This is the second of three articles that I am publishing about negotiation. In the first one I discuss the role that negotiations have in our lives and that most of the time we are not aware that we are being part of a negotiation process or, in a more broad sense, a (non)cooperative conflict where an agreement or understanding can be achieved. In this second part, we will briefly delve into each of what I consider to be the five building blocks that we should all master in a negotiation (this topic would certainly deserve a more detailed analysis, one that cannot be presented in a blog format). These work as weighs in a weighing scale, and the better we can balance all of them, the better will be the outcome of the negotiations.
Self-Awareness
‘The greatest thing in the world is to know how to belong to oneself.’― Michel de Montaigne.
‘At 30 a man should know himself like the palm of his hand, know the exact number of his defects and qualities, know how far he can go, foretell his failures – be what he is. And, above all, accept these things.’― Albert Camus.
Oddly as it may seem to many, having self-awareness is a virtue that defines most of our actions and behaviours as individuals. And negotiating is certainly influenced by the degree of self-awareness one is able to achieve. Being able to understand and accept our own virtues and flaws, listening to our intuitions, and control our emotions are key pillars in developing emotional intelligence (the product of self-awareness), which determines our ability to generate as much value as we can from our interactions with others. But it is crucial not to be self-judgmental, otherwise the inner reflexion turns out to be counterproductive. Acceptance is key in the process of becoming self-aware and developing emotional intelligence.
Lacking self-awareness does not mean that we are failing in some aspect of our lives. It is known that we tend to live in “autopilot” most of the time. And this happens because we define a set of beliefs and living rules that prevent us from having to stop and reflect every time a challenge or a decision is presented to us. How many times have you felt that days, weeks and years go by at the speed of light? But, at the same time, that so many things are happening in our lives? The fast pace at which society is living does not leave us much time to develop self-awareness. But if we do not find the time to reflect upon ourselves we may be neglecting an important (though hidden) opportunity cost for the actions and choices that we are unable to detect.
Self-awareness allows us to manage emotions and understand the motivations underlying the actions of the other party in a negotiation table.
People that have high levels of emotional intelligence tend to act consciously rather than react passively. They also understand how their emotions and reactions affect others. They are able to develop empathy as well as a higher sense of social wellbeing. Roger Fisher and Daniel Shapiro demonstrate that negative emotions (and being unable to control them) impede integrative negotiations. On the other hand, fostering positive emotions can lead to better outcomes in the negotiation process. Managing our emotions can be a decisive tool.
It has been previously mentioned that “Ego is the enemy” (an expression made famous by Ryan Holiday). It is clear that egoistic personalities are highly likely to develop blind spots in how they evaluate situations and other people’s actions. It is also a clear symptom of lack of self-awareness. But in a negotiation table we cannot have that luxury and let ego take control of our emotions, diverting our attention from relevant (though subtle) matters. In his book, Ryan Holiday says that ego takes charge whenever a concern becomes an obsession or self-confidence becomes arrogance. These are two very simple (but often seen) behaviours that are easily spotted in a negotiator. And avoiding being controlled by ego is as important as knowing if the person in front of us is egoistic or not.
Understanding ego, how to avoid it and how to recognise it can have a profound impact on how we manage any conflict resolution.
Aspiring to be humble, actively listening to other people’s concerns and ideas, being sensitive but not emotional, accepting one’s faults, and making every effort possible to stop for a moment and put to perspective one’s problems (mindfulness, exercise or doing some form of art can be great allies) still prove to be some of the major tools to avoid being egoistic and developing self-awareness.
Time
‘The two most powerful warriors are patience and time.’― Leo Tolstoy
‘We must use time as a tool, not as a crutch.’― John F. Kennedy
Time, and timing, is one of the most difficult aspects to manage in a negotiation because it is highly correlated to the degree of vulnerability that we humans have to its inevitability. For some of us the passing of time can be a precious commodity in a negotiation while for others every minute counts in a stressful manner. The ability to manage and control time in a negotiation is fundamental. Patience and self-awareness play a crucial role in endowing us with the ability to cope with time. But make no mistake, managing time can sometimes mean that we need to put pressure on the table. It is about being aware of the role time plays for each side of the negotiation table and managing it to work effectively in our advantage (or even for the sake of reaching an agreement at all).
To do so, one has to be clear about:
- the deadlines.
