Negotiations - A Rational Process Until It Isn't
In the early 1940s, two very bright men, a mathematician and an economist proposed a theory, which would revolutionise the fields of business and economics. Their names were John von Neumann and Oskar Morgenstern, and their creation got to be known as Game Theory. Game Theory is a theoretical framework about interaction among rational actors (or players) where one actor’s payoff is contingent upon another one’s actions. Its objective is to produce optimal decision-making in a competitive setting. Prisoner’s Dilemma is one of the most popular examples of Game Theory.
Since its creation and some key contributions throughout the 1950s, most notably the Nash Equilibrium, named after John Nash, Game Theory permeated virtually all fields of thought and social science. One of these fields was negotiations. For many years after that, the negotiations space was dominated by Game Theory and its main premise that actors, or in this case - negotiators, acted in a rational way. Hence, the best way to win a negotiation, the theory went, was to adopt a rational, problem-solving mindset, separate the person and their emotions from the problem, and try to subdue the opponent with rational arguments.
While this line of thought was hugely influential for its time in the mid-to-late 20th century, it had a major flaw – it assumed people were rational beings and acted in a rational way. Logic can do little in the face of an emotional opponent – angry, scared, upset or challenged even if these emotions might not be immediately visible. There is a very simple reason for that – when emotions kick in, as they often do in negotiations, the amygdala (the emotions centre of our brain) takes over and mutes the pre-frontal cortex (PFC), which is the rational part of our brain. From that point on, it is a completely different ball game. Just think about the last time you had a heated discussion with your partner and despite your best efforts and all perfectly logical arguments you had, these simply would not get through to your partner and the discussion went nowhere at all.
In this article, I will review some of the main biases and emotional responses that often influence negotiations. Being aware of these can help to protect us when used by others or give us a competitive edge when used by us. These are biases that I have also come across in business, finance, and everyday life. You might think this article does not apply to you because you do not negotiate very often. That could be the case if you think about some of the obvious negotiation scenarios – hostage situations, large geopolitical conflicts, or sales. But, as a matter of fact, we negotiate all the time even if we do not strictly think of it this way – trying to convince our partner that it is a good idea to buy a new sofa, that we deserve a night out with our friends, trying to get a better salary when applying for a job/trying to secure a pay rise, or explain why the 25 pairs of shoes we have in the wardrobe are not good enough for the upcoming event and we need a new one.
The emotional side of negotiations
Ego threat: if you have read any of my other articles or my book (I Am Only Human), you will know that discussing ego is one of my favourite topics. There is a very simple reason for that – everything comes down to it. Negotiations are no exception.
We, humans, have a natural desire to create and maintain a positive image of ourselves. It is important for our inner peace to believe we are right, great, better than the rest. By extension, what we believe must also be correct and superior to what others believe (if different). In a negotiation the other party would naturally have a different position from ours and this creates a threat to our ego i.e., ego-threat. As a result, we have the proclivity to see the other party in a negotiation as an opponent that has to be defeated. For that purpose, we need to adopt a more contending behaviour, steering away from cooperation and problem solving. Research suggests that when our status is challenged, our amygdala goes into overdrive, suppressing the more rational part of our brain – the prefrontal cortex and decreasing our IQ. The result is obvious – we are likely to escalate the situation, hurting our own chances of going home with a favourable outcome.
What we should be mindful of is that ego-threat applies to us as much as it does to the other party. We need to be aware of this and take steps to diffuse the situation before everyone leaves the table worse off. We will review some of the simpler techniques later.
Loss Aversion: this is one of the most popular psychological biases and has far-reaching implications on many aspects of our lives – from marketing promotions influencing our shopping habits through investing to negotiations. It simply states that people would prefer incurring losses to similar size gains. In other words, we would feel greater pain from losing £5 than satisfaction from winning £5. Why is this relevant to negotiations? In every negotiation, each of the parties has something to offer in exchange of something else. What we have to offer can be framed as a win for the other party, but can also be framed as a loss. For example, “If you are prepared to spend this much extra, you will gain a top professional in the field” is not as impactful in human minds as “If you are not prepared to spend this much extra, you will lose a top professional in the field”. Marketers use this bias adeptly with free trials. They know perfectly well that once a customer signs up to their service, product or subscription, loss aversion would then work against them as they would not want to lose what they are already getting today. Hence, framing the proposition as a loss, rather than a gain in a negotiation can have a powerful psychological impact on the other party.
