Truth 8. Develop your reservation price

A few years ago, I was selling my house. I tried to practice what I preach in my classes: Develop an attractive BATNA, set a feasible target (aspiration point), and so on. But none of it changed the hard truth that I didn’t have an offer on my house!

To make matters worse, I made the grave mistake of telling friends about my lack of success. From that point, they took daily delight in grilling me about the house: “Hey, what’s your BATNA?” As the days dragged on and I still didn’t have an offer, I’d hear things like, “I can loan you a good book!”

One day I arrived at work with a picture of drunken fraternity guys on my laptop screen. They were surrounded by empty bottles and other party paraphernalia. A murmur rippled through the office. Had I forgotten to change my screen saver after a wild spring break? Was I having a midlife crisis?

“Here’s my BATNA,” I announced solemnly. Blank looks. I explained that in the event that I didn’t get an offer on my house, my next best course of action would be to rent it—to these party animals. I described the men in the picture as undergraduates taking all of their courses pass/fail. My coworkers were concerned: “Wouldn’t these ‘young men’ destroy your house?” This led to a discussion about risk and the benefits of a damage deposit. Then more questions: “Are these guys going to agree to let you have realtors show the house?” That led to a discussion of the wisdom of securing a contractual agreement that would involve a clear understanding of certain hours during which the house could be shown. Then more discussion, about neighbors growing angry with loud music from the house, my name on the police blotter, and the like.

Finally, someone said, “So what’s the least money I could offer you for your house now where you would be indifferent between the party animals and my offer?” In short, what is the monetary equivalent of my BATNA? In other words, even though BATNAs, just like the party animals, are messy, subjective, and psychological, we must be able to make them monetary; otherwise, we won’t be able to compare alternatives meaningfully.

Given that I put a value on subjective-emotional things such as my time, peace of mind, marital harmony, neighborly relations, liquid assets, and absence of conflicts, I came up with a number. A penny less meant that I would rather rent than sell. A penny more meant that I would rather sell than rent. That indifference point is my reservation price. It’s what negotiators mean by their “bottom line.”

A different person selling the same house with my same BATNA might have a different reservation point because he or she has a different value system, different risk psychology, and so on.

Thus, the beauty of a reservation point is that it quantifies subjective values.

The lesson: After you identify your BATNA, convert it to a reservation point.

Recall my friend who was looking for a job. Say that he determined the least amount of money that Company X could offer him such that he would be indifferent to accepting the offer versus declining it and extending his job search. That go-no-go number would be his reservation point.