Want to become a more effective negotiator?  One of the most powerful drivers of the decision-making process is loss aversion.   Understanding the psychology of this concept and how it impacts risk management can give you a decided edge during mediations.  The concept is so fundamental that it is a key underpinning of behavioural economics.

Tversky and Kahneman carried out ground-breaking research that resulted in Kahneman winning the Nobel Prize in Economics in 2002 (sadly, Tversky had passed and the Nobel is not awarded posthumously).  Three critical conclusions from their work impacted what we thought we knew about behavioural economics.

1. Despite classical theory, humans as individuals and in groups often make irrational economic choices.
2. There are consistent patterns and causes among these irrational actions that allow us to understand and influence decision making.
3. One of the strongest explanations for irrational decisions is loss aversion.

 

Loss aversion simply means that people are more afraid of losing something than they are attracted to gaining it.  The literature demonstrates that people are approximately twice as averse to a loss as they are keen for a gain.

Imagine the following scenario:  A friend offers to flip a coin and give you twenty dollars if it lands on heads.  If it lands on tails, you give her twenty dollars.  Would you take that gamble?  For most of us, the amount we could possibly win would need to be at least twice as large—forty dollars—as the amount we could lose—twenty dollars—before we would accept the risk.  Once this concept is understood, an advocate can use the principle to guide the framing, structure, and timing of offers to enhance the likelihood of acceptance while avoiding any real sacrifice.

 

Framing:

Before we delve into the precise process, it’s important to analyze the study that set these parameters.  Tversky and Kahneman presented the following parable to a host of physicians, specifically targeted because of their training to use evidence and reason to find solutions.

 

The community is preparing for an outbreak that is expected to kill 600 people.  Two alternate programs to combat the disease have been proposed.  Which program do you prefer?

 

Program A:  If Program A is adopted, 200 people will be saved.

Program B:  If Program B is adopted, there is a 33.3% probability that 600 people will be saved and a 66.6% probability that no one will be saved.

 

For the same scenario the physicians were then asked to choose between the following two programs:

 

Program C:  If program C is adopted, 400 people will die.

Program D:  If program D is adopted, there is a 33.3% probability that no one will die, and a 66.6% probability that 600 people will die.

 

A careful read will demonstrate programs A and C are identical, as are programs B and D.   Logically, if a doctor chose A in round one, they should choose C in round two, and the same with B and D.  However, the physicians delivered almost reverse results with 72% choosing A in round one, but 78% choosing D in round two.  Why the reversal?  Framing.

In the first round, the outcomes are framed as “lives saved,” while in the second round, the propositions are framed as “lives lost.”  Our emotional mind weighs the value of losses and gains in very different ways.   We’re hardwired to avoid losses, even in ways that aren’t rational.

The moral of the story:  Offers should be framed as the avoidance of a loss, rather than as the opportunity for a gain.  In one large study involving insulation sales, homeowners who were told that failing to install insulation would mean losing X cents per day were much more likely to purchase the insulation than those who were told that it would save them X cents per day.

 

Framing an offer as a way of avoiding a loss is much more effective than framing it as an opportunity to gain or save.

 

Structure:

Our cognitive biases don’t just influence weighing loss and gain, they cause us to feel differently about the way we experience that loss or gain.

 

In a research study, subjects were asked which of the following scenarios would make them happier?

 

Scenario 1:  You’re walking down the street and find a $20 bill.

Scenario 2:  You’re walking down the street and find a $10 bill.   The next day you are walking down a different street and find another $10 bill.

 

Despite the fact that the outcomes are the same, the majority of people felt they would be happier in Scenario 2.

 

Taking the reverse approach, subjects were asked which of the following scenarios would make them unhappier?

 

Scenario 1:  You open your wallet and discover you have lost a $20 bill.

Scenario 2:  You open your wallet and discover you have lost a $10 bill.   The next day you open your wallet again and discover you have lost another $10 bill.

 

Once again, despite the equivalent financial outcomes of these scenarios, the majority of respondents indicated that Scenario 2 would cause them greater unhappiness.  What is the conclusion from the research?

 

People prefer to gain money in installments, and people prefer to lose money all in one lump sum.

 

These findings offer clear negotiation applications.   It is beneficial to structure offers to categorize gains—and spread them out over time—while one should lump together any losses in an offer and deliver all the bad news in one message.

 

Application:

In a typical motor vehicle litigation case, when four or five heads of damages are in play, how should each side structure their offers to have the best behavioural effect on the other party?

Plaintiffs are effectively asking their counterpart to give up something they have, or suffer a loss, so they benefit by moving to lump sum offers at an earlier stage in the process, putting the cards they are willing to show on the table early.  This approach also has tactical advantages beyond the cognitive impulse that will be discussed in later issues of Negotiator’s Edge.