This party works because we often think of our own wants and needs. “I want this” or “I need that”. We are not very good at considering the flip side – what are we prepared to lose or can lose. By framing the proposition as a loss, suddenly the loss becomes tangible, real.
Anchoring: another very popular bias, which causes us to rely too heavily on an initial set of information or in the case of a negotiation – on the opening bid. Anchoring has far-reaching psychological implications. Even though we know this is just an opening bid and we will move away from it, the anchor creates a drag, which stops us from going too far away from it. It creates a reference point for the value of the proposition in our minds and any subsequent discussion starts from this initial point. By placing an anchor far into our zone of preference (too low or too high), it limits how far away the other party can pull.
How can we use these known psychological effects and biases to our advantage?
There is a virtually endless list of tricks that we can utilise in any negotiation. For a more thorough review, I would recommend one of my favourite books on the subject – Never Split The Difference, written by the former FBI hostage negotiator and a leading negotiations professor and practitioner – Chris Voss. There are, of course, many other quality books on the subject. It is truly astounding how subtle some of the tactics leading negotiators leverage are, sometimes coming down to the use of a specific world or the way in which something is said. Writing up all of these would be virtually impossible and would take a lot more than a short online article. So, I will only focus on a subset of the more comprehensive ones that I have come across or heard of. This would be a good starting point for the purpose of this article.
Empathy: Demonstrating empathy is probably the single most important thing in a negotiation. A demand that one brings to the table is usually underpinned by deeper feelings and reasons. We all have our reasons for doing what we do. If we are talking to our boss about getting a pay rise, it could be simply because we want more money (fair enough), but often it could also be because we have to send our child to university and our current salary isn’t quite enough to support them; because our partner has lost their job and we are now the sole provider for the family; because we are worried about job stability in the future and want to capitalise as much as we can now, etc. Understanding the underlying motifs one has is important for at least two reasons:
It can give us leverage in the situation (i.e., if we know that an employee is asking for a pay rise, just to boost their ego or because someone else got a rise and they just wanted to keep up) could allow us to say “no” without being a d*ck.
It can open opportunities to expand the size of the pie. In a negotiation we often assume that the pie size is fixed, or it is a zero-sum game – if we are to win, someone else must lose. What we often miss is that this might not be the case. If we go back to the above example, the boss might be able to expand the pie size by offering a longer contract extension at the same pay or with a modest increase (if the employee is worried about job stability). Alternatively, they might be able to help the partner get another job.
Rapport: Like empathy, establishing rapport with the other party, a common ground for a more fruitful discussion is critical. Neuroscience has a good explanation why this is the case. Research suggests that higher levels of oxytocin in the brain as associated with greater collaborative behaviour. Oxytocin production can be boosted by simple things like smiling and handshaking, establishing common interests, swapping names, or sharing information about us. All of these, help to create a rapport and encourage a more collaborative approach. We do not need to be neuroscientists to know this. We always have because it is very simple. If we do not know someone, it is easy to rip them off. There is no reason why we should not. They are just an unknown person. But when we establish rapport and build some appreciation that they are people, just like us, we are a lot more likely to relate to them and offer a mutually beneficial solution.
Reciprocity: This is another simple one and similar to empathy and rapport. We are social animals and have an innate sense of justice. If someone does us a favour, we feel like we must repay it. The same applies to negotiations. In such cases, the opening bid is hardly ever the last one. Everyone, who has gone out to buy a car knows how this works – a series of offers and counteroffers. The key to this tactic is to trigger the other party’s sense of reciprocity and justice. We can do that by making the first concession. It does not have to be a major one, but it signals to the other party, we are ready to cooperate and also compels them to do the same in return. Throughout the negotiation, we can make more than one concession, this is normal, but it is important that every next one is of smaller magnitude. This signals that we are coming closer to our “this is the best I can do” position. It does not have to be the case, only we know where this point is for us, but as long as the other party believes we are getting there, we could go home with a bigger cut of the pie than we initially expected.
