Why do negotiations fail?

24 October 2023

BI research sheds light on why it is so difficult to reach agreement even when doing so would be mutually beneficial.

“The model usually used to understand negotiations assumes everyone is rational and only have preferences over their own outcomes. If we look at how negotiations are conducted in the real world, these assumptions do not always hold,” says Professor Tom-Reiel Heggedal from the Department of Economics and BI Norwegian Business School.

“For instance, there may be some stubborn bargainers that insist on a particular claim and reject any other offer. The behavior of irrational types like these is perhaps not so interesting, but their potential existence gives rational bargainers an incentive to pretend to be stubborn because they hope this will make their opponents believe they must give in. This can cause inefficiency and delay in negotiations between rational parties,” Heggedal continues.

Professor Tom-Reiel Heggedal.

Since 2016, he and his colleagues have looked closer at how parties behave in negotiations through the project ‘Causes of Bargaining Failure’. The project included researchers from 7 countries and has produced 19 scholarly articles. It was financed by the “Toppforsk” programme of the Research Council of Norway.

“High quality externally funded research is an essential part of our success as a leading European business school. It allows for excellent research, recruitment of the best faculty, and supports relevant and research-based education. Moreover, it contributes to the betterment of society and businesses by providing new knowledge and insights,” says Harald Øverby, Provost for Research, Learning and Impact at BI Norwegian Business School.

Important implications

“Although the standard model goes a long way in explaining bargaining behavior in many cases, there are important deviations from equilibrium predictions that made us want to look more closely and what was going on, and try to find better ways of understanding negotiations,” Heggedal says.

Research in the project was organized through the Centre for Experimental Studies and Research at BI. The Research lab at BI was used to observe and test how negotiators behave in different situations. 

“Negotiations are an essential part of business, government, and international relations to mention just a few areas. In our research, we have investigated some underlying mechanisms and characteristics that can have far reaching implications,” Heggedal says.

“For example, we have studied the existence and impact of irrational bargainers, how discounting affects negotiating positions, and how entitlement and loss aversion shapes bargaining demands and conflict”, Heggedal says.   

Still more research is needed. Moving forward, research into bargaining and more generally within Game Theory and Industrial Economics will continue to take place within the Centre for Experimental Studies and Research.

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