[Book Notes] 20 insights: Negotiation Genius



I was so impressed by Prof. Malhotra’s book – Negotiating the impossible – that I bought his other book, Negotiation Genius, as soon as I finished the first one. My notes from this book are below:


#1


The first step in any negotiation is to ask yourself, “What will I do if the current negotiation ends in no deal?” In other words, you need to assess your BATNA, or best alternative to negotiated agreement. 

Step 2: Calculate your reservation value or your walk-away point in the current negotiation. Another way to think about your reservation value is to consider it your indifference point. 

Step 3: Assess the other party’s BATNA. 

Step 4: Calculate the other party’s reservation value. 

Step 5: Evaluate the ZOPA (zone of possible agreement). The ZOPA is the space between the seller’s reservation value and the buyer’s reservation value.

One way to evaluate your performance is to ask whether you surpassed your reservation value. Another way to evaluate your performance is to consider the entire ZOPA and how much of it you were able to capture. While these two metrics are useful, they both suffer from one important drawback: they evaluate your performance relative only to what you knew before the negotiation. A more complete measure would evaluate your outcome according to what you could have discovered during the negotiation.

 

#2

[on whether you should make a first offer in a negotiation or not]


The primary benefit of making a first offer in negotiation is that it establishes an anchor. Given the powerful effects of anchoring, it becomes clear that there may be an advantage to making an aggressive first offer in a negotiation. Why, then, is it sometimes better to let the other party make the first move? Whether you should make the first offer or not depends upon how much information you have. If you believe you have sufficient information about the other side’s reservation value, it pays to make a reasonable (i.e., sufficiently aggressive) opening offer that anchors the discussion in your favor.


If you suspect that you may not have enough information about the ZOPA, you’d be wise to defer an opening offer until you have collected more information. In this case, it may even be a good idea to let the other party make the first offer. You might forgo the opportunity to anchor the negotiation, but you also avoid the downside of not anchoring aggressively enough. Notice that a lack of information can also lead you to anchor too aggressively, demanding an amount that might offend the other side and drive them away. In other words, asking for too little diminishes the amount of value you can capture; asking for too much diminishes your chances of consummating the deal.

 

#3

Keep the entire ZOPA in play

How can you meet the goal of making an offer that keeps the entire ZOPA in play? By making an offer that falls outside the ZOPA—one that you know the other side will not accept. In this manner, when substantive negotiations begin, you will still have the ability to claim as much value as possible. The idea is to force the other party to negotiate their way into the ZOPA. If your first offer is already inside the ZOPA, you have given up the ability to claim value that lies between your offer and the other party’s RV from the very start.


How far outside the ZOPA should your offer be? On the one hand, the higher your first offer, the more likely it is that if you reach an agreement, it will be closer to the other side’s reservation value than to yours (and hence more profitable for you). However, the more aggressive your first offer, the more likely it is that the other party will be offended by it, think that you are not serious, or believe that there is no way of reaching an agreement with you.


How can you balance these concerns? First, consider the context: the degree of aggressiveness should be appropriate to the situation. In most real-world negotiation contexts, you will not want to be too far outside the ZOPA; otherwise, you lose credibility. To determine your exact offer, ask yourself the following question: “What is the most aggressive offer that I can justify?”

 

#4

Once you have reached a semblance of an agreement then ask yourself how both parties can be made better off when an additional issue is added to the negotiation. In technical terms, such a revision of the agreement is referred to as a Pareto improvement: changes to a deal that make at least one person better off without making anyone worse off. One of your goals in every negotiation should be to look constantly for Pareto improvements until you have reached an agreement that is Pareto efficient: that is, until there is no way to make one party better off without hurting the other. Notice that Pareto efficiency says nothing about how the created value is divided between parties.

 

#5

Contingency contracts are dangerous if the other party is more knowledgeable than you. Contingency contracts are useful only if uncertainty will be resolved in ways that can be measured objectively. If you hire an employee and offer to promote her “if she performs well,” make sure that both parties understand what “performs well” means. Will you base performance on revenue generated? Hours worked? Projects completed? A good work ethic? Not all of these standards are easy to measure objectively.


A rule of thumb: if you’re going to argue about who won the bet, it’s not worth betting in the first place. Make sure you understand the effect of contingency contracts on the incentives of the other party. For this reason, make sure your contingency contracts are incentive compatible. That is, the clause you negotiate should provide incentives for the other party to behave in ways that are compatible with the spirit of your agreement.

