The five-hundred-dollar twenty-dollar
and other negotiated pleasures
by Mike Finley
Copyright (c) 1995) Max Bazerman began his morning session on negotiating strategy predictably — he auctioned off a $20 bill.
It was a simple matter, he said. The person who offered the most for the bill would win it. Oh, there were a few other rules, too:
Sure enough, only a smattering of individuals bid. By the time bids reached $8, only two people were still in pursuit of the coveted twenty. As they realized that they would either win the $20 or shell out cash to Bazerman, the bidding became more intense.
The bidding reached $20 — zero gain for the winner, but a $19 loss to the loser. On they plunged, until bidding reached $24, and the loser appeared to realize that both he and his adversary were caught like rats in a trap, and declined to raise. The auction ended.
Over the past seven years, Bazerman said, he has conducted about 180 such auctions, and over that period his take has been less than the full $20 only once. Seven times he has cleared $100.
What does it all mean? It means that there are other forces driving human negotiation — an auction is a classic negotiation — than reason.
This auction is driven first by greed, then by fear, and finally by a kind of suicidal vengefulness.
Usually, Bazerman said, a number of people are interested at first — simple greed, the attraction of cheap money. When the bidding reaches the $8-$10 range, however, the greedy drop out, leaving the top two. The top bid is determined to stay on top. The lower bid is panicking, afraid to drop out and owe the speaker the bid.
Finally, the $20 barrier is crossed. From here on, pure nutzoid feverishness drives the auction. The top bidder is willing to pay more money than the $20 is worth to prove the point.
"The best hope the lower bid has," Bazerman said, "is that at the last moment a white knight will take irrational interest in the auction and free him from the trap." That, of course, never happens. The low bidder, sensing that he is about to be humiliated, wants to take it out on his competitor, making his opponent's victory as hollow as possible by driving up his bid.
At this point, the loser's mentality is, "So what if I lose — I'm going to make your victory unbearable." And the winner's is, "I don't care how much money I lose, so long as I lose less than you."
Sound familiar? Maybe it doesn't, but this kind of irrational negotiating is part of the warp and woof of modern life. It is the logic that brings countries to war. It is the logic that a general uses to send an army off into certain death, knowing it will mean the death of more of the enemy's army.
It is the logic of the mergers and acquisitions, in which companies will even bid against themselves, will bid vastly more than the appraised value of a company, will spend themselves and their existing shareholders into a deep crevasse to make their acquisition offers acceptable to prospective shareholders.
It is the logic of market giants who engage in mutual bloodletting — not to increase market share, but to avoid being handed the "second-best" label. Coke/Pepsi, GM/Ford, Polaroid/Kodak, Medifast/Atkins.
For really irrational negotiations, consider the ongoing discussion between the team owners and the Major League Players Association. A $3 billion dollar pot to share, and the two parties have decided instead to completely alienate a market that has faithfully ponied up the big money for decades, and that may decide this spring, if the strike is resolved, to take its recreational dollars elsewhere.
The fact is, we not only negotiate dumb, we negotiate crazy. Negotiating rationally is the best avenue open to us, but Bazerman cautioned that it is not easy to change our personal negotiating styles and habits. The trick is for each of us to identify the kinds of mistakes we systematically make and be on the lookout for making them again.
Dig up some course catalogs from America's top business schools from about 15 years ago and see how many course offerings there were in the art and craft of negotiating. They were as rare as respect for Japanese business.
Today, negotiating is a staple of the executive education circuit. There are numerous books are on the market (see box on page 8), and they're all pretty good.
What explains the sudden increase in interest in a topic that should be as settled as Methuselah's bones? Three things, according to Bazerman:
Roughly half of Bazerman's session was spent studying and then playing out a specially created case study called "Working Women."
"Working Women" is a fictional TV program. The negotiation that occurs is between a representative of an independent Chicago TV station and the syndicate that is selling the program for rerun use.
Bazerman created two sets of handouts for this activity — one informing the station rep of her financial realities and needs going into the negotiation, and the other doing the same for the syndicate salesperson.
Bazerman suggested that participants focus on a handful of variables in the negotiations:
Let's make a deal
People broke up into dyads and wandered through Ted Mann Concert Hall, arguing their points on staircases, conversation nooks, and even on the lip of the stage. Though a handful of people escaped from the building before the exercise began, most stayed with it, and the animated looks on their faces and the babbling music of 300 people negotiating at the same time suggested there was a high degree of engagement and interest.
