The Two Cognitive Blind Spots in Negotiations.
Dr. Sagarika Devburman l Communication Specialist ??????Corporate Storytelling/Connection Mastery??
??Times Ascent Topmost Coaching Leader 2022 ???Top100 Most Influential Coaching Leader 2023 ? I speak globally on Communication related topics and provide Executive Coaching and Consulting services since 2009 ?ISB Exe Al
Negotiation is a complex art that involves understanding and navigating various psychological phenomena. Two key traps that negotiators often encounter are anchoring and framing. These concepts can significantly impact the outcome of negotiations, and mastering them can provide a substantial advantage. Let’s delve into these Blind Spots with real-life examples to illustrate their importance.
Anchoring and First Offers in Negotiation
Effective negotiators skillfully influence the other side’s perceptions of the possible outcomes, known as the Zone of Possible Agreement (ZOPA). The opening offer often serves as an anchor, which can dramatically shift the other side’s perception of your reservation price and hence the ZOPA.
Case Study : The Tech Start-Up Acquisition
A tech start-up is being acquired by a larger corporation. The start-up’s founders are willing to sell for anything above $5 million. The corporation is prepared to pay up to $7 million. Both sides are unaware of each other’s exact limits but know a deal within this range benefits both parties.
The corporation’s CEO asks the start-up’s founders to make the first offer. The founders, estimating that the corporation might pay up to $8 million, decide to start high but not too high, offering to sell for $6.5 million. This amount is close to the corporation’s upper limit but not over it. The corporation, initially considering offering $5.5 million, is anchored by the $6.5 million proposal. They counter with $6 million, and after a few rounds of negotiation, they settle at $6.3 million.
First Offers as Anchors
What happened here? The initial offer of $6.5 million served as an anchor, influencing the corporation’s perception of the start-up’s value. Although the corporation had a higher reservation price, the anchoring effect caused them to adjust insufficiently from the initial $6.5 million, leading to a final price closer to the start-up’s initial offer.
Anchoring is a robust psychological phenomenon observed in many settings.
For instance, during the COVID-19 pandemic, the initial price of ventilators set by early sellers influenced subsequent negotiations, despite variations in actual production costs.
Even irrelevant numbers can serve as anchors.
In one study, people’s estimates of African countries in the UN were influenced by a random number from a wheel of fortune.
Lessons in Anchoring :
By understanding and utilizing the anchoring effect, negotiators can skillfully influence outcomes and achieve more advantageous agreements.
Framing and Negotiation
Framing refers to how an object, event, or situation is depicted or presented, which can significantly impact negotiation outcomes. Different frames can affect the perception of a concession, offer, or the fairness of a potential deal.
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Real-Life Example: The Real Estate Market
In the volatile real estate market of 2008, homeowners and buyers often had vastly different perspectives. A seller might list a home for $400,000, having bought it at the peak of the market for $450,000. A buyer offers $350,000, citing current market conditions and the need for extensive repairs.
The seller's agent might frame the situation to the seller as a significant loss from the original purchase price, emphasizing the emotional and financial pain of selling below cost. Conversely, the buyer's agent frames the $350,000 offer as generous, considering the market downturn and necessary repairs. This dual framing affects both parties' willingness to negotiate further.
Three Varieties of Framing:
People often perceive outcomes in terms of losses and gains relative to a reference point. For example, during salary negotiations, a candidate might frame a $90,000 offer as a gain from their previous $80,000 salary, while the employer frames it as a concession from the initial $100,000 budgeted for the role.
Consider a car dealership offering financing options. A $30,000 car might seem expensive, but when framed as a $500 monthly payment over five years, it appears more affordable. Similarly, a $2,000 yearly bonus might seem substantial when framed as an extra $5.50 per day.
In subscription services, a $120 annual fee might be framed as just $10 per month, making it seem more manageable. This aggregation makes the total cost less daunting, encouraging more customers to subscribe.
Framing and Fairness
At the end of a negotiation, the perception of fairness often hinges on framing. In labor negotiations, for example, framing a 5% pay cut as a necessary measure to avoid layoffs might be more acceptable to employees than presenting it as a simple cost-saving measure.
The way negotiators frame the justification for offers and concessions can significantly impact the negotiation’s success.
Lessons in Framing:
Sophisticated negotiators must understand the psychology of framing and anchoring, both to use these tactics effectively and to protect against them.
Understanding and leveraging anchoring and framing can turn a negotiator into a formidable force, transforming the negotiation landscape to their advantage.