would make. Based on the results of what everyone wrote, you can see what percentage of folks would have turned down their own offer. Next, you get to play with all of the other students in the course all at the same time. We can see how often your offer would have been accepted, and how often your minimum acceptable offer or reserve price would have been given to you. On the website, you can see the average payoff for your offer, and the average payoff for your reserve price. We have also provided the payoffs for each possible offer and each possible reserve. The last set of numbers is how well you did as a percentage of what would've been the profit maximizing choice. When it comes to reserve prices, I don't need to look at the chart to know the profit maximizing choice. You should take all offers, period. For those of you who put reserve prices above a dollar, the chart will tell you how much it cost you to be a social norm enforcer. Okay, new game, this time around you get to be the proposer and I'll be the receiver. I've written down the lowest number I'm willing to accept, and it's part of a computer program so I won't be able to change my answer based on what you've written down. I'm not gonna reveal exactly what my cut off level was but it's more than a dollar and a lot less than 50. I'm willing to incur some small cost to impose a social norm or teach you a lesson, but not that much. What's interesting about this costly parishment is that I like you. Here you are, willingly taking my course. Therefore, I should be happy when you end up with more money. So, why am I willing to impose a cost on you in order to punish you for being too greedy? The answer is, I wanna prepare you to deal with others out there who are far more eager social normal enforcers than I am. I have one last variation of the ultimatum game I'd like you to consider. In this version, the proposer gets to make an ultimatum to you. Just as before, if you say yes, that's the deal, and the game is over. But now, if you say no, then you get zero and the proposer gets one more chance to make an ultimatum to someone else. Now, what's the lowest you're willing to accept? I bet you'd take less. The reason is you can't punish the other side as easily. Even if you say no, the proposer can go to someone else with a more generous split. Thus, saying no hurts you without causing a great deal of harm to the proposer. What that says to me is that you didn't really want to turn down the small amount. You weren't insulted by the small offer, you just wanted to punish the other side. This version of the game does a good job of revealing your true underlying motivation. Okay, now, let's watch the ultimatum game being played out. I found some folks to play the game with me. Our friends at Coursera have offered us $100 if we can agree on how to split it up. Since I'm the one designing the course, I thought it only fair, well, not entirely fair, that I'd be the one to make the ultimatum. My partners in this experiment seemed happy to play along. They realize they're in the weaker position, but something is better than nothing, right? Here we go. Hey guy. Would you like $5? >> Sure. >> Thanks! We're done. Of course, I conveniently left out the fact that his saying yes, means I get $95. You think that's relevant? Okay, I'll put it back in. Hey guy, would you like $5? >> You mean, I get $5, and you get 95? >> Exactly! >> I have to turn you down. >> Why? >> Well, because if I say yes to you, then everyone else will only offer me $5, and I"ll really lose out in my next negotiations. >> I don't think you understand the game. No one but me will ever know your decision today. No one's watching us. It's a complete secret. We'll never meet up again. I don't know you and you don't know me. >> Really? >> Really! >> Okay, then I'll take the five bucks. Just don't tell anyone. >> Deal. It'll be our secret. [SOUND] I think that guy started out a little bit confused about how the game works. Let me see if I can find someone a bit smarter to play with. Hey, guy, would you like $5? >> You mean, I get $5 and you get 95? >> Yeah, like I said, would you like $5 or not? >> Not. I want to teach you a lesson. >> What's the point of that lesson? >> Be generous. >> Great. So then, why aren't you being generous to me? You have the ability to bestow $95 on me and gain $5 in the process. And yet, you're paying money to make me suffer? That doesn't sound very generous. Don't you like me? >> You? No, man. I know your type. I don't like folks who try to take advantage of others. I mean, if the split were 95-5, but it wasn't you who had made the split, then I'd happily have given you the 95 and taken 5. It isn't the unfairness I object to, it's your sticking it to me. >> Look the way this ultimatum game works, the two of us are completely anonymous to each other. I don't know your name. You don't know mine. We're never gonna see each other again. Are you really willing to spend $5 to teach a civics lesson to a stranger? >> Well, you put it that way, I guess I'll take the $5. But I hope I never see you again. >> Hey. It's mutual. [SOUND]. I have one last person to play with. Would you like $25? >> You mean, I get 25, and you get 75? >> Yes. I think I'm being quite generous. >> No you're not. I reject anything less than 50/50. >> What? >> I would've given you 50. I'm not going to let you take advantage of me. >> Hold on a second. If I'd have been in your shoes, I would of taken anything above a dollar. So I'm not asking you to accept anything I wouldn't take. Yes, I am getting more than you, but that was a luck of the draw. If you had been the proposer then you would have ended up with more than me. This game isn't an opportunity to right all the world's wrongs. Indeed I have no idea if outside this little game you have more money than I do or not. I don't know if the 75 25 split is making us more equal, or less equal. Look, it's too late for me to change my offer. If I could change my offer, I wouldn't be the one making an ultimatum to you. You'd be the one making it to me! So, we're stuck with my offer. I was trying to be generous. I didn't think I had to give you more than a dollar or two. There aren't that many people out there who insist on a 50-50 split. You aren't changing anyone's behavior, all you're doing is hurting yourself and bringing others down with you. >> Boy, when you put it like that, I guess you're right. I shouldn't hold out for 50. I'll go down to 33. >> But that doesn't help me or you. You're still saying no. >> Yeah, but now you can feel worse about your offer. You were so close and yet so far. >> I hope I never see you again. >> I thought you might say that. [SOUND] >> I have a few takeaways I'd like to share. One way to get power in negotiation is to put yourself in the position where you can make ultimatums. That's true, but use that power with discretion. I don't suggest making wildly lopsided ultimatums even when you have the power to do so. The other side will often reject your proposal though it hurts them. And if it's a real ultimatum you can't go back. You may end up with no deal. Making an ultimatum is a crutch which people overuse. They often try and make an ultimatum when they don't have the power to back it up. The end result is embarrassment, or a much worse deal when the other side sees them come back to the table after their ultimatum fails. Or, you can end up with both sides making an ultimatum to the other. One side makes its ultimatum and the other responds in kind. People fight fire with fire, and the typical result is no deal. This shouldn't be a surprise. No one likes being told what to do even when the proposal is reasonable, and less so when it isn't. When someone makes an ultimatum to you, often your best strategy is to push back and demonstrate that the ultimatum isn't real, or to recast it. We'll see in the example of that in one of the videos for the case. Without ruining the surprise, you'll see it's harder to make an ultimatum than you might first imagine. Avoiding ultimatums might also help you when negotiating a salary. If you say, I need 65,000 or else I won't come to work you for you, that is effectively an ultimatum. The receiver may not respond well to this demand. Compare this strategy to saying, if you raise your offer to 65,000 then I promise to come to work for you. Now you've offered a carrot, and haven't made any threat about what you'll do if they don't raise their offer. I don't recommend firms make ultimatums either. This was a strategy famously employed over the 1940s and 50s by Lemuel Boulware, a vice president at GE. He made what he considered, a reasonable offer to labor, then stuck with it through strikes and all. One problem with this approach, is that few people believe that your first offer is truly your limit, and fewer still want to be in the position of having their terms dictated to them. So even if you want to train the other side to forego negotiations because your first offer will be your best, let me caution you against this approach. Indeed, this level of intransigence, when done as part of collective bargaining with a union, is a breach of the duty to bargain in good faith, and is illegal in the US.