 

#6

One way to obtain better outcomes is to have high aspirations; those who set aggressive targets tend to capture more value. However, those who set aggressive targets and get better outcomes as a result also tend to be less satisfied with the deals they negotiate! Why? Because when the negotiation is over, they compare their final outcome to their high initial aspirations. Focus on your target during the negotiation; when it is over, shift your focus to your reservation value. By doing so, you will negotiate effectively (thanks to your high aspirations) and still be satisfied with your outcome afterward (because you are now comparing it with your RV).


Related example: Bronze-medal winners appeared much happier to the viewers than did silver-medal winners. Why might this be? It seems that bronze-medal winners—who were close to winning no medal at all—are thrilled simply to be medal winners. Meanwhile, silver-medal winners—who were close to winning the gold—are disappointed not to have come in first. Objectively, they have achieved more, but they experience greater regret.

 

#7

Weakness in negotiation results when the other side’s BATNA is relatively strong and your BATNA is relatively weak. The obvious lesson: having a weak BATNA is not terribly problematic if the other side does not know that your BATNA is weak. If you have a weak BATNA, don’t advertise it! 


Moreover, having a weak BATNA is not particularly problematic if the other side’s BATNA is weak as well. What typically happens when both sides are in a position of weakness? When both parties have a weak BATNA, it means that the ZOPA is large. In other words, a lot of value is created when the two sides reach an agreement. Who claims more of this value? In this case, the one who fares better is the one who makes the other side’s weakness more salient throughout the negotiation. 

 

#8

The following strategies will help you turn the tables on would-be bullies and achieve outcomes far superior to those you might otherwise expect. 


STRATEGY 1: INCREASE YOUR STRENGTH BY BUILDING COALITIONS WITH OTHER WEAK PARTIES. For example, when bargaining with management, individual employees have often banded together to form unions. If a company were to negotiate with employees one at a time, it could credibly threaten to hire someone else if the employee’s demands were perceived as excessive. When employees bargain collectively, however, they avoid competing against one another. The result is typically an above-market wage for all employees. This process effectively shifts power and money from shareholders to employees. 


STRATEGY 2: LEVERAGE THE POWER OF YOUR EXTREME WEAKNESS—THEY MAY NEED YOU TO SURVIVE. After World War 1, Romania profited from the post-war talks. Romania was a weak country that had contributed relatively little to the Allied war effort When the negotiations ended, Romania had roughly doubled in size.

How was this possible? Why was Romania able to claim so much value when it had done little, if anything, to create value? Romania’s power lay not in its strength but in its weakness. When the war ended, the greatest perceived threat to the Allied nations (in particular, to Great Britain and the United States) was not a resurgence of the defeated enemy. Rather, it was communism, the recently empowered political philosophy that had made its debut with Russia’s 1917 October Revolution. Because of the great fear of communism’s potential to spread westward, Romania, which lay immediately to the west of Russia, suddenly became an important consideration.

 

#9

Negotiation may not be the best option:

  1. when the costs of negotiation exceed the amount you stand to gain

  2. when your BATNA stinks (and everyone knows it)

  3. when negotiation would send the wrong signal to the other party

  4. when the potential harm to the relationship exceeds the expected value from the negotiation

  5. when negotiating is culturally inappropriate

  6. when your BATNA beats the other side’s best possible offer. 

It is common for negotiators to become so focused on “getting a good deal” or “winning” that they fail to consider the value of the time they are spending (or wasting) in pursuit of fairness or victory. In doing so, they often waste time on trivial negotiations that could be better spent consummating more important deals, completing other tasks, or simply relaxing. But sometimes in negotiation, you should not get to yes! Sometimes your BATNA is better than any offer your current negotiation counterpart can make, and “no deal” is the best outcome that two fully rational negotiators can hope to achieve. In these cases, the best you can do is to get to “no” as efficiently as possible.

 

#10

Roosevelt’s manager had already printed millions of photos of Roosevelt for a campaign without taking the permission from the photographer. Therefore, he feared that he may have to destroy all the photos (if the photographer refuses to give permission) or may have to pay a very large sum to the photographer as the photographer would have a lot of power over him. Now consider how Roosevelt’s manager dealt with the situation. After carefully analyzing the problem, he sent the following telegram to the photographer: “Planning to distribute three million copies of campaign speech with photographs. Excellent publicity opportunity for photographers. How much are you willing to pay to use your photographs? Respond immediately.” The photographer did not take long to issue a reply. He sent back a telegram with the following message: “Appreciate opportunity, but can only afford $250.”

 

#11

Negotiators should reciprocate the concessions made by others. Because people are hardwired to feel obligated when someone has provided them something of value, this norm is a powerful motivator of behavior. Yet people are also motivated to undervalue or ignore the concessions of others in order to escape feelings of obligation. Our research has shown that it is easy for people not to reciprocate when the other party’s concessions are not top of mind. For this reason, it is critical to label your concessions. Instead of simply giving something away or moderating your demands, make it clear that your action is costly to you. Because labeled concessions are hard to ignore, it becomes difficult for recipients to justify non-reciprocity.