Handling anchors: Anchoring bias is a well-known one, which means that quite possibly we are not the only ones who know it in a negotiation. If we are the ones to use it – great, it works well with the reciprocity principle above. We set the anchor very high or very low (depending on which side of the negotiation we are) and naturally we will have to make a couple of concessions along the way to move to a more acceptable area. Because the anchor is set high/low, even with the couple of follow up bids, we are likely still in a favourable place. But what to do when someone else sets the anchor first? The most important thing is to recognise how far off the bid is as a competitive strategy and break away from the trap that has been set for us. We do that by setting an opposing anchor. So if someone goes too high, we answer with a very low anchor, as opposed to playing along, trying to shave off a bit of their anchor.
This is a generally uncomfortable strategy. It feels like a rip off and many people argue against it, when dealing with someone on an ongoing basis. We might make a killing the first time, but could end up ruining the relationship in the longer term. It is a fair argument. This strategy would work better in a one-off negotiation when we want to go home with the whole pie, even if the other party starves.
Handling emotions: We discussed earlier in this article, how ego-threat could make the negotiation a lot more emotional that we would like it to be. When threatened, we produce neurochemicals, which impact our ability to properly evaluate and respond to situations calmly and rationally (or as rationally as possible). When dealing with an emotional side, it is unlikely anyone would leave the room better off. The best way to handle the situation is to try and turn down the heat or even better – use preventative tactics. Establishing a rapport is a great way to do that and keep the other party “cool”. If fire starts, nevertheless, trying to argue back or getting wound up is the worst thing we could do. There is only one way this will end – with a fire. There are a couple of things we can do in this situation.
Label the emotion. Often, we do not realise that we are getting emotional in the heat of the moment. It is very common, in fact, to mistake anger with confidence. Making the other party aware of their feelings and how they come across, could act as a wakeup call to them and allow them to tone down.
Ask for a break or another discussion later on. It is so simple and so effective; I don’t know why I don’t do it more often. I sometimes snap at people on a business call or send an angry email when provoked. Ten minutes later I wonder why the hell I did that. Never a smart choice, so leaving the discussion for later when emotions have subdued and the prefrontal cortex is back in charge, is strongly recommended. I should probably put that on a sticky note on my desk going forward.
Create illusion of control: This is a simple strategy but can go a long way. I use it frequently at my job. Everyone wants to be on the winning side of a negotiation, argument, or anything at all. It feeds our ego to believe we are in control of the situation. How do we do that? Get the other party to work out the solution for us. In his book, Chris Voss suggests the use of what he calls “calibrated questions”. These are “How” question e.g., “How can I do that?”. It is a very powerful question because it does a few things.
It creates the sense of cooperation. We are not saying “no”, not directly anyway. Rather it feels like we are saying “I am happy to do it, I just don’t know how”.
It makes the other party to think with us, not against us because we put the ball back in their court.
It gives the other party the impression that they are in control. They are the ones doing the talking and coming up with the ideas. Clearly they must be controlling the situation in this case.
It increases the chances of them following through because this was their idea in the first place.
If you are delivering a project and need more resources, but the sponsor is only willing to give you so much funding, ask them the question “How am I supposed to deliver the project with just these resources?” Let them tell you.
Use specific numbers: Let’s look at this one last and draw the line. Consider this hypothetical scenario. You need a new family car. You like your cars and want to buy something decent. Your partner could not care less about cars, however, they are more prudent with money than you are. So, here is the negotiation – how much should you spend on a car? For the sake of the argument, let’s suppose you have around £30 000 in mind and your partner - £10 000. Would you suggest setting aside £28 640 for a car? Probably not. Why would you, it is a very precise number and not easy to work with. Most likely you will not spend this exact number so why suggest it? The answer is – because it suggests a lot of thought and deliberation. Coming up with this exact number tells your partner that it is based on solid estimates and groundwork. They will be less likely to argue against it. Always a good idea to have some fictional arguments in mind, in case they don’t buy the bluff.
There are many more tricks in the book, but I will stop here. I have picked up those as they have psychological grounds and an area of specific interest for me. But this is a huge topic, and if of Interest, I would recommend reading some of the leading books in the area. It is a truly fascinating topic.
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