- Is there a clear understanding on both sides of what are the internal deadlines of each party? Is there a “long stop” date common to both parties? How flexible are the deadlines on each side? Who is accountable for reaching an agreement?
- We need to answer these questions in order to have a clear assessment on how deadlines affect our negotiation strategy.
- Usually, the party less interested in closing the deal (we’ll get to this in more detail below) will have time as its powerful ally because it has no planned deadline. It can force the other party to make concessions that would otherwise be impossible to get. This is especially true in pure private negotiations. But once we introduce a social wellbeing factor into the equation, both parties should (hopefully) be equally interested in reaching an agreement.
- There is a dynamic game associated with deadlines. They can work in our advantage in one phase of the negotiation and can turn against us if the process reaches certain milestones. For instance, think about the case of a company procuring strategic components for a project that will only be operational in two years from now. The procuring party can leverage its position by proposing to close the deal with the supplier now. Certainly the supplier will benefit from closing the deal now because it will hedge its operations two years ahead, gaining visibility in its backlog. However, if the negotiation process for some reason extends in time, the procuring party may see the operational deadline of the project getting closer and its need to close the deal can jeopardise its bargaining power unless it has alternative suppliers on hold.
- what are the different scenarios that could unfold during the negotiation which could trigger a different timeline?
- Sometimes we can have time working on our side but for some exogenous or endogenous reason we may find ourselves facing the clock. Such situations could be, for instance, a sudden change in regulation, a natural catastrophic event, a disruptive new technology or market player, a change in strategic or operational priorities from one party. These events can suddenly change the timeline of the negotiations and we should be aware of this possibility.
- Our ability to anticipate or allocate probabilities for these type of events can play a crucial role in mitigating the impacts, having a plan B in stand-by mode and acting swiftly whenever the scenarios materialise.
- the bargaining power of either being a buyer or a seller in a buyer’s or seller’s market.
- Are we a buyer in a buyer’s or seller’s market? On the contrary, are we a seller in a buyer’s or seller’s market? We need to understand the industry and the market dynamics in order to grasp whether we are in the dominant position or not.
- The party in a dominant position is always able to work with time (and, obviously, other factors such as competitive pressure) and force the other party to agree in moving closer to its preferred terms.
- If we happen to be a buyer in a seller’s market or a seller in a buyer’s market, we always benefit from acknowledging and accepting our weaker position. In this case it is in our advantage to clearly signal to the dominant party what are our redlines (or deal breaker points) for closing the deal right from the start of negotiations. This will allow everyone to save time and avoid endless negotiations that could eventually lead to no agreement at all.
- the role that the agreement plays in the big picture of the parties involved.
- Is it strategic to any of the parties? Is it an operational level deal? Is it administrative?
- The more strategic is the deal, the more pressure will be on the table to reach an agreement.
- the type of relationship one wants to develop with the other party.
- Do both parties foster a long-term relationship or is it a one-shot negotiation with no future prospects?
- When both parties engage in a long-term relationship, the negotiations tend to evolve into a higher stage of commitment. Cross-deal negotiations with different timelines can take place and alter the perception of time, usually to the benefit of both parties.
Uncertainty
‘Doubt is not a pleasant condition, but certainty is absurd.’― Voltaire
‘The trouble with the world is that the stupid are so confident while the intelligent are full of doubt.’― Bertrand Russell
Closely related to time is our ability to cope with uncertainty. The final agreement is rarely a close approximation of the initial positions from each party. And embracing this fundamental law of negotiation allows us to approach every opportunity with an open mind, prepare in detail our initial position and structure our decision-making process for each negotiation scenario.
Coping with uncertainty requires maturity, being able to process events in terms of probabilities as well as being able to anticipate. It is part of both static and sequential negotiation processes. Uncertainty can stem from different origins such as human (mis)behaviour (which we will look into detail in the Bounded Rationality topic below), unforeseen changes in the business environment, strategy shift from one of the parties, existence of blind spots that cloud our understanding of the preferences of the other party or even a sudden third party influence.
The most effective tool to deal with uncertainty in a sequential type of negotiation is to keep updating our beliefs and probability assessment on the different scenarios and on the other party’s preferences as we move through the stages of the negotiation process. This is what we economists call learning in the context of (bayesian) game theory.
