In early 1996, when we were both teaching at the Kellogg Graduate School of Management at Northwestern University, one of our students approached Thomas for help in responding to a business opportunity.1 A physician had offered the student, a product manager for a large pharmaceutical company, the opportunity to purchase a patent the company had been using for the last ten years in the production of one of its most profitable medical test kits. In the past, the physician had received annual royalties based on successfully produced kits. And each royalty cycle, the physician and the company disagreed over the exact number of successful kits that had been produced. Ostensibly tired of these annual disputes, the physician was offering to sell the patent to the corporation for the remainder of its seven-year life. His asking price was $3,500,000.
Before responding to the physician’s offer, our student wanted Thomas to check his analysis of the most his corporation should be willing to pay based on their estimate of the expected value of the royalty payments for the next seven years. The analysis was quite involved, and revealed that the maximum amount the corporation could pay for the patent was $4,100,000. At that price, there was no difference to the company between owning the patent and continuing to lease it from the doctor.
Margaret walked in as the student was summarizing his analysis: he could accept the physician’s offer and realize an immediate profit of $600,000 ($4,100,000 − $3,500,000). Or, if he were to negotiate, he could likely secure an even better deal by not accepting the doctor’s first offer: “If I could get him to agree to $3,000,000 or so, I would realize a $1,000,000 benefit for my company,” said the product manager. “This will make me look so good—my next promotion is virtually assured.”
“Just a second,” said Margaret, who had been reviewing the details of the offer. “You’re not ready to negotiate.” The student was surprised—and was even more so when Thomas commented: “She’s right.”
Our student was way ahead of himself. In his mind, he was already enjoying the $1,000,000 benefit of this prospective deal. Because he was so taken with the potential benefit and what that could mean for his future with the company, he had come up with a number and then leaped to an obvious, but woefully incomplete, answer.
In the student’s analysis, the deal looked like a sure win of at least $600,000 for the company—but from the doctor’s perspective, the offer made no sense. Given the facts, he simply was asking for too little. “A deal should make sense to both sides—and this one doesn’t,” said Margaret, continuing, “and why, after ten years of leasing the patent to you, has he now decided he should sell?” Maybe, we suggested, the numbers alone didn’t tell the full story.
Thomas stepped up to the white board where he and the student had done their calculations. Except this time, they looked at the deal from the doctor’s perspective. That analysis showed that the expected present value of the payments to the physician for the next seven years under the current arrangement was approximately $5,000,000. “Why is he willing to make an opening bid of $3,500,000, when the ‘status quo’ is worth approximately $5,000,000 to him?” asked Margaret. Seeing where we were going, our student made a last-ditch effort to save his promotion: “Maybe the doctor can’t do present values, or—”
“Or maybe he knows something you don’t know,” said Margaret.
Our student had fallen into a classic negotiation trap. He had focused on the analysis from his own perspective, ignoring the doctor’s side. Caught up in the prospect of closing the deal, he became convinced by his initial, favorable computations and failed to do any due diligence.
Three psychological factors contributed to his behavior: the power of a familiar story, the confusion of accuracy and precision, and the inherent attraction of reaching an agreement. First, the company and the physician had a decade-long relationship, and our student was only too familiar with the patent and the difficulties that had arisen from the contract. It was easy for him to believe that the doctor had decided to sell the patent simply as a matter of convenience.
Second, our student had computed a value for the patent (to several decimal points) that made sense to him and promised a quick deal and a great return. Although his numbers were precise, he had done precious little to test their accuracy.
Finally, once people are negotiating—as they had already begun to do since the doctor had made the first offer—getting to “yes” often feels like success, even if accepting the deal were not in all parties’ best interest. For example, negotiators are more likely to choose an outcome that is worse for them if that outcome is labeled “agreement” than if it is labeled “option A.”2 All of those factors made it easy for our student to take the next obvious step: Get the deal done and move on!
Driven by these psychological factors, the student might have rushed to close a deal with the physician—but after considering our advice, he decided to conduct some further analysis. After consulting with us, the company decided not to pursue the doctor’s offer. In less than a year, the company was using a new patent (not developed by the doctor) that was superior to the original one. The original patent had become essentially worthless.3 Systematically integrating psychological principles into economic calculations led to a superior outcome for both our student and his organization: He avoided wasting $3,500,000 and likely losing out on acquiring the new patent to boot. With our help, he took a more disciplined approach to calculating the economic value of the deal for both parties, while also acknowledging the psychological pressure to reach a deal—all of which ultimately led him to temper his initially bullish analysis. By integrating economic and psychological perspectives in this way, both our student and his company were able to get more of what they wanted: not only did they avoid losing $3,500,000 on a soon to be obsolete patent but it also allowed them to secure the rights to the new technology.
