in Behavioral Economics

Everyday Negotiation

Swathes of literature discuss the nuances and intricacies of successful negotiation. There is plenty of excellent advice out there, but today I want to discuss one technique that comes out of some of the excellent research done on cognitive biases.

In his new book, Thinking, Fast and Slow, Daniel Kahneman, a Nobel Prize winner in Economics, amongst other things writes about how cognitive biases and heuristics affect how we behave under some of the most mundane of circumstances. In this excerpt, Daniel Kahneman discusses the powerful role of anchoring effects in negotiation and how to fight their influence.

We see the same strategy at work in the negotiation over the price of a home, when the seller makes the first move by setting the list price. As in any other games, moving first is an advantage in single-issue negotiations—for example, when price is the only issue to be settled between a buyer and a seller. As you may have experienced when negotiating for the first time in a bazaar, the initial anchor has a powerful effect. My advice to students when I taught negotiations was that if you think the other side has made an outrageous proposal, you should not come back with an equally outrageous counteroffer, creating a gap that will be difficult to bridge in further negotiations. Instead you should make a scene, storm out or threaten to do so, and make it clear—to yourself as well as to the other side—that you will not continue the negotiation with that number on the table.

Depending on the nature of one’s work or extracurricular persuasions, we are not apt to encounter such instances of overt negotiation with much regularity. But if we think about the myriad of interactions we go through in day-to-day living, often we are looking to get something from someone in exchange for something we possess, or the converse in which someone is looking to get something from us.

If we approach conversations as negotiations (where appropriate, of course), this knowledge may give us pause should we find ourselves working toward an agreement that began from an unfavorable starting point. In such cases we may have the presence of mind to simply walk away. I can’t help but think how contrary this is to our nature, where, when confronted with a challenge the natural instinct is to fight back rather than disengage, even if disengaging is our best course of action.

Behavioral science seems to play this out—we shouldn’t always trust our gut.

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