Mental Accounting in Negotiations: Solving Negotiators’ Cognitive Dilemmas in Multi-Issue Negotiations

Five experiments (N = 1275) investigate how negotiators cognitively process proposals and outcomes when a broad set of issues are negotiated simultaneously. Based on seminal research on mental accounting, we predict that negotiators strive to reduce complexity in multi-issue negotiations by mentally creating subsets of issues (i.e., topical mental accounting; Thaler, 1999; Tversky & Kahneman, 1981). We propose that such mental accounting processes play out as a double-edged sword: creating mental accounts on issues that include the integrative potential within subsets of issues will help negotiators to reduce complexity and explore beneficial tradeoffs. By contrast, creating mental accounts on issues that scatter the integrative potential between subsets of issues will impede the discovery of win-win agreements. Experiment 1 explored the cognitive process of mental parsing (i.e., creating cognitive subsets of issues) in multi-issue negotiations. Experiments 2 and 3 investigated how the way the issue subsets were created impacted parties’ perceptions, behaviors, and outcomes. Experiments 4 and 5 sought to investigate a cognitive tool (i.e., integrated outcome editing, Thaler, 1999) that helps parties to overcome detrimental effects arising from the mental accounting process. Overall, our findings highlight when, how, and why mental accounting helps versus hurts negotiators in complex multi-issue negotiations.