Throughout the period, you wondered what Bazerman wanted you to do — make a deal at any cost, slaughter your "opponent," or somehow break out of the paradigm altogether and form some new kind of agreement.
So it was a surprise, when the group got back together after the break, to learn that Bazerman had a "right solution" in mind all along. Not a dollar figure, but an approach that consistently took the negotiation deeper than mere cost per episode.
A few in the audience, eager to strike some kind of deal, had opted for agreements of less value than the alternative deal — the ace in the hole they had taken into the negotiation.
A few could not come to any agreement at all, stymied by the "stubbornness" of the other side. (Bazerman had warned against citing external reasons, however true, for negotiation failure. See box above.)
A large number, however, achieved an agreement guaranteeing profit well in excess of the alternative deal — by as much as $4 million.
One key to this negotiation was resolving the honest difference between the seller's valuation of the program and the buyer's. Was one side lying? Possibly, though Bazerman reminded us that it is nature's way for the seller to want to be paid more and the buyer to want to pay less.
The stronger likelihood was that there was a simple difference in the assessment. Bazerman suggested that, instead of blocking a deal, the difference could be used to seal the deal.
He proposed a "bet" in which the two sides bet on different expectations. If ratings were above a certain level, the buyer would compensate the seller; if ratings fell below that level, the buyer would receive a rebate from the seller. Both sides would clearly win with such an accord because both sides could achieve greater value with less risk.
Bazerman talked about a bargaining zone that exists in most negotiations. The bargaining zone is an area between what the seller is willing to take and what the buyer is willing to spend. In most negotiations biggest mystery of all — and the information both parties are desperate to know.
Most negotiations are a stab in
the dark. The buyer guesses the seller's bargaining zone and comes in
as low as he dares. Hands are shaken and contracts drawn up. In a good
negotiation, both sides work together to achieve a
satisfactory point in the heart of the bargaining zone, not at the two ends (the predatory and
Using graphs, Bazerman showed how, by coaxing new information into the discussion, both sides could:
The U.S. company desperately contacted the supplier, requesting that, to complete its part of the deal, the supplier should ship by air — at a shipping cost increase of over 500%.
The supplier tried to reassure the American company that the air shipment was not necessary — its goods would arrive by sea in plenty of time to beat the deadline.
So, was the supplier lying to save air transportation costs, or were they right about the schedule? Give the American company credit for creating this bet:
"You send it by air, and we'll keep track of the boat. If the boat arrives on time, we'll pay the airfare. If the boat is late, you pay."
It is a clever bet because it covers both cases. If the exporter was indeed bluffing, he will change his tune ("Why don't we just split the airfare 50-50?").
Throughout the process of negotiation, Bazerman stressed, both parties should remember what they came for, what they want, what they can get elsewhere. These lucid pieces of information must dispel the emotion and ego that cloud the waters of negotiation.
One of Bazerman's least favorite negotiations (along with mate selection) are the ones acquaintances ask him to make when they have found a house and want to buy it. They call him, usually late Sunday afternoon, describe the house to him (he doesn't care), and ask him what price will appeal to the seller without being too high (he has no idea).
"I tell them that they have violated the number one rule of buying a house. You should fall in love not with one house but with three, so you have alternatives. If you have no alternative, and you love one house, you are at the mercy of the seller. You must be willing to risk losing the house."
Bazerman was quick to point out that this negotiating tactic did not necessarily apply to mate selection.
Soft or tough?
Is it better to be a tough negotiator or a softy?
Neither, according to Bazerman. The soft touch gives up too much of the bargaining zone too often. The tough negotiator — the fellow at the party who bores everyone with the great deals he's haggled — has been shut out of ten opportunities for every deal he rammed mercilessly down a buyer's throat.
Don't be soft. Don't be tough. Be rational. Identify your own reservation price — the highest price you'll pay and be at peace, and the other side's — the lowest it will take and be at peace.
Fairness is another issue. Does fairness fit into a rational view? According to Bazerman, it does. Raising the price of umbrellas during a rainstorm can be justified economically, short-term. Angering future customers with your opportunism may be a bigger loser in the long term.
Bazerman says there are five strategies that can help keep negotiations on a rational plain.
1. Build trust and share information.
Parties across the table from one another have reason to be distrustful — each side knows things the other side desperately needs to know. So long as the negotiating atmosphere is contaminated by this distrust, there is little chance that negotiations can succeed. Sharing information communicates the idea that mutual gain is a possibility — that I don't have to succeed by making you fail.