 

#12

The best way to evaluate how well you did is to systematically analyze how well you could have done.

 

#13

Negotiators should seize every opportunity to create value. If the other party values something more than you do, let them have it—but don’t give it away, sell it. Of course, if you do care about the other side, all the more reason to create value. In negotiation, there often will be issues that you do not care about—but that the other side cares about very much! It is critical to identify these issues. For example, you may be indifferent between whether you start your new job in June or July. But if your potential employer strongly prefers that you start as soon as possible, that’s a valuable piece of information. Now you are in a position to give them something that they value (at no cost to you) and get something of value in return.

 

#14

Negotiations should never end with a “no.” Instead, they should either end with a “yes” or with an explanation as to “why not.” In short, there is nothing wrong with “no deal” or with a rejection of your offer—as long as the reason for the “no deal” is that there is no ZOPA (i.e., no mutually agreeable outcome). If you are not the partner who helps the other side create the most value, then you do not deserve the deal. But if you can create the most value, and there is no deal because you were out-negotiated, then that is a tragic, value-destroying outcome.

 

#15

In the context of decision-making and negotiation, many of the mistakes people make are systematic and predictable. There are 4 such critical, systematic errors:

  1. Fixed-pie bias: Negotiators often fail to create value because they assume there is a fixed pie of value or resources even when it is possible to increase the size of the pie. The fixed-pie bias not only makes value creation difficult, it can also lead to reactive devaluation: the tendency of negotiators to denigrate and devalue another party’s concessions simply because these are being offered by an adversary.

A study of how U.S. citizens responded to an arms-reduction proposal showed this tendency in action. Researchers divided 137 study participants into two groups and then asked how favorable the proposal was to the United States and how favorable it was to the (now former) U.S.S.R. One group was correctly informed that the proposal was made by then–Communist Party secretary Gorbachev. The other group was falsely told that the proposal was made by then-president Reagan.


Among those who believed the proposal originated with Gorbachev, 56 percent thought that the proposal favored the U.S.S.R. and only 16 percent felt that it favored the United States. The other 28 percent thought that it favored both sides equally. When participants were told that the proposal came from President Reagan, however, only 27 percent thought that it favored the U.S.S.R., another 27 percent thought it favored the United States, and 45 percent thought that it benefited both sides equally. 

  1. Vividness bias: Students accept—and soon quit—high-paying jobs with prestigious firms because they over-weighted vivid or prestigious attributes of their offers and under-weighted other issues that would affect their professional and personal satisfaction, such as office location, collegiality, and travel. 

  2. Non-rational escalation of commitment: Research on the non-rational escalation of commitment reveals that negotiators have a strong psychological need to justify (to themselves and to others) their prior decisions and behaviors. It is often difficult for negotiators to admit that their initial strategy was ill conceived or that they may have made a mistake; to avoid acknowledging these facts, they will escalate their commitment even when it is extremely costly, and perhaps disastrous, to do so.

Deepak and his colleagues have demonstrated that emotion can compound the escalation problem. Their research on competitive arousal reveals that interactions that heighten feelings of rivalry can create in negotiators the desire to “win at any cost.”

 

#16

When negotiators are asked to explain their successful results, they usually give personalized internal reasons—e.g., the skill, perseverance, or creativity with which they handled the situation. In contrast, when asked about a failure, most negotiators cite external reasons: the difficult context in which they were negotiating, the incompetence of the other side, or plain bad luck. Surely, would-be entrepreneurs should decide whether to go into business using the outsider lens—with a realistic understanding of the risks involved—rather than using the more tempting insider lens.


Yet, in one study, more than 80 percent of entrepreneurs viewed their personal chances of success to be 70 percent or higher, and one-third of them described their success as certain. This is clearly the insider speaking. The outsider can easily find out that the five-year survival rate for new businesses is only about 33 percent! 

 

#17

Highlight their potential losses rather than their potential gains

People are more motivated to avoid losses than they are to accrue gains, consistent with the principle of loss aversion. As a result, when you frame the exact same set of information as a loss, it will be more influential in negotiation than when you frame it as a gain. Loss aversion is also one reason why negative political ads are so effective, even though everyone professes to hate them: when candidates warn you about the dangers associated with electing their opponent (rather than touting their own merits), they are leveraging this strategy.