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The negotiation perspective we present in this book dates back to 1994. That summer, the dean of the Kellogg School challenged us and our fellow faculty members to come up with interdisciplinary business approaches that prepared managers for the real world. Managerial decisions, the dean observed, do not fall neatly into the discipline-based silos of accounting, finance, organizational behavior, or marketing. Rather, successful managers must integrate knowledge of multiple fields.
The dean’s challenge resonated with our own experience. Combining the insights from economics and psychology in our research had helped us understand the mistakes that organizational leaders often make and gave us insight into what they might do differently. In response, we developed a new course that incorporated systematic psychological responses with economic principles of decision making. The dean’s challenge—and our course—foreshadowed a trend of linking behavioral and economic insights in business education—a trend that took off over the next decade.
Back in 1994, however, most of our colleagues thought our proposal to combine the psychology of organizations and economics into one course was crazy. Ironically, after hearing our proposal, the dean thought so as well. What possible benefit, he and many of our peers wondered, could come from abandoning the tenets of economic rationality—where reasonable, disciplined human beings made choices that maximized their utility—and try to incorporate the impulses that distract undisciplined individuals from doing what was best for them? Nevertheless (and indeed as psychological theories would predict), our colleagues’ and the dean’s skepticism only reinforced our resolve to make our experiment work, and we forged ahead.
As we developed a model for our integrated course, our combined backgrounds proved to be a major asset. They allowed us to develop a far more sophisticated model than each of us would have been able to create individually. Thomas’s academic foundation is in classical economics and is based in the belief that people act rationally. From his point of view, people know exactly what they want in negotiations and other decision-making situations, and they engage in behaviors that help them achieve it. There is a direct connection between actions and outcomes as predicted by rational actors—homo oeconomicus—and everything else, psychology, irrationality, and the like fade to irrelevance and thus can, or even should, be ignored.
In contrast, Margaret’s training focused on factors that get in the way of negotiators’ ability to translate their wants into outcomes. In her view of negotiation, the parties’ desires and demands often change, even in the absence of new information. Situational characteristics such as the parties’ emotions, the powerful impact of past actions, and the idea of saving face predictably influence their behavior. In Margaret’s world, negotiators often make choices that thwart their best interests.
As we worked together, we quickly learned to respect the insights that each discipline brings to the study and practice of decision-making generally and negotiation specifically. The economic perspective offers a benchmark by which we can judge our performance; while social psychology helps us understand, intervene, and incorporate the predictable—but not always rational—ways in which we and our counterparts behave: ways that can hamper our efforts to get more of what we want.
Much to our delight (and relief), the integrated class that we created at Kellogg proved to be a big success; Thomas even won the prestigious “best professor” designation in 1996. In large part, our success resulted from our ability to explain managerial successes and failures not as a result of luck but rather the systematic—and therefore, predictable—ways in which humans process and integrate information.
Unfortunately, we were able to offer our integrated course only twice, because Margaret soon left Kellogg for the Stanford Graduate School of Business. Yet the brief experience had convinced us of the value of our approach. In the years since, behavioral economics has hit its stride, moving from the fringes of its two parent disciplines to mainstream theory and empirical research, along the way having a considerable impact on public policy and producing best-selling books, including Freakonomics, Predictably Irrational, Nudge, and Thinking Fast and Slow. Behavioral economics has provided a new way of understanding the systematic failures of many individuals as they save for retirement, choose to become organ donors, or select among health plans. Behavioral economics is so useful because it integrates economics and psychology—something that we have been advocating in business for some two decades.
Despite its popularity, however, this kind of integrated thinking has not yet made its way to the field of negotiation. We hope this book will help to correct this oversight, and update the practice of negotiation for a new, more scientific age.
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The standard approach to negotiation has long been based in large measure on the book Getting to Yes and its direct descendants. At first, Getting to Yes seems to be a perfect title for a book on negotiating. It implies that agreement is the outcome to which every negotiator should aspire: agreement = success. And the way to arrive at an agreement is to create value for your counterpart as well as yourself—the famous win-win solution. This leads to a clear recipe for success: Create as much value as you can, and you will get an agreement that will make you richer, wiser, happier, and maybe even a bit healthier. More specifically, Getting to Yes assumes that the more value you create, the more value you can claim and the less conflict will exist between you and your counterpart. After all, dividing up a larger pie will make everyone happier.
