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Strategic Negotiation Video Lecture

By Bisk

Transcript of “Negotiator Thinking Patterns” lecture by Dr. Don Conlon, PhD

Okay. In this session, we’re going to summarize some of the work that we’ve learned about negotiation from the people who study judgment and decision making, because a lot of people characterize negotiation as joint decision-making across two or more parties so there’s a lot of work that’s been done in cognitive psychology and in judgment and decision-making that influences the things that go on in negotiation.

So one of those things – and shortly you’ll see perhaps the scariest looking thing you’ll see in this material on negotiation – has to do with something called the framing effect.

And, what we’ve learned is that negotiators are often differentially affected by whether information is viewed in a positive or negative frame. And this relates to an economic theory called prospect theory which makes the point that for most people, losses loom larger than gains.

And so let me give you an example of what I mean by that.

For most people, if you found a hundred dollars on the street, obviously that would feel good. But if you had a hundred dollars in your pocket and you were walking along, and then you put your hand in your pocket and realize that pocket has a hole in it and you’ve lost a hundred dollars, that feels bad. And for most people, losing a hundred dollars feels worse than gaining a hundred dollars feels good.

Hopefully, you can understand the point I’m sort of trying to make there. In fact, here’s the scary figure that I was referring to a moment ago. The people who try to articulate that we view gains and losses differently in behavioral economics talk about this in terms of prospect theory.

So here, we try to show you an example that, if on the X axis you see either a positive dollar sign, you know, monetary gains or monetary losses and then the Y axis is what economists would refer to as utility; positive utility or negative utility.

I tend to refer to utility as “happy happy joy joy.” In other words, how much happy happy joy joy do you get out of $100? If you have gained $100, that obviously feels good so, you know, you move up that positive utility sign, certainly up from the zero point.

A hundred dollars provides you with a good amount of this happy happy joy joy. The thing is, $200 – yeah, that feels better than $100, but it doesn’t feel twice as good as a hundred dollars. I mean, you get a little bit more happy happy joy joy but you don’t get twice as much happy happy joy joy out of the two hundred.

So that’s sort of showing the point that there’s a diminishing returns, if you will, for gains. We’d rather lock in sure gains and maybe not care quite as much about a bigger gain if we can lock in a sure gain, and this kind of relates to negotiation when you don’t always know whether or not you’re going to get the gain that you’re hoping for.

Think about it like a coin flip. For example, if I offered you a coin flip and I said, “Look, let’s say that you have $100,” and I say, “You can either keep that hundred dollars or we flip a coin. If it’s heads, you’ll get $200, but if it’s tails, you get nothing.”

Would you rather take the sure hundred dollars from me or would you rather flip the coin, and if it’s heads, I’ll give you two hundred, but if it’s tails I’ll give you zero? Most people, when we’re talking about gains, they say, “You know what, just give me the hundred dollars. I’m fine with that.” We’re risk averse for gains. We take the sure gain over the risky gain, but we behave differently if we’re talking about losses.

If we’re dealing with the negative side here – so let me give you this example. Let’s say you owe me $100 and, you know, owing $100 feels bad so you’re on the negative side of that happy happy joy joy scale. Two hundred dollars – yeah, that’s worse, but it doesn’t feel twice as bad, you know. That initial $100 is where the lion’s share of that negative utility is found. So for most people, if you say, “You know what, you either give me $100 right now or we’ll flip a coin. If it’s heads, you give me $200, but if it’s tails, you don’t have to give me anything.”

Most people, when we’re dealing with the negative side of prospect theory, say, “Go ahead and flip that coin,” because losing $200 doesn’t hurt much more than losing $100. It’s bad. It’s not twice – it’s just a little bit more bad. So, why not go ahead and take that risk?

So we tend to be risk seeking if we’re dealing with losses or we’re thinking about things as losses, but we’re risk averse and we prefer certainty when we’re thinking about things as gains.