We all start a negotiation with a set of (prior) beliefs about the other party. Learning means that we are able to constantly update our beliefs as new information arrives in each negotiation stage.
Most people are not able to do this and too often we see negotiators stick to their initial beliefs and force an agreement that is far from achievable. Being able to process information, translate it into strategic knowledge and use it to update our set of beliefs is paramount to mitigate the uncertainty level.
Incomplete or Asymmetric Information
‘The universe is asymmetric.’― Louis Pasteur
By nature, a negotiation joins two or more parties that attribute different valuations to a deal. There is an information gap that needs to be addressed. Usually, the main reason lies in the difference between the willingness to pay from the buyer (or its marginal utility) and the willingness to supply from the seller (or its short run marginal cost). Both decisions imply a whole different set of decision-making factors and of private information that each party takes into account, which most of the times are not visible nor disclosed to the other party, thereby creating inefficiencies (resources will hardly be allocated in the optimal way, in a Pareto sense, because that would require both parties to have perfect information). For instance, the buyer may be weighing in the strategic fit of the deal to the company’s business but the seller may only be concerned to whether it will cover its variable costs. Regardless of the underlying factors, a negotiation is bound to be an asymmetric information game. The more independent (common) is the valuation given by both parties to the good or service, the more (less) inefficiencies are created by closing the deal.
However, as you know, information is power, and both parties usually possess information that is either not known by the other party or consciously not disclosed. But understanding that there are unobservable factors or information and acting accordingly can play a crucial role in promoting a non-zero sum deal for both parties (i.e., mitigating the inefficiencies caused by the asymmetric information). It certainly affects the relationship between both parties after signing a contract. It is all about increasing the pie rather than fighting for the biggest piece.
Asymmetric information in a negotiation or any other context in which an agreement is reached can take the form of adverse selection (or hidden information) or moral hazard (or hidden action) phenomena. The information theory line of research within economics science was pioneered by Kenneth Arrow’s 1964 paper The Role of Securities in the Optimal Allocation of Risk-bearing and George Akerlof’s 1970 paper The Market for “Lemons”: Quality Uncertainty and the Market Mechanism.
Adverse selection occurs when one of the parties has an unobservable information advantage over the other party (typically, prior to reaching any agreement). The hidden information is usually related to the quality of the good or service under negotiation. The uninformed party may be hesitant into whether it should reach an agreement or not. And this type of market inefficiency may prevent many agreements to be reached. The baseline result is that low-quality products or services will crowd-out high-quality ones from the market. On the other hand, moral hazard occurs when one of the parties undertakes an unobservable behaviour that affects the performance of the good or service being traded (it is a problem that usually takes place after the agreement is closed). The hidden action causes sub-optimum behaviour from one of the parties that results in poor allocation of resources. The baseline result is that there will be some form of rationing or risk-sharing in the final deal. In both situations, unobservable behaviour or information prevents natural differentiation to take place, thereby creating inefficiencies. But how can we manage or mitigate the effects of these phenomena in a negotiation process?
Firstly, have common sense and acknowledge this reality. It pays off and we avoid being naive during the negotiation. Think about the context and what is being negotiated, analyse the market environment and the market positioning of the other party, and then ask the right questions. Additionally, ask the right requirements that allow you to unfold the right (and possibly hidden) information.
Secondly, to avoid adverse selection (hidden information) two strategies are worth implementing: signalling and screening. Signalling consists in providing or asking additional information that gives comfort to the other party (for instance, asking or giving warranties, showcasing the high-quality of a product or service through a free pilot-project, or obtaining international certifications). Screening consists in actively force the other party to self-reveal the information. For instance, by implementing a technical pre-qualification before a commercial negotiation takes place, or designing a negotiating mechanism where you let the parties on the other side of the table to self-select themselves so that you know that whoever seats on the negotiation table has the desired characteristics.
Thirdly, to avoid moral hazard (hidden behaviour) the best advice is to thoroughly design and structure the final contract. And there are usually three areas that need to be carefully balanced and explicitly written in the contract: the commercial side of the deal, the legal framework that bounds the future relationship between parties, and the operational or technical risk profile desired. Contract design and management is the single most important tool that both parties have to avoid a moral hazard problem because it regulates behaviour. This is such an important topic that deserves a full article discussion!
