Risk and Risk Perception in Negotiations

Cite this article as:"Risk and Risk Perception in Negotiations," in The Business Professor, updated June 26, 2018, last accessed July 14, 2020, https://thebusinessprofessor.com/lesson/risk-and-risk-perception-in-negotiations/.

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What is “risk” and how does “risk perception” affect a negotiation?

“Risk” is the probability of an undesirable outcome. Rarely is a negotiation outcome certain. Conceding value related to one interest in hopes of claiming greater value related to a separate interest entails an inherent amount of risk. This risk may be in the negotiation process, such as disclosing information that weakens your position; or, it may be in the likelihood that the other party will live up to their promises. Understanding that risk is a part of any structured negotiation, try to understand your willingness to accept the possibility of an outcome that is negative or does not meet your interests. Understanding your risk propensity will help you in determining or setting your negotiation BATNA. Concepts related to risk propensity include:

• Strategic Risk – This concerns the probability that the strategy or tactics that negotiators use at the bargaining table will result in an undesirable outcome. This means that the strategic plan employed may subject the negotiator to a worse result than another strategy.

• BATNA Risk – Risk with regard to the certainty of the BATNA. Recall, a negotiator will frame up a negotiation and determine a reservation point based upon the BATNA for an individual or group of interests. The probability that the negotiator is incorrect about the BATNA is a form of risk.

• Contractual Risk – This regards the risks in arriving at and living up to a negotiated agreement. There is some probability that the terms of the agreement will not encompass all relevant interests; the parties will fail to live up to the negotiated agreement; or the terms of the negotiated agreement is not enforceable?

• Perception of Risk – The risk an individual believes exists, whether real or no. As previously stated, risk regards probability of an outcome. Therefore, the risk in a situation is fixed. Often, however, two individuals will perceive differently the level of risk or possibility of a negative outcome in a given scenario. This tendency means that risk itself does not cause variations in a negotiation; rather, the perception of existing risk by the negotiators will affect their action and disposition.

• “Confidence” is a related concept, as it pertains to an individual’s perception of certainty in a (favorable) result. An absence of confidence will lead a negotiator to perceive an abnormally high likelihood of an unfavorable result.

• “Counterfactual thinking” is a phenomenon where an individual focuses on non-existent facts and how they could potentially affect the negotiation. It is a tendency toward self-doubt that is characterized by a lack of confidence. It also involves looking backwards to constantly think of how things might have turned out. An abundance of confidence, on the other hand, will lead a negotiator perceive to perceive a low likelihood of an unfavorable result.

• “Overconfidence Effect” refers to the unjustified level of confidence that individuals have in their own ability or a positive outcome. It causes individuals to underestimate the likelihood of negative events. Often, uncertainty in a result is replaced by belief in oneself or “self-efficacy”. Self-efficacy belief can be divided as follows:

⁃ Distributive Self-efficacy – A negotiators’ belief in his or her ability to claim resources effectively (e.g., “gain the upper hand;” “persuade others to make the most concessions”).

⁃ Integrative Self-efficacy – A negotiator’s belief in her or his ability to create resources (e.g., “establish rapport;” “find tradeoffs”).

• Risk Aversion – Individuals subjectively determine the perceived level of risk they are willing to accept. They will consciously avoid scenarios where perceived risk is beyond the maximum acceptable level. Risk aversion is a spectrum of acceptable levels of risks. Interestingly, a completely risk averse individual (accepting of no risk) will prefer a certain outcome rather than be subject to an outcome that has a potentially lesser, equal, or greater expected value.

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