Hopefully, that makes sense but I’ll give you another example of how that might work right here.

Imagine that you are involved in a salary negotiation and there are a lot of different pieces of information that you could think of in this salary negotiation.

So for example, let’s say that your current salary is $40,000 and the employer has made an initial offer to you of $47,000, but in your own planning and preparation you had decided that the least that you were willing to accept – in other words, your resistance point for taking this job – is $50,000. And you believe that the company could offer you as much as $54,000; they just haven’t done it yet. And your initial salary request, your opening offer, was $55,000. So we have all of those different numbers at play.

How do you view an offer they might make of $48,000 for you to come work at the company?

So let’s take it from the top because a settlement of $48,000 can be framed very differently. Do you view that offer or settlement of $48,000 as an $8,000 gain over your current salary? Or a $1,000 gain over the initial offer you received? Or a $2,000 loss from what you said your resistance point was? Or a $6,000 loss from your estimate of the most they could offer you? Or a $7,000 loss based on your initial salary request?

I mean, ironically, $48,000 is $48,000, but it becomes framed as a loss as one moves down this list. So that’s sort of the role that framing plays, and if we frame something negatively, even though it’s the same amount, we tend to behave differently than we would if we framed it positively.

So for example, we know that when disputes or the information in disputes is framed negatively, that negotiators make fewer concessions, they reach fewer agreements. And even when they do reach agreements, they perceive their outcomes as less fair.

So, you know, there may be some real benefit to listening carefully to how people describe what they’re feeling in negotiations. If people are framing things negatively they may say things like, “This is too costly for us,” or “We will lose too much value agreeing to this. This is going to be too expensive for us.”

Try to get them to refocus not on what they’re losing, but the actual value they’re gaining -- “Look, it’s not really a loss of $7,000; it’s a gain of . . . you know, in this case $7,000 from what you are currently making in terms of your salary.”

So it’s a way to increase the likelihood that you’ll reach agreement if you can get people to focus on the gains rather than the losses, and this just points out that anything could be framed either way depending on what the reference point or comparison point is that people use in negotiation.

Okay. Enough on prospect theory. What else do we know from the people who study cognitive psychology and judgment in decision-making?

We know that we also fall prey as negotiators to a number of cognitive biases or shortcuts that we often rely on when perhaps we shouldn’t. One of these is what we call the anchoring and adjustment problem. Many times in negotiation we anchor our number estimates on information that shouldn’t matter. You know, it’s irrelevant to the current negotiation, but sometimes we, you know, intentionally or unintentionally anchor on that information as if there’s something really true and important about it.

Other times we over-rely on the most readily available information, information that’s easily accessed in our memory. So what kinds of things are most easily available in our memory?

It tends to be things that have happened to us personally. That tends to be more available; things that are vivid; things that made a strong impression on us. And the fact of the matter is these events, whether they happen to us personally or whether they were very vivid, may in fact be very infrequent.

It may be very unlikely they would happen again but because we quickly think of them they carry too much weight when we’re making decisions about what to do.

So, the second one is this problem of availability.

And the third one is a problem of overconfidence. Very often we’re overconfident about the likelihood that we’re going to get a positive outcome in negotiation. And this is particularly the case when we may have negotiated with someone in the past and that went well, and so now there’s a follow-up or a second negotiation, and because we did well the first time, we become overconfident. And then what happens?

We do a lousy job of planning. We don’t do the hard work involved with planning effectively for this negotiation. We sit there and go, “Oh, this will be easy. I don’t expect any problems. This is going to go just like last time.” Well, guess what? Maybe many things have changed since last time.

You may be negotiating with the same company but there may be very different people in charge. The economic picture has changed. There are lots of reasons that you should always plan very thoroughly and very judiciously, but sometimes when we’re overconfident we don’t do that level of planning, and we should.

So here’s an example of anchoring on irrelevant information, another example from my friends in the billboard advertising industry.

