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Bounded Awareness in Strategic Settings 57
the same pattern of responses depicted in Figure 3.1 (Ball, Bazerman, & Carroll, 1991;
Grosskopf, Bereby-Meyer, & Bazerman, 2007).
Most individuals have the analytical ability to follow the logic that the optimal offer
is $0 per share. Yet, without assistance, most individuals do not see it. Thus, individuals
systematically exclude information from their decision-making processes that they have
the ability to include. They fail to recognize that their expected return depends on an
acceptance by the other party, which in turn is affected by the rules, which state that
they get to know the true value before accepting or rejecting the offer. This implies that
the acceptance by the target is most likely to occur when it is least desirable to the
negotiator making the offer.
The overwhelming majority of respondents provided solutions that yield a negative
expected return. However, using an adapted version of the Acquiring a Company exercise,
Valley, Moag, and Bazerman (1998) found that if the parties talk face-to-face, the
common result is a trade at a mutually beneficial value. Thus, social interaction creates
a mechanism to overcome the inefficient outcomes predicted by game theory and behavioral
decision theory. Valley and her colleagues suggest that communication enhances
positive utility for benefits gained by the other party, creates trust, and allows for
information exchange not expected by game-theoretic models.
These three problems are particularly good examples of instances in which the rules
of the game and the decisions of others—two absolutely central and often accessible
pieces of information in a negotiation—are out of focus. However, these focusing failures
explain negotiation failures far beyond our five example problems. Ho, Camerer, and
Weigelt (1998) examined a game in which each player was trying to anticipate others’
choices, as follows. Each player chooses a number from 0 to 100. The winning number is
the one closest to one-half of the mean of all of the entries. If the decisions of others and
nuances of the rules of the game are out of focus, 50 emerges as a naïve yet common
submission. But even the simplest logic should lead people to think that if the average
were 50, a better submission would be half the mean, or 25. Of course, this logic requires
attention to the rules of the game. Yet when you consider the decisions of other players, it
should become clear that others may follow this same logic; therefore, if the mean might
be 25, you should submit 12.5. However, if others use this logic, you should submit 6.25,
and so on, down to 0—the equilibrium solution. The winning answer is typically greater
than 0. Simple numbers such as 50 and 25 are common in this game, and come from not
fully considering the rules of the game and the thoughts of other players.
Bounded awareness also affects our assessments of competitors. Camerer and Lovallo
(1999) argue that people are insensitive to the quality of their competition, a phenomenon
they label reference group neglect. Moore, Oesch, and Zietsma (2007)
demonstrate that entrepreneurs are more focused on themselves, their strengths, and
their weaknesses than on the competition. This self-focus makes them too eager to
enter simple contests (which many other competitors also enter) and too reluctant to
enter difficult competitions (which have few competitors) (see also Moore & Cain,
2007). This may in part help account for why the rate of entry into industries like restaurants,
bars, hobby shops, liquor stores, and retail clothing is so persistently excessive.
In order to succeed, a new venture depends on more than the founder’s energy and the
quality of the product or service. It also must be better than the competitors.