Finally, if transaction costs are too high and obtaining the additional information turns out to be too costly, the odds of having a significant asymmetry of information is high. To compensate, we can (and should) rely on one of the most important aspects of human relations – trust. Build trust and reputation in your relationships and you will be able to mitigate the problem of asymmetry of information.
Bounded Rationality
‘It has been said that man is a rational animal. All my life I have been searching for evidence which could support this.’― Bertrand Russell
‘No rational argument will have a rational effect on a man who does not want to adopt a rational attitude.’― Karl Popper
This pillar could be seen as the mixer in which all the previous pillars would be used as ingredients. Indeed, we could think of a perfect rational human being in the sense of the neoclassical economic theory that would excel in implementing the previous four pillars. We would deal perfectly with time, acting in the right moment and having consistent intertemporal choices. We would certainly be neutral to uncertainty, given that we would consistently maximize our expected utility given our risk aversion (or risk seeking) level. We would live in a world of complete information because everyone would understand that it promotes a more efficient market allocation of resources. And, of course, we would be perfectly self-aware (if this kind of virtue would be needed at all in the daily decisions of such a rational individual). This hypothetical human being is usually referred to as the Homo Economicus, a quite different species from what we humans really are.
Perfect rationality in the neoclassical sense does not exist and models that are built on this premise are destined to be a flawed tool to design and implement an effective course of action.
Surely there are valuable conclusions taken from them but their applicability is limited. This is why most of the public policies and other applied economics recommendations tend to have unexpected results (unpredictable errors that are not normally distributed with zero mean). If we have to compare ourselves to the neoclassical notion of Homo Economicus then we would seriously need to advocate the introduction of bounded rationality assumptions in mainstream economic models. This is directly true to negotiation processes as well given that we all have cognitive bias and predetermined thinking processes that put us very far away from the rational person in the neoclassical sense.
For instance, what could possibly explain that we accept (and participate in) the slaughter of 150 billion animals (which we don’t see) every year at the same time that we feel sorry when our pet (dog or cat) dies? The reason seems to lie in a lack of awareness that prevents us from distinguishing what Thomas Schelling defined as a “statistical life” from an “identified life”. If we don’t see it, odds are that we don’t care. That doesn’t seem to be very rational (in a classic sense). If we have a lack of awareness in some aspect of our lives we should be making every effort to gain a deeper understanding of what is going on. Instead, most of us actively decide not to.
If we want to succeed as negotiators (and in life as well) we need to address this limiting behaviour and acknowledge that we all tend to apply quick rule of thumbs to understand what is going on around us and to quickly make most of our decisions (these rule of thumbs are known as heuristics, as Khaneman and Tversky named in their classic 1974 paper). And these heuristics tend to generate persistent decision-making biases that drive us very far away from what the Homo Economicus would do. Additionally, we tend to overlook what 2017’s Nobel Prize winner Richard H. Thaler called as Supposedly Irrelevant Factors (SIFs) – issues that affect our decisions but that would not have any impact should we act under perfect rationality. The application to negotiation processes is straightforward.
But what do we really mean by bounded rationality? It means that we should acknowledge that the vast majority of people lack the ability to fully identify all the alternatives, evaluate all possible pay-offs and incentives, have clear preferences or interests, and take an action based on a clear optimisation of their and the other party’s utilities. One of the biggest fallacies about negotiation is that both sides of the table behave under perfect rationality. But we know that in fact it is rarely the case, and self-entitled rational players can either become frustrated along the process or create blind spots in the negotiation.
Several human features give rise to bounded rationality behaviour. For instance, procrastination (or laziness), altruistic values or empathy, pro-social welfare bias, inconsistent time decisions, egoistic character, framing effects (how things are presented, or framed, to us have more impact than what we would expect) or cognitive biases (due to heuristics and SIFs), just to mention a few. The list is long and the research literature is growing as we speak. I will delve into the bounded rationality topic in more detail in a future article because it is the building block of behavioural economics, one of the most exciting advancements in the economics science in the past twenty years.
For the purpose of this article we have to retain the important fact that in a negotiation process it is very likely that both parties present bounded rationality behaviour and are not always able to fully incorporate in their strategic thinking all the factors that affect the negotiation. It is our task to read between the lines and disentangle the other party’s behaviour, which we should use to leverage our position and foster a more efficient agreement.
The Economic Factor 