Somebody told me a story where, quote, “We paid lease rent of $3,600 on an advertising structure,” meaning a billboard. “We made the deal with one TV station, but this station was later sold to a new company. The new general manager believes our company should have renegotiated with the new ownership. The new GM therefore asked for lease rent of $36,000 a year for a 10-year lease.”

In other words, 10 times as much as you were paying, you know, prior to that. “He stated that his company gets over $50,000 per lessee for space on his television tower.”

Okay. Well, that’s interesting, but the billboard location isn’t in the same location as the television tower. It’s not as high as a television tower. Perhaps it’s in a much more rural location where nobody sees it. Just because you get a lot of money on your television tower that’s in another location doesn’t mean that that should influence the price you have to pay for a billboard in this location.

So that would be an example if you believed that and, you know, greatly increased what you’re willing to pay, that would be an example of you anchoring on irrelevant information, but hopefully you didn’t fall prey to that. Just because they get that over here doesn’t mean you should get that over there.

Okay. What else do negotiators have to do? What are some other challenges?

Certainly, I’ve talked about the importance of perspective taking and that’s another thing that the people in the judgment and decision-making literature have identified; that we often overlook the valuable information that can come from thinking about the other side.

It’s much easier to talk about or think about our own side because we know it so much better, but we can learn a lot from thinking about the other side, the other party’s perspective, in negotiation.

Another problem is the problem of what we call retroactive devaluation. And what I mean by this is you can imagine in negotiation where somebody is saying, you know, “Please make a concession on this issue. Please make a concession. Give in on this, give in on this,” and then you finally do and it’s often the case that almost as soon as you do, the other side discounts that and sort of says, “Oh, come on, you can do better than that. You can do better that.”

We’ve seen this historically in a number of situations. Many people argue that the United States’ response to when the Soviet Union cut their missile capability by 50%, that was a big concession. But there were some people in Congress who said, “Ah, that’s nothing. Those weapons weren’t of any use anyway. They probably couldn’t hit the broad side of a barn.” That’s a good example of retroactive devaluation.

So what you need to make sure you do when the other side makes a concession is recognize the difficulty that existed in making that concession. Thank them for that; sort of state how you know how that was a very difficult thing for them to do. Don’t just, you know, discount it and dismiss it as something that wasn’t very valuable. Oftentimes it’s very difficult for parties to make concessions.

Okay. As we move to thinking about what kind of happens during and toward the end of negotiation, there are a few more points that I want to make, one of which is making sure that your concession pattern in negotiations is consistent with what you say in negotiations.

So in the slide behind me you can see two different examples of people who made a series of concessions and they’ve gotten to the same point over time. The person on the left has made three concessions that are equal in size.

Let’s say they were, you know, $500, $500, and $500. So they’ve made a total of $1,500 in concessions and they’re now saying, “This is as low as I can go.”

And in the other case, the case on the right, they’re saying the same thing, “It’s as low as I can go.” But they started out making, let’s say an $800 concession and then they made a smaller concession, $400, and then they made a smaller concession still, $300. So across the two, they’ve both conceded $1,500 and they’re both now saying, “This is as low as I can go.”

Who are you more likely to believe? Whose behavior do you think makes a stronger case that this is, in fact, as low as they could go? I would argue that it’s the person on the right because they’re making proportionally smaller and smaller concessions. They’re communicating more effectively that they’re getting close to their resistance point, whereas the person on the left – they keep making the same size. You know, what’s to stop them from making another one?

So think about how the concessions that you make should be making the same point, if you will, that your statements, your verbal statements, are about the fact that you’re getting close to reaching an agreement.

Okay. So let’s switch to some of the things that go on near the end of negotiation.

