Behavioral Economics and Irrational Behavior in Negotiations

Could you take a moment to look around you? The computer on your desk, the chair you sit in, and the phone in your hand are all triumphs of human ingenuity. Humanity has achieved extraordinary feats, from airplanes and skyscrapers to oil rigs and space shuttles.

Yet, for all our brilliance, we’re far from perfect. We forget our car keys, misplace our glasses, break promises, and procrastinate. We make impulsive choices, overindulge in unhealthy habits, and often regret decisions that seemed reasonable at the time.

The truth is, we’re not as rational as we think. Many decisions—whether in life or business—are guided more by emotion, habit, and cognitive biases than logic or reason. Behavioral economics, a field popularized by Nobel laureate Daniel Kahneman, has shed light on this fundamental truth. It challenges the long-standing notion of Homo economicus, the rational decision-maker, and shows us a more accurate picture of how we think, act, and negotiate.

The Myth of Rationality in Decision-Making

For decades, traditional economic theory was built on the idea that people make rational choices. We were taught to evaluate our options carefully, weigh the costs and benefits, and choose the path that maximized our utility. However, behavioral economics has proven that this is far from reality.

Kahneman’s research reveals that our decisions are often irrational and emotionally driven. Emotions are central even in professional contexts, where logic and analysis are prized. For instance, we’re more likely to buy from or collaborate with someone we like and trust, even if they offer a less competitive product or price. This is not a failure of reason; it’s human nature.

Think about your own experiences. Would you switch to a supplier who is 10% cheaper if you don’t trust them? Or would you stick with the one you have a strong relationship with, even if it costs more? My research involving over 3,000 participants showed that most people are willing to pay 10–20% more to maintain trust and a positive relationship with their supplier.

Emotions: The Driving Force Behind Negotiations

What’s fascinating is how often emotions, not facts, determine the outcomes of negotiations. Kahneman’s findings demonstrate that we make emotional decisions and rationalize them afterward. In other words, we use logic not to decide but to justify the choices we’ve already made emotionally.

This emotional foundation is why trust, likeability, and rapport are critical in negotiations. They can outweigh traditional factors like price, product features, or delivery timelines. If you understand the emotional drivers behind your and your counterpart’s decisions, you can shape negotiations to achieve better outcomes.

Why We’re Wired for Irrationality

Our brains are built for survival, not for rationality. We process information using three interconnected brain systems:

1. Reptilian Brain: The oldest part is responsible for instinctual behaviors like fight or flight.

2. Limbic System: The emotional brain, where trust, fear, and empathy reside.

3. Neocortex: The rational brain, where analysis and logic occur.

While the neocortex processes data, the limbic system makes decisions. This is why emotions often override logic, even when we think we’re being rational.

Here are some common examples of irrational behavior that stem from this dynamic:

- Loss Aversion: Losing $100 feels far worse than the joy of gaining $100.

- Confirmation Bias: We seek information that supports our existing beliefs and avoid material that challenges them.

- Instant Gratification: We often choose immediate rewards over better, long-term outcomes.

Walter Mischel’s famous marshmallow experiment at Stanford University illustrates this perfectly. Children were given a choice: eat one marshmallow immediately or wait a few minutes and get two. Only one-third managed to stay, and those who did were more successful later in life. The lesson? Self-control and delayed gratification are critical for long-term success.

Trust as the Currency of Negotiation

Trust is one of the most powerful currencies in negotiation. To illustrate, consider a simple scenario:

You’ve been working with Supplier A for years. They charge $0.10 per unit, and the relationship is strong. Now, Supplier B enters the picture, offering the same product for $0.09—a 10% discount. However, you don’t trust Supplier B. Their communication is unclear, and the rapport isn’t there.

Who do you choose?

In my study, most participants stayed with Supplier A even when the price difference increased to 20%. This highlights a crucial truth: trust and likeability are often worth more than financial savings. The more complex the product or service, the more important these factors become.

Everyday Examples of Irrationality

Behavioral economics provides countless examples of how irrationality shapes our decisions:

1. Tipping in a Foreign Country: Even when you’ll never return to the same restaurant, many still tip—a purely altruistic act with no personal benefit.

2. Loss Framing: Losing a $100 ticket deters many from buying another, but losing $100 in cash doesn’t have the same effect.

3. Reward Timing: People prefer to lose $50 all at once rather than in two $25 increments but prefer to gain $50 in two smaller amounts rather than all at once.

These quirks of human behavior extend to the workplace as well. For instance, employees often respond better to pay raises spread over multiple periods rather than given all at once, even if the total amount is the same.

Navigating Irrationality in Negotiations

Understanding human irrationality can give you an edge in negotiations. Here’s how:

1. Build Trust: Invest in genuine relationships. Trust isn’t just a feel-good factor; it’s a tangible asset influencing decision-making.

2. Simplify Complexity: Break complex decisions into smaller, manageable steps to reduce overwhelm.

3. Acknowledge Emotions: Recognize the emotional drivers behind your and your counterpart’s decisions.

4. Leverage Delayed Gratification: Focus on long-term wins, even if they require short-term sacrifices.

Conclusion: Embrace the Irrational

Being irrational isn’t a flaw—it’s part of being human. By understanding decision-making's emotional, unpredictable nature, you can become a more effective negotiator and leader.

Trust, relationships, and emotional intelligence often outweigh logic and data. If you can navigate these dynamics, you’ll close better deals and build stronger, more lasting partnerships.

What about you? Have you encountered irrationality in your negotiations? How did you handle it? Let’s discuss this in the comments below!

Dr. Keld Jensen (DBA) , the acclaimed author of 27 books, is a leading expert in SMARTnership Negotiation. He advises globally on negotiation strategies, teaches NegoEconomics and TrustCurrency, and collaborates with top professionals to enhance negotiation practices. A sought-after speaker, he regularly conducts keynotes and webinars, empowering individuals and organizations to achieve optimal negotiation outcomes.

Jensen's innovative approaches and extensive research have transformed traditional negotiation methods, making him a trusted advisor in the public and private sectors. His work emphasizes collaboration, trust, and mutual value creation, setting new standards in negotiation.