Introduction
In a negotiation process, the participants in the process essentially attempt to undertake some form of exchange or trade. The exchange can take different forms such as services for services, goods for services, money for services or money for goods. In all these forms of exchange or trade, each participant privy to the negotiation process aims at maximizing his/her advantage. In other words, the negotiator will try his best to come out with a good if not the best deal or cut. This means that each party will aim at gaining much more for little consideration or exchange.
Depending on the uniqueness of the trade, one may use different approaches to achieve the same goal or aim that is giving up as less as possible while gaining as much as possible. In advertisement and contract bidding, the principal remains the same even though different approaches in achieving the means may differ. In this paper, I examine a case of two executives competing for an advertisement contract from the New York state lottery Commission. One executive advocates for rational expectation theory as the best approach while the other believes in the prospect theory as the best means in advertisement goals. The models differ in definition and the level of results and therefore, disagreements are bound to occur in their presentation even though the goals remain the same.
Rational expectation theory
Rational expectations theory states that individuals make their decisions based on their future expectations. According to this theory, future expectations may be in error but on average, such expectations are correct. This means that a “rational expectation” is a best guess of the future based on present, past information and experiences. This model assumes that such expectations are not systematically biased and that individuals will always make a rational choice by observing their previous experiences and available information both past and present. An example is that if individuals have been winning in previous lotteries based on high number of lottery entries, a person with a more than average number of entries will make a rational decision to acquire more entries based on a future expectation of winning.
Prospect theory
On the other hand, prospect theory suggests that people assign more weight or value to gaining than losses. Individuals will therefore make their decisions based on perceived gains rather than losses. This means that if a situation presents one with two choices that are equal in magnitude but one expressed in terms of loss while the other expressed in terms of gain, the individual is likely to pick the latter choice expressed in terms of gain. An example is if a lottery completion presents one with two games in which in one, an individual has a 90 % chance of gaining Sh.1000 if he wins but 10% percent chance of loss if he loses. In the second game, he stands a 100% chance of gaining Sh. 900 if he wins but zero percent chance of loss if he loses. The person is more likely to participate in the second game that has an expression in terms of gain even though both are games of equal magnitude.
Certainty; According to the prospects theory, individuals prefer more certainty and will therefore be willing to spend more to achieve it. Executive 1 will advocate for less winning price with more guarantee as a strategy to appeal to the public. The Rational theory executive 2 on the other hand will advocate for a higher winning price with an equal amount of risk since he expects that the public will make a rational choice of participating in relatively uncertain games due to expected high winning price.
Perception of Loss; Executive 1 will support the expression of lottery advertisements in terms of gains as a strategy to attract the public. This is because he believes that the public assigns more value to gain than losses. Executive two on the other hand will express the adverts in terms of gains and losses since he expects that the public will examine the available choices and pick the best choice with a higher net gain.
Probability; Executive 1 will advocate for less emphasis on advertising high probabilities of losing. This is because prospect theory asserts that if individuals perceive low probability of loss, they tend to ignore it and therefore the public will participate in the lottery. On the other hand, Executive 2 will advocate for realistic advertisement of the losses and gains since he believes the public will still participate in evaluating the net-benefit and making a rational choice.
In conclusion, in their bid to win the advertisement contract, the two executive presentations differed due to the different approaches in use. The disagreements occurred due to the varying definitions of certainty, perception of loss, probability, and relative positioning in the two theories. Both executives aim at achieving maximum advantage but due to the different ways of arriving at it, disagreements emerge.
References
Bénassy, J.P. (2011). Macroeconomic theory. New York : Oxford University Press.
McDermott, R. (2009). Prospect Theory and Negotiation. Berlin: Springer Berlin Heidelberg.
Rachlinski, J. (1990). Prospect theory and civil negotiation. Stanford : Stanford Center on Conflict and Negotiation, Stanford University.
Roy Lewicki, D. M. (2010). Negotiation. Canada: McGraw Hill.