What often happens near the very end? Well, in a lot of negotiations, we’ve spent a lot of time and effort trying to reach an agreement. Okay. That may be true, but that doesn’t mean that you should, in fact, reach an agreement, right? We make the point that sometimes the best thing to do is to not reach an agreement, so be careful about escalating your commitment to reaching an agreement if that’s not a good agreement to make.

And we hear this in a number of other fields; you know, people talk about throwing good money after bad, or getting a deal at any cost, having too much time or money invested to quit. That shouldn’t matter. Those are some costs.

What matters is whether or not the deal on the table is a good deal. If it’s a good deal, fine, but if it’s not a good deal it doesn’t matter how much time you’ve been put in; you don’t reach an agreement.

And how do you know if it’s a good deal? Again, you compare the deal that is on the table to your target and resistance point. If you’re below both your target and resistance point, then you shouldn’t make a deal. What you could do is say, “You know what? This isn’t good enough. We can keep talking but we may have to go back and revisit some settled issues or, you know, reconfigure some things so that I can get enough value here.”

But don’t agree just because, well, you’ve put in a lot of time so you might as well agree.

And finally, you get to a point in negotiation sometimes where people just have trouble pulling the trigger on reaching an agreement. People are just indecisive. You’ve might have spent a lot of time with these folks but you just can’t seem to get them to make that final commitment.

Again, this is a great time to ask these people some questions.

You know, if they’re unwilling to commit, put that BATNA option in front of them. Say, “Hey, let me ask you: what’s your best alternative to accepting my proposal right now?” you know. And a lot of times, if you can get people to actively consider, “Well, gee, it would only be this,” then they’re more willing to say, “You’re right. This is a good deal. I’m going to take it.”

“If you reject this offer, what will take its place that’s better than what you know you will receive from me right now?” That’s sort of another way of trying to get them to think about their BATNA. Or, or just put out the uncertainty. “How can you be sure you will get a better deal elsewhere?” Again, if we link that back to framing – people prefer sure things, sure gains, over uncertain gains.

If you can frame your proposal to them as a sure gain and then heighten the uncertainty of what they might get elsewhere, they ought to feel better about reaching an agreement.

The final thing you should think about, though, is, you know, maybe the reason you’re near an impasse has to do with you. Perhaps you need to go back and check your target and resistance points. So, for example, have you learned anything during the negotiation and the information exchange that goes on with the other side that should lead you to revise your target point or your resistance point?

You know, maybe you should think about whether you’ve learned something that should alter your target and resistance points in negotiation. And finally, you know, a couple of last questions that might get people to reach an agreement.

You know, “Is there anything I can do to close this gap or that either of us can do to close the gap?” “Is there a concession that I could give you right now that could bring this to a close?”

And of course, if you’re offering up that concession, make sure it’s on perhaps a lower priority issue and not a higher priority issue.

Or get them to think about the future: “Hey, if we were looking back at this negotiation next month, what would we have wished we had brought to the table, or what would we have wished we would have mentioned in this negotiation?”

A lot of times it’s the most difficult part of negotiation -- is getting people to make that final move to say yes, and this is where, where time is often your best friend. It sometimes just takes people time to get to a point where they’re willing to say yes, and so a couple of final examples from people that have written me about their negotiations.

One person writes, “Patience and consistent, persistent contact was the key. We slowly whittled down his $100,000 and closed the transaction at $65,000.”

And then another example: “As I expected, the general manager missed the cancellation date and I notified him of the five-year extension. That did not please him in the least. I received a telephone call where he explained how this could be the most underhanded stunt he’s ever faced in business. A few days later,” – a value of time or delay, right? “A few days later, I called him and he apologized for his remarks and asked if we could sit down and do something so he did not have to lose face with his company.”

Again, we see the intangibles bubbling to the surface here in this last example that I provided.

So, that’s a nice summary of the judgment and decision-making perspective on negotiation and the biases that can plague our ability to reach good agreements. So, hopefully you’ll be aware of them and you won’t fall victim to them. Thanks, and I’ll see you later.

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