If all of this sounds too good to be true, it is. The Getting to Yes recipe, while relatively simple and palatable, cannot ensure negotiation success. As with any recipe, there is a specific set of ingredients and one ideal outcome. A recipe, however, sometimes limits the cook’s capacity to innovate. The Getting to Yes framework ignores a critical point: Regardless of how much value you create in a negotiation, what’s important is the amount of value you ultimately get. Ironically, viewing value creation as your primary focus will handicap your ability to claim value.
This is our first big point of departure from the Getting to Yes perspective: Good agreements are those that make you better off—that get you more of what you want. Agreements for the sake of agreeing are not so great, unless of course agreement is all you care about. But then, if that were the case, you wouldn’t need to negotiate. You’d just need to accept your counterpart’s first offer.
In this book we will show you how to think about, prepare, and implement strategies that will help you claim more value in your negotiations. The gold standard in negotiations is not how much value you and your counterparts create, but how much value available in the negotiation you are able to claim.
The second big difference between our book and those like Getting to Yes is that our advice and approach are based on decades of research on negotiation. Although stories and anecdotes alone may be entertaining, what is critical is knowing what, on average, works—and what doesn’t. Leveraging the results of decades of empirical research, we have painstakingly analyzed different strategies to ascertain which are most effective—when. Anecdotes and isolated experiences cannot allow us to accurately measure performance; empirical research can. We use the results of these studies to help you make better choices in your negotiations and increase your odds of success.
The third critical contribution our book makes is showing that, by integrating insights from economics and psychology, you can better articulate what you want in each negotiation and influence your counterpart to accept outcomes that are in your interest. By understanding your counterpart, you can be more strategic in the information you share and more successful in the outcomes you attain. You will also get a better handle on what information you should share and what you should keep to yourself. And you will be able to create value without handicapping your ability to get more of what you want.
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Our unique integration of economics and psychology has yielded impressive results from the very beginning. The first time we taught our integrated negotiation course, we had much more to say about how to be a better negotiator, including predicting what negotiators would do that would make them worse off. This allowed us to develop strategies and create interventions that improved our students’ performance in their negotiations.
Consider how you would respond when a buyer accepts your asking price for your used car. Are you pleased? Economic theory would suggest that you should be; after all, as the owner of the car you know more about it than anyone else, so your determination of its value—your asking price—is bound to be the most extreme. Yet more often than not you feel bad—you should have asked for more! Paradoxically, if the buyer had negotiated and you had agreed to less than your asking price, you would be more pleased with this deal. From an economic perspective, such a response makes no sense. You value money—and yet you are happier with less. From a psychological perspective, however, your response is predictable: People have expectations about how social interactions including negotiations should unfold. You make a first offer that you think is extreme. By accepting, your counterpart is making it clear that your offer wasn’t as extreme as you had thought—and you are disappointed because you believe you could have asked for even more. Thus, a buyer acting strategically should not accept your first offer; rather she should negotiate—getting you to agree to less and making (both of) you happier. She used her knowledge of your expectations to get the car for less; while you are pleased because you got more than you expected, even though it was less than your first offer. Now that is a winning combination!
And that is just one example. Our method of thinking about negotiations can help you get more of what you want in your interactions with colleagues, superiors, spouses, friends, enemies and strangers. Here are a few examples of other situations in which our model of negotiation has been put to the test—and helped us get more of what we want, time after time.
THE DRY CLEANER. Margaret stopped by her favorite dry cleaner to pick up her laundry. The owner apologetically told Margaret he had lost a bedspread she’d left to be cleaned. He offered to compensate her for the loss, and asked what a reasonable amount would be. Margaret had a better solution. Rather than taking the owner’s money for the discounted value of the bedspread ($150), she said he could pay the price of a new bedspread ($250) in service, rather than in cash. That way, both Margaret and the drycleaner were better off. The cost to the drycleaner was also much less than the benefit to Margaret. She got $250 worth of dry cleaning while the dry cleaner incurred costs of only $125—which was $25 less than the dollar amount he would have paid; plus he retained Margaret’s good will and continued business. Not only had Margaret created additional value—she had also claimed more of it in a way that made both parties better off.