 

#18

Disaggregate their gains and aggregate their losses

People seem to prefer finding money in installments but losing money in one lump sum. In order to maximize pleasure, then, you should separate the total gain into lots of small wins (rather than one big win). Meanwhile, to minimize pain, you should put all of the losses together—this gives you only one loss to absorb. If you have the ability to make concessions, do not make them all at once. For example, if you can increase your offer by $100, break up this concession into smaller concessions that add up to $100 and distribute the smaller concessions individually. Your counterpart will evaluate this string of concessions more positively than one lump-sum concession. If you have bad news to share, share it all at once.

 

#19

Door in the face: Cialdini’s research assistants went around the city posing as workers from the county juvenile detention center. They stopped people on the street at random and asked them for a favor: “Would you be willing to chaperone a group of juvenile delinquents on a day trip to the zoo?” As you might imagine, most people were taken aback by the extreme request, and only 17 percent said yes.


The researchers then tried a different approach. This time when they stopped a person, they asked for an even greater favor: “Would you be willing to serve as a counselor at the juvenile detention center? This will require two hours of your time each week for three years.” Not surprisingly, everyone turned down this request. Without skipping a beat, the researchers then went on to ask: “Well, if you can’t do that, would you be willing to chaperone a group of juvenile delinquents on a day trip to the zoo?” The response was staggering. Now, 50 percent of those asked to chaperone agreed to comply! Why does compliance increase after an initial rejection?


Because, according to Cialdini, when the person making the request moderates his demands (and asks for something less extreme), the other side views this as a concession that must be reciprocated. In other words, because the rejected party has “compromised” by asking for less, it is incumbent on the other side to “meet them halfway.” Another factor is the contrast effect—our tendency to judge the size of something based on the context in which it is situated. Placed next to the request for a three-year investment of time, chaperoning a zoo trip does not seem like much to ask!


Cialdini refers to this extreme-then-moderate approach as the “door in the face” (DITF) strategy, referring to the image of a salesperson having the door slammed in his face when he makes an outrageous request. Of course, in this case, the salesperson does not walk away after the door is slammed; instead, she makes a second, less outrageous request.

Foot in the door: Research suggests that once someone has agreed to an initial request, they are more psychologically committed to seeing the process through to its end. Thus, willingness to agree with one request leads to an increased commitment to agree with additional requests that naturally follow from the initial request. The critical factor here is the motivation that people have to justify past decisions and to preserve consistency between their statements and actions.


This approach, which has been referred to as the “foot in the door” (FITD) strategy, may appear to contradict Cialdini’s “door in the face” (DITF) strategy in which the more extreme request is made initially. However, these strategies have different underlying mechanisms and objectives. DITF (aim for rejection, then moderate your demand) is appropriate (as in the zoo-trip study) when your goal is to make your key demand seem reasonable.


The FITD (aim for compliance with a simple request, then increase your demands) is appropriate when you are in need of building commitment toward your key demand. When applying the DITF (extreme-then-moderate) strategy, try to make the moderate request very soon after the other side rejects your extreme request. Otherwise, the contrast effect diminishes and the moderate request is perceived not as a concession, but as an entirely different demand.

 

#20

One randomly chosen subgroup of members was sent the questionnaire with no financial incentive. Of this subgroup, 20.7 percent returned a completed questionnaire. Another randomly chosen subgroup of members was promised a $50 payment for completing and returning the questionnaire. Unfortunately, the $50 incentive did not significantly change behavior; this time, 23.3 percent of members responded. Why such a weak effect?


One plausible theory is that the incentive was not large enough; perhaps the association should have promised $100 or $200. However, consider what happened with a third group of members. This group was sent the questionnaire and, along with it, a single $1 bill. This time, 40.7 percent of members returned a completed questionnaire! Research on trust and reciprocity suggests that recipients of gifts and concessions are often insensitive to the degree of cost incurred by the giver; thus, even a low-cost (i.e., “token”) concession may be sufficient to induce reciprocity, compliance, or agreement.


As this experiment suggests, the way in which people value their own interests (in this case, their time) is open to influence. Going across town to save $20 may seem foolish when we are purchasing a big-ticket item (such as a computer or an automobile). But if there was a $20 discount on something relatively cheap (such as a calculator or a $60 sweater), we might feel compelled to make the trip. In other words, people do not objectively evaluate the cost of an item or an issue; rather, they evaluate costs in comparison with salient reference points (e.g., the total amount they are spending that day). This is exactly why car salespeople get away with selling so many add-ons. When you are already paying $30,000 for the car, paying an additional $200–$500 for floor mats or scratch proofing does not seem like a big deal. On the other hand, if you already owned the car and someone came to your door selling floor mats or scratch proofing at the same prices, you would probably slam the door in their face!