Defendants effectively offer a gain to their counterpart, so they are better off keeping their offers segregated by heads of damages and increasing their offers (the good news) slowly and incrementally across a number of rounds.  This method appeals to our cognitive preference for gains over time.  Your counterpart will evaluate the string of concessions more positively than one lump sum concession.

 

Timing:

People can become attached to objects or gains, even before accepting any offers.  Once that attachment forms, then the loss aversion behaviour pattern starts to have an impact, even though no true loss can occur because the gain has not yet been realized.  This phenomenon is called Expectation Loss Aversion or Expected Loss Aversion.   This behavioural pattern needs to be carefully managed to avoid problems in achieving settlement, but it can also be leveraged to finalize resolutions.

We must be cognizant that a party can form an attachment to an outcome long before that outcome has come to pass.  Counsel needs to advise their clients that best-case scenarios or aggressive opening positions are not realistic or expected outcomes, but merely a negotiating tactic or tool.  A client developing Expectation Loss Aversion to an unrealistic position can be an obstacle for settlement.

To enhance the chances of settlement, a party may consider an offer as their asset and become attached to it, even before it has been accepted.  This allows the power of loss aversion to propel the negotiation forward.  For example, if an individual is offered $100 and has time to form an attachment to it, they may then approach the next round being protective of the $100 they now believe is in their pocket, rather than aggressively pursuing a larger figure.  This makes the original party more amenable to compromise.  However, people need time to form that attachment.  Both counsel should carefully balance the timing and pace of offers, considering both the time needed to form an attachment and the power of urgency in moving parties towards or away from any particular outcome.

 

A counsel who hopes the opposition will become attached to their last offer should slow the proceedings down, while counsel seeking to avoid that connection should keep the offers moving quickly.

 

Possessive language can harness the power of Expectation Loss Aversion while guiding a party towards settlement.  Stressing to a party that the offer in hand is effectively an asset to be protected and moving forward creates a risk of loss of that asset harnesses the cognitive impulse to resolve the case and avoid the potential loss.  This approach finds its clearest expression in the well-worn but effective “Going to Vegas” analogy where the current offer is referred to as “coin in hand” and proceeding is analogized to putting that coin into a slot machine and taking one’s chances.

 

Take-Aways:

1. In the human mind, loss looms twice as large as gains.
2. Gains in offers should be categorized and spread out over time.
3. Losses or concessions in offers should be lumped together.
4. Parties need time to form emotional attachments to an offer.
5. The language of ownership can help parties become invested in offers.

Perhaps it’s helpful to start with what negotiation science can’t do for you. Negotiation science can’t mesmerise, trick or fool your counterpart into accepting an offer that doesn’t satisfy their needs. It can’t make a strong case weak, or a weak case strong. And it will never take the place of properly building your case through the careful investment of time and resources. Negotiation science also won’t allow you to read your counterpart’s mind or predict their moves with precision.

Negotiation science can do two things for you. It can enhance the likelihood that any particular proposal will be accepted or at least received in a positive fashion, and it can help you identify the real needs of your counterpart, so you can satisfy their needs in a way that makes sense for both sides of the table. No doubt about it—consistent use of negotiation science will produce better results.

Negotiation science is not a game changer in the same way as an independent witness who supports your client’s version of events; rather than being a building block, it’s an enhancer. That’s why we call our newsletter the Negotiator’s Edge. Will these techniques consistently enhance the chance of any particular proposal being accepted by ten percent? Probably not. But it might just enhance it by two or three percent, and that’s the edge you want. Because case after case, year after year, that edge can make all the difference.

Let’s explore two powerful ways you can enhance your offers.

 

Be Justified

The likelihood of a request being accepted is greatly enhanced when a justification is offered for that request. This can be referred to as the “because factor”. The power of the “because factor” is based on two scientific realities. We’re all literally hardwired to work together and co-operate (although sometimes it may not seem like it) and our evolutionary success is based on the power of the rational mind, which seeks out reasons to co-operate. When an offer is accompanied by a justification or a “because,” it has a significantly greater chance of being accepted.

Researchers at Harvard University explored this behaviour in depth. During one study, they arranged for a librarian to shut down all of the photocopiers in the university library except for one, creating long lines of students who wanted to use that machine. They then deployed researchers who asked students to allow them to cut into the line, using two different approaches.

The first group asked “Excuse me, I have five pages. May I use the photocopier?”

The second group asked “Excuse me, I have five pages. May I use the photocopier because I have to make some copies?”

