- How the Secrets of Economics and Psychology Can Help You Negotiate Anything, in Business and in Life -
MARGARET A. NEALE AND THOMAS Z. LYS
Purchase Now !
Just with Paypal
Just with Paypal
Book Details
Price
|
2.50 |
|---|---|
Pages
| 314 p |
File Size
|
1,794 KB |
File Type
|
PDF format |
ISBN
| 978-0-465-04063-6 (e-book) |
Copyright©
| 2015 by Margaret A. Neale and Thomas Z. Lys |
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.
*
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.
*
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.
Table of Contents
PREFACE
PART ONE—THE BASICS
CHAPTER ONE
Why Aren’t You Negotiating?
The Choice to Negotiate
CHAPTER TWO
Creating Common Ground
The Infrastructure of Negotiation
CHAPTER THREE
Creating and Claiming Value
The Value of the Exchange
CHAPTER FOUR
Value Creating
The Integrative Potential in Negotiations
CHAPTER FIVE
Mapping Out the Negotiation
What You Don’t Know Can REALLY Hurt You
CHAPTER SIX
It Takes at Least Two to Tango
Thinking Strategically in Negotiation
PART TWO—THE NEGOTIATION
CHAPTER SEVEN
Who Should Make the First Offer?
Is S(he) Who Speaks First Truly Lost?
CHAPTER EIGHT
Managing the Negotiation
Supplementing and Verifying What You (Think You) Know
CHAPTER NINE
Concede or Else!
The Influence of Promises and Threats
CHAPTER TEN
Should You Let Them See You Sweat (or Cry)?
Emotions in Negotiation
CHAPTER ELEVEN
Power
Having It—or Not—and Getting More
CHAPTER TWELVE
Multiparty Negotiations
The More the Merrier?
CHAPTER THIRTEEN
Auctions
Lots More than Two
CHAPTER FOURTEEN
Bringing It Home
Making the Deal Real
ACKNOWLEDGMENTS
NOTES
INDEX
Bookscreen
