Using Decision Trees to Calculate your Options and BATNA

Negotiation, like any other human interaction, can seem unpredictable. But if you know that going in, you can plan for multiple outcomes. Decision trees are powerful tools that helps you determine the best possible outcome in any given scenario. In this blog post, we'll be discussing what decision trees are, how they work, and how they can be used to calculate options and your BATNA.

A decision tree is a visual tool that allows you to map out all the possible outcomes of a decision. Each branch on the tree represents a decision that must be made and your best estimate of the percent probability. A decision tree is very easy to read and understand, even for individuals who are not traditionally from a mathematical or statistical background.

One of the most critical things that a decision tree can help you determine in negotiation is your Best Alternative To a Negotiated Agreement or BATNA. Consideration of BATNA is essential when planning your strategy, as it informs you of the minimum outcome that you are willing to accept before feeling pressured to accept other less favorable terms. BATNA is fundamental to negotiation as it allows a negotiator to evaluate an alternative plan and gives peace of mind that even if the negotiation fails, there are viable exit strategies.

How do Decision Trees work? Decision trees come with their unique set of rules for implementation. The first step is to determine your alternatives and decide which variables you must consider. Then, determine the probability of each possible outcome and calculate each course's expected value. Once you have all the probabilities and expected values, you can chart them on a decision tree diagram. This diagram will clearly show the outcomes and probabilities for each choice, making it easier to see which choice has the highest expected value.

To give you an example, let's say you're negotiating with a potential employer about a $70,000/year job offer. You have three options:?

• accept the offer as it is,?
• counter the offer with $80,000, or?
• decline it with no counter.?

You can calculate each choice's expected value by multiplying your belief of the probability of each outcome by its financial payoff and your satisfaction with the offer. Let’s say this is what we believe we can expect and how we feel about each.

Value = Offer($) X Probability(%) X Satisfaction(%)

• Accept the offer of $70,000 (100% success rate, 70% chance we will be happy with the offer.)
• Counter the offer with $80,000 (25% expected success rate, 50% chance they counter with $75,000+, 100% chance we will be happy with the outcome of $80,000 or $75,000)
• Decline the offer of $70,000 (10% chance you believe you’ll find a better offer, 25% chance you believe they will raise their offer)

Then we map out how we value each decision accordingly.

• Accepting the offer is worth $49,000?
• Countering the offer is worth $57,500
• Rejecting the offer is worth $1,750

Of course there is some risk associated with these calculations. But according to this model, we believe the best possible course of action is to counter the offer with $80,000 and our next best option (our BATNA) is to accept the $70,000 offer. Rejecting the offer is entirely undesirable.

A clear understanding of your options and BATNA can help you determine your alternatives and make the best possible decision in a negotiation scenario. By considering your BATNA, you can ensure that you are making a well-informed decision before entering into a negotiation. A well-thought-out decision tree will allow you to weigh the pros and cons of each possibility in a negotiation. This will ensure that you can make a decision that is in your best interest.

Decision trees are powerful tools that can help you navigate complex negotiations with confidence and clarity. This technique provides you with a visual map of all the possible outcomes of a decision, making it easier to calculate probabilities and make informed decisions. Decision trees are used to calculate BATNA, which is crucial in determining your best alternative in case your primary objective fails to be met. In conclusion, a Decision Tree can help you make informed decisions, identify areas where there may be uncertainty, and helps you calculate the probability of potential outcomes, therefore ensuring you go into any negotiation well-informed and with the best possible outcome.