Does this mean that the enlightened negotiator promptly hands over all sensitive information to the other side? No.
It does mean that negotiators must prioritize their concerns. They are not at the table to keep secrets or to gain personal credit for being "tough," but to make good deals. If sharing information moves the process toward a better deal, it is a sensible strategy.
Likewise, if the objective of negotiating is to create the best deal possible, both sides will need information to work from the biggest picture, the biggest pie, possible. Without information, there can be no trading.
Think of it in the same sense that we consider the organizational phenomenon of partnering, by which organizations create a deeper relationship by agreeing to be open with one another.
This point, Bazerman concedes, has the disadvantage of requiring a leap of faith on the negotiator's part, so he prefers not to push it — hoping people discover its power on their own.
2. Ask questions.
It is great to go into negotiations with a dossier full of information prepared by your own analysts. The data are usually better, however — more accurate, more reliable, more balanced — if the other party simply tells you what they are.
You will say, "Why should my competitor answer my questions?" Bazerman replies that, through many years of exhaustive research on that very issue, he has concluded that your chances of getting good information are greater if you ask than if you don't ask.
True, your competitor may not want to divulge information on sensitive issues, such as the cost of capital, what their alternative plans are, etc. But think: an unguarded answer suggests that the other side is not greatly concerned about that issue.
Bazerman suggests that questions be as specific as possible. Not "Are subsidiary rights important to you?" but rather "What value do you place on subsidiary rights?"
Another tip: listen. "Negotiating is a tough task. When their side is talking, there is a temptation to be planning our responses. As we divide our attention, we should favor listening over replying. The information in their remarks is valuable and provides many clues, which we do not pick up on often enough."
3. Give away some information.
Should I blurt out your most important confidence — the value of your alternative deal, or your top or bottom price?
No. But you can do what you hope your competitor does in #2 — give hints as to what is important. Financing, stability, upfront cost, duration.
Then, if the two sides are smart, you can feel your way toward trades that benefit both of you. Increasing the pie size benefits both sides.
Behaviors are usually reciprocal, Bazerman said. "If I yell, you will yell back. If I give away honest information, chances are you will give some back to me."
If you give away and the other person doesn't reciprocate, don't give more. You don't want to give away the store, just feed the discussion and break out of the spiral of "informationlessness" that blocks meaningful trades.
4. Make multiple offers simultaneously.
When negotiations are complex, it may help to offer a variety of different solutions at the same time.
An example might be a financial offer of three alternatives, each all totaling $4.5 million in value. The other side may balk at the $4.5 million, saying all three are unacceptable, but may indicate that, of the three, one at least provides them a basis for discussion.
Multiple simultaneous offers show that you yourself have no preference — you are not holding out. They suggest openness and willingness to accommodate the other side. To submit them in sequence suggests the opposite — that you are holding out.
5. Search for "post-settlement settlements."
It doesn't have to be over, even if the fat soprano or fat tenor has sung. Imagine that you have completed an agreement on a purchase. Goodwill is at a high level. Now is a good time to go back into negotiations and see if there aren't other matters that can be agreed upon, other trades to be made.
Say, "I can't get it out of my mind that there may be other things to talk about — not at one another's expense, but for the good of both sides."
Wanna make a bet?
Finally, Bazerman says, agreements don't have to nail down every contingency. Why not define certain contingencies to the advantage of both sides?
The verbose version of this idea is "building off differences to create integrative agreements." The short version is called making a bet.
If the two sides disagree on the outcome or value of one of the terms being discussed, why not word the agreement so that it reflects and rewards those differences?
Bazerman listed three main dimensions that people disagree on in negotiations:
The value of such a bet is obvious — ut gets us to yes, which both sides want, without either of us being penalized for being wrong about our assessments. I won't mind refunding you money if I made money overall. You won't mind paying me more if I gave you greater value than you realized.
The bottom line in successful negotiation, Bazerman said, is to break out of the irrational straitjacket we create out of the prevailing condition of informationlessness.
If you don't have necessary information to make sensible negotiations, go get some. If the other side is unwilling to give you any — no matter what you may offer in return — then you are probably right to be suspicious.
Either way you are ahead. And you have sidestepped the error of all bad negotiations — blaming failures on external attributes:
"And oh yes," Max Bazerman
added, "the man in the fourth row owes me $24."