THE NEPHEW. Thomas’s nephew was living with him. He had not realized how challenging a seventeen-year-old could be. He was especially surprised by the number of hours his nephew slept on the weekend—and was uncertain whether this represented a real need for sleep or just a way to get out of the chores that Thomas had assigned him. Early in his stay, Thomas’s nephew wanted permission to drive Thomas’s SUV on Saturday nights. Rather than simply saying yes or no, Thomas had a slightly different proposal. Because Thomas wanted him to help out with chores—specifically cutting grass in the pastures that surround the house—he proposed that the nephew could use the car on Saturdays if he were willing to mow two of the pastures each Saturday. Thomas knew that his nephew liked to sleep in on Saturdays but he also had a love of large, noisy machines. Although mowing the pastures was not particularly attractive, when Thomas yoked the chore with the opportunity to drive the tractor and permission to use the SUV, the package trumped his nephew’s desire to sleep. This deal lasted until the first snow.
THE FRIEND. A friend of Margaret’s was bragging about the “smoking” deal he’d just gotten on a new truck. As he described what he did—negotiating the price of the new truck, then negotiating the trade-in of his old truck, and then negotiating the extended warranty—Margaret knew that he could likely have done much better. By combining all three issues (the truck, the trade-in, and the warranty) into one negotiation rather than three separate negotiations, he could have folded three issues of differing value into the same negotiation—allowing him to gain more leverage and obtain an even lower aggregate price. But because he was Margaret’s friend—and was so happy with his new truck and the deal that he got—she thought better of pointing out his missed opportunity!
THE DEAN. This fourth and final example is complex, but also revealing of the various factors that can complicate a negotiation. Quite awhile ago, the director of executive education at Kellogg asked Margaret to serve as the academic director for a custom executive program for a large law firm. Such a position would require significant extra work, but she agreed to take on the role after coming to what she thought was an agreement on the extra compensation. Later she learned that the director understood their agreement quite differently. Rather than arguing with him, Margaret decided that the benefits she would receive from running the program were not worth the conflict, so she offered to step down as director to allow another faculty member to take her place.
The director insisted that he wanted her as the program director, but just not at the price she thought they had agreed on. To overcome this impasse, he asked Margaret’s boss, the school’s dean, to pressure Margaret to accept his version of the compensation package. When called into the dean’s office—an experience much like being called into the principal’s office—Margaret realized that the dean also wanted her to take this position because of the importance of the program for the larger executive education initiative at Kellogg and the pressing deadline to present the program to the client. The dean gave Margaret a piece of paper and said, “Write down what you think you should get for designing and running the program. Whatever you write down, I will honor. In fact, I will instruct our accountant to pay whatever the note says.”
At this point Margaret found herself in a position not uncommon in salary negotiations; two options immediately came to mind. She could write down the number that she thought they had agreed to in the first place. Or, if she approached the situation from a purely economic perspective, she might, now knowing how badly she was wanted, write down a much larger number. As it turns out, however, neither of these would have been the optimal solution.
By the time Margaret faced this decision, she had been studying negotiation for over fifteen years, and so she knew the problems that accompanied the most obvious two options. If she wrote down a large number, the dean might well have interpreted her behavior as a sign of greed—as taking advantage of the looming deadline and his strong desire to have her manage the program. His offer to let her name her price represented only the first move in a much larger interaction, in which the dean constantly updated his idea of Margaret’s essential character, the extent of her self-interest, and her commitment to the institution. Although she might get the higher amount in the short run, in the long run, taking advantage of this situation would reveal to the dean a what-is-in-it-for-me-today orientation.
On the other hand, if Margaret had written down the original number she had expected as compensation—a number that, after all, she had once thought was a reasonable deal—she would be passing up the chance to extract more value from the interaction. The new circumstances—the dean’s offer to let her choose her own compensation, and the director’s willingness to use the dean to make sure she directed the program—immediately struck her as a chance to get more of what she wanted. In this case, it wasn’t just about the money. She now had an opportunity to signal her good faith and offer the dean an opening to do the same.
And so, when the dean asked for her number, Margaret handed the paper back to him, saying, “You decide my compensation for designing and conducting this program; I will accept whatever you think is appropriate.” The dean looked up surprised, and then smiled. Taking back the paper, he wrote down a figure and passed the paper back to her. His number actually exceeded the amount Margaret thought she had originally agreed to. The result: She organized and conducted the program, was well paid, and earned the admiration of her dean.
Margaret got more of what she wanted. She learned something about her dean. When given the opportunity to choose between taking advantage of her and acting generously, he chose the latter. That knowledge was at least as valuable as the money she got paid, particularly as she expected their relationship to continue for many years. And, just as important, her willingness to give the dean control over the situation by accepting his proposal sight-unseen made it perfectly clear to him that she expected he would value her long-term interests. So, in the end, she got the complete package: more money, a more favorable evaluation from the dean, and the reputation of someone who put the institution’s interests above her own—a patriot.
