A Simple Lesson in Negotiation

From experimentation to practicality

Of all the courses I took in college, the favorite class I took was ECON 174: Negotiations. As part of the curriculum, we learned how game theory and behavioral economics could influence the rational actor (someone thinking logically) in the event of a negotiation. The class had a reputation for being a standout course in the UCSB Economics department, and I enrolled in it the first chance I could.

The professor for the course, Professor Gary Charness, was a very pragmatic individual, and quite frankly didn’t give a damn about a standard lecture-test-lecture-test course format. Instead, Charness wanted us to gain some practical experience. We had two lectures a week; on Tuesday we would be given instructions that described a hypothetical negotiation scenario, and on Thursday we would randomly pair up and negotiate against a classmate. Our course grade was entirely determined by how well we performed in these negotiation scenarios. At the end of each experiment, we would be ranked by how well we did, and the top score would get a 100% on the experiment, while the worst score would get 0% credit. In order to foster a non-toxic environment, Charness decided that the lowest score you could get in the class would be a B.

How ECON 174 was graded

I fought hard. Needless to say, I got a B.

My goal in the beginning was to always stay above the lowest price I could go and settle on a deal that I thought was fair for both parties. Once that strategy netted me consistently low scores, I realized that I was shorting myself with this mindset and toughened myself on higher target prices. Even so, I was never able to place high among my negotiating peers; I never had the it factor. I would always walk away from the negotiation feeling good until the results would place me low on the ladder.

On a whim, I recently revisited what I learned from ECON 174 and decided to read Never Split the Difference by Chris Voss, a book written by a former top-ranked FBI hostage negotiator about how to negotiate successfully without apparent leverage. The act of reading the book was somewhat cathartic, as its contents slowly exposed reasons why I failed to bring home the bread in Charness’ class. Experiences aside, I highly recommend the book — it taught me tactics (such as inciting “no’s” instead of “yes’s” in a discussion) that I am itching to try out soon.

The book affirmed a principal lesson that I had started to internalize in Negotiations: if an agreement is reached between two parties, both parties believe they have made a good deal. Whether or not the party has made the best deal for themselves is irrelevant; no one will accept a deal unless they think that deal benefits them in some way or another. The words “never split the difference” may sound unfair, but it really is not. You can reach an agreement favorable to you if both parties feel like they are benefitting; the hard part is finding out what the other party really wants.

Eager to observe a negotiation up-close, I enlisted my housemates Jordan and Dennis to conduct a mock negotiation. The scenario was simple: Jordan would try to sell a used Macbook Pro, listed for $3000, to Dennis. In order to spice things up, I set a Zone of Possible Agreement (ZOPA). Privately, I told Jordan that the lowest price he should sell at would be $2500, while Dennis’ walk-away price would be $2800. After setting these simple parameters, I let the two begin negotiations for a new price.

Jordan and Dennis went back and forth for a while, and eventually settled on a price of $2650, which happened to perfectly split the zone of possible agreement. Before I revealed the ZOPA, however, I asked Jordan and Dennis individually what they thought the other party’s walk-away price would be. Jordan, as the seller, thought Dennis’ walk-away price was $2700. Dennis, as the buyer, thought Jordan’s walk-away price was $2600. In other words, both parties believed they had “beat” their opponent in the negotiation, whereas in fact each party didn’t do as well as they believed.

In the experiment, Jordan perceived that he had won himself a favorable deal. He had settled on a price $150 better than his own walk-away price while simultaneously believing that he was squeezing Dennis to within $50 of his walk-away price. Dennis, however, felt a similar sentiment. Both parties were doing what I had done in my class, which was to stop the negotiation at the delicate intersection between “this is fair” and “I am winning.” Hypothetically, if Jordan had pushed Dennis to his “limit” of $2700, it is likely Dennis would have still agreed, as Dennis would have perceived the price point of $2600 as “splitting the difference.”

The results of this simple experiment spelled out, as clear as day, the idea that when an agreement is reached, both parties believe they are making a favorable deal for themselves. The takeaway is to remember this fact when you inevitably make your next negotiation. Don’t be timid; if a deal is reached in the end, you know that both sides have benefited. After all, no one in their right mind would accept a deal if they don’t have something to gain.

While reading about this fact may be straightforward, seeing it in practice has really made me internalize it. I hope that after reading this article you may be able to spot this fact in real life, whether from your perspective or as a third-party. Best of luck negotiating!

Hi, I’m Arthur!

https://arthurpan.me/

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