Valuation of gains and losses, fairness and negotiation outcomes

Abstract

Reports the results of two experimental tests of the extent to which the large disparity between people’s valuation of gains and losses, and related fairness determinations, are used in judging the acceptability of alternative negotiating or conflict resolution proposals. Participants acted as arbitrators and selected their preferred resolution of conflicts, involving either the division of gains or sharing responsibility for losses. Different cases were presented in which one or the other party incurred varied combinations of direct or opportunity costs, or received varied forms of payments. Contrary to conventional economic assumptions, but consistent with earlier behavioural findings, direct costs incurred by one party to the negotiation were far more important than opportunity costs in setting the terms of a more acceptable resolution. The results strongly suggest that recent behavioural findings might be used to improve the design of negotiating and conflict resolution proposals.

Sunk costs and fairness in incomplete information bargaining

“…When psychologists have examined peoples' attitudes, there is little doubt that the latter is considered to be the fair outcome. For example, Borges and Knetsch (1997) asked subjects what would be a fair way to share 10 dollars between two people, given that the ten dollars had been generated by an investment of 2 dollars by one of them. The vast majority indicated that the 6 : 4 split would be most fair.…”

Reciprocity: Weak or Strong? What Punishment Experiments Do (and Do Not) Demonstrate

“…Kahneman et al 1991, Borges andKnetsch 1997). Psychological evidence on loss aversion suggests that we should be more reluctant to pay a fee to sanction nasty actions, than to miss an opportunity to profit at somebody else's expense.…”

What we need is theory of human cooperation (and meta-analysis) to bridge the gap between the lab and the wild

“…But it is not obvious that positive and negative reciprocity are governed by the same psychological mechanisms. It is well known that the perception of gains and losses is biased by framing effects, and that missed opportunities are processed differently from directly incurred costs (e.g., Borges & Knetsch 1997;Kahneman et al 1991). Psychological evidence on loss aversion suggests that we should be more reluctant to pay a fee to sanction nasty actions, than to miss an opportunity to profit at somebody else's expense.…”