Students allowed researchers who used the second request to move ahead 50% more often than those who used the first request. This is astounding, because the second request adds no substantive information to the first request, and is a frivolous justification. What other reason would the researcher have for wanting to enter the line other than to make copies?

So why the better response rate? The answer lies in the power of the word “because”. Humans are essentially programmed to build mutually beneficial relationships based on reciprocal efforts to fulfill needs. Humans are also territorial and naturally resist others imposing their will on them. The researcher who simply asks to cut into the line will be resisted more often than not. The researcher who offers a justification for cutting the line stands a far better chance of success because the student believes they are doing something to willingly help someone with their need.

The same phenomenon can be seen when vendors and purchasers haggle over price. Effective hagglers offer justification for their positions, “Your competitor has the same product at 50% less.” or “This is smaller than I had hoped for.” or “If I take your offer, my children will starve!” because consciously or unconsciously they know that offering a justification increases the chances of an offer’s success.

Similar studies have shown that the word “because” is particularly powerful in creating this reaction. Our minds look for shortcuts to arrive at conclusions, and the word “because” is a signal that the other party feels there is a rational need for their request. To the English speaker, the word “because” sends a direct signal to the brain that enhances the chance of compliance, even when it offers no additional information.

Beyond enhancing the chance of acceptance, there’s a secondary benefit to using “because” in your offers. Even if the offer is not successful, the use of the word “because” reduces the chance that the other side will find your offer offensive, illegitimate or overly antagonistic. Even if you are aggressively anchoring and don’t expect your offer to be accepted, using the word “because” will reduce potential fallout and increase the possibility that later offers will be accepted. Offering justifications and using the word “because” will definitely enhance your negotiations. How does this information impact lawyers in the context of a mediation where a party almost never gets to deliver the offer themselves? Is the tool still as powerful? The answer is a resounding “yes.”

The thoughtful mediator will deliver the “because” for you, enhancing the chances of settlement in any particular exchange, which is exactly why you have them there. This technique should not be a license to abdicate your responsibility and let the mediator do the justification work for you. A mediation is your process, and the case is your case. The parties must maintain as much control of the process as possible to meet their needs and reach an agreement. The justifications that the mediator delivers need to be your justifications to maximize your opportunity for success. Using justifications will enhance the mediator’s view of your theory and allow them to be a better surrogate for your position. You should use “because” with the mediator as often as you would with your direct counterpart if the mediator wasn’t there.

Social Proof

The power of the “because” can be further leveraged with an understanding of the science of “social proof.” Humans are herd animals. A decision will be more appealing to individuals if they believe other people are doing the same thing. Peer pressure and fashion trends are obvious examples of this trait, but it also has well-documented power in commercial transactions.

A classic example is a simple change of wording in late-night infomercials. After pitching the product, the “call to action” would be delivered in this format: “Operators are standing by, please call now.” For years, this was the standard approach and results were satisfactory, if unspectacular. A minor variation in this “call to action” resulted in skyrocketing response rates.

The new phrase was “If operators are busy, please call again.” The change was revolutionary for the industry. The first phrase implied that few people were calling, while the second suggested that many people were purchasing the product. Without changing any of the information given to the consumer about the product, the marketers achieved substantially better results by implying that many other people were placing an order.

Another experiment illustrated the same effect in a non-commercial context. A lone researcher stood on a busy city street gazing upwards, as if he was looking at something in the sky. Passers-by rarely glanced up to determine what the researcher was looking at. However, when three or four more researchers joined the first looking at the skies, almost every passerby looked upwards. They weren’t interested in joining the lone stand-out, but they were eager to join the herd.

How does this help counsel in the litigation context? If you align your offer with the position of the herd, you increase the chance of it being accepted. This process can begin quite early. When the parties are told “96% of civil cases settle without a trial,” they are already being primed to resolve their case rather than fight to the bitter end.

A more direct example is the use of case law. Lawyers may submit a case or two to support a position. Unless the issue is a legal one and the decision is from a binding appellate court, it will do little to persuade. It’ll be like that lone researcher gazing up at the skies—lonely and irrelevant to the decision-making process. But if you have five, ten or more cases that suggest a certain quantum or liability split, you amplify your chances for success. The larger the herd, the better. It could even go so far as “we have analysed the last ten years of reported X cases and…” That is a powerful persuader.

Social proof can be created informally without structured back-up. Comments such as “in our office, we have handled many of these cases and have never resolved one for more/less than X” could sway your counterpart to move towards your proposal. The key technique is to align your offer with the position of a herd.

Take Aways

• Enhance your offers with one or preferably multiple justifications
• Use the word “because” as part of your offer
• Arm your mediator with your justifications if you are not making the offer directly
• Align your offers with the perceived position of the herd