For this strategy to be successful, of course, there must be a future in which the dean and Margaret expect to return to the negotiating table. Our advice would change drastically had this dispute taken place among parties unlikely to ever face each other again. In that case, the economist’s solution of writing down the largest number likely to be accepted might prove the dominant solution. Of course, such a situation would make the dean’s initial offer unlikely in the first place and would also increase the likelihood that—contrary to what he said—he would reject an offer that he deemed too large. There is a big difference in the information that you can glean from the interaction if you demand X dollars (and get paid that amount) versus what you can learn if your counterpart offers you that same X dollars. Finding out the true nature of your long-term partner is priceless!
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Good negotiation outcomes require more than wishful thinking or luck—but knowing how to negotiate better is only one of the ingredients for success. It also takes discipline to get more of what you want. Discipline is a factor that is often overlooked in the development, care, and feeding of negotiators because it is not something one can learn from a book (or many books!).
To be disciplined requires practice—but to be effective you need to couple discipline with knowledge. You need to know when to walk away and have the discipline to follow through—even when it would be easier just to say “yes.” It also takes discipline to gather information: to figure out what your counterpart wants, what information you should share—and how to share it (or not). It takes discipline, too, to think creatively about potential solutions that let your counterpart agree but that also make you better off than settling for a compromise. And it takes discipline to ask, and to engage your counterparts in the social exchange that is negotiation.
This is a book for people who seek out negotiations and for people who avoid negotiations—and for those who wonder if they could have gotten a better deal when they did. Our approach provides a roadmap for effective negotiating: to make you more knowledgeable about what it is you want in a negotiation and how to develop and implement a plan to achieve better outcomes, regardless of the metric that defines those outcomes. The value that you are interested in claiming is not limited to greater wealth. Perhaps what you want is a better reputation, a more predictable environment, more influence in your team or organizational decisions, more security in your job, or a hundred other dimensions of unique value to you. What you want can be as different as the situations you face. But in each and every situation, our integration of economic and psychological perspectives can help you get more of what you want.
In the chapters that follow, we share not only our own stories but also those of clients, students, and organizations, although we have changed names and identifying details to preserve anonymity. We have chosen each vignette specifically to embody the strategies and tactics that our research (and that of our colleagues around the world) has proved effective.
When you apply our approach to your negotiations, you will be able to answer the questions that arise at the various points in a negotiation.
• When should you negotiate? (Chapter 1)
• How do you know what a good deal is? (Chapter 2)
• At what point should you walk away? (Chapter 2)
• What are the trades you need to consider when you think about claiming value and creating value? (Chapters 3 and 4)
• What should you know (or attempt to discover) about your counterpart? (Chapter 5)
• What information will help you claim value—and what information will hurt? (Chapter 6)
• When should you make the first offer? (Chapter 7)
• How can you fill in gaps in your knowledge about your counterpart? (Chapter 8)
• What strategies can you use to encourage your counterpart to make concessions? (Chapters 9, 10, and 11)
• How should your strategies change when your counterpart is a team or when you are confronting multiple counterparts? (Chapter 12)
• When should you think about switching from negotiations to auctions? (Chapter 13)
• How should you end your negotiation? (Chapter 14)
This book is divided into two parts. The sequence of these parts corresponds to the order in which you would need them as you consider and implement a negotiation. The first part is effectively a boot camp. It contains the basics of negotiation, starting with how to decide whether to negotiate and moving on to the basic structures of most negotiations. Although the more experienced reader may wish to skim these chapters, they provide a framework on which we build in the main part of the book—so they are worth a look even for the most experienced reader. We focus on the strategic underpinnings of the information exchange necessary for successful negotiations and the ways in which planning and preparation can facilitate getting more of what you want.
In the second part, we focus on the factors that push us and our counterparts to behave in ways that complicate our negotiations. Are you better off making or receiving the first offer? How should you respond to a threat? What are the challenges that are unique to negotiating when you are in a team? What should you do in negotiations that become emotional? How can you mitigate the downside of not having power? In the final chapter, we wrap up with a discussion of what you need to keep in mind after you get to an agreement—especially how to reduce the chances that you have left value on the table and how to reduce the chances that the deal will get foiled in the last moments. In negotiations, as in so much else, what may seem like the end is actually just another beginning—and just another chance to get more of what you want.