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More Pie, Please

Why We Think We Got More When We Got Less

Research by George Wu

George Wu is professor of behavioral science at the University of Chicago Graduate School of Business.
 
 

Most people hope to learn from their mistakes. Unfortunately, some mistakes are harder to detect than others, making them harder to correct. Recent research identifies these mistakes and explains how they can lead to costly errors during negotiations.

Common sense dictates that if someone is willing to give you something you want, you should take all you can get. But according to recent research by University of Chicago Graduate School of Business professor George Wu and Richard P. Larrick of Duke University, people are seldom able to effectively follow this straightforward advice. The reason, the authors suggest, is because it can be difficult to accurately estimate how much people are truly willing to give us, and when we guess wrong, our guesses are not always corrected.

When two people are negotiating over an issue such as price or salary, the amounts that each person is willing to give or take (i.e., their bottom lines) determine the range of possible settlements, commonly called the “bargaining zone” or “pie.” Put differently, the pie is the total value available for negotiators to split, and is defined by the size of the bargaining zone—the difference between the maximum amount that one person (e.g., a buyer) is willing to give and the minimum amount the other person is willing to take (e.g., a seller). There will only be an acceptable deal if one person is willing to pay as much as the other person needs. However, most savvy negotiators will not tell their counterpart how much they would really be willing to pay or accept. While each person might have ways of developing informed guesses about the other’s situation, perfectly accurate guesses are hard to come by, and mistakes are inevitable.

This is not necessarily cause for concern among negotiators, since negotiations provide people with opportunities to communicate extensively with one another. By using the negotiation process to exchange information about themselves and their situation, people might be able to correct their mistaken estimates, accurately identify the range of settlements that are possible, and thus give themselves the best chance of getting the deal that serves them best. But does this actually happen?

Larrick and Wu’s research clearly demonstrates that people make deals without even realizing that they could have had more “pie” had they asked for it, because the process of negotiation tends to leave people with overly modest estimates of what can be achieved.

Why We End Up Thinking Too Small
According to Larrick and Wu’s recent study, “Claiming a Large Slice of a Small Pie: Asymmetric Disconfirmation in Negotiation,” our partners in negotiation have an interest in correcting our mistakes if we have overestimated what it is possible for us to get.

“When people start with initial guesses about what the other side is willing to pay these optimistic guesses are very likely to get corrected because the other side will turn down our demands, because they are unreasonable.” says Wu.

However, because people often object to overly ambitious demands vehemently and aggressively, we may be led to overcompensate, revising our impressions so much that we end up underestimating the other’s true position.

The situation is even worse if we start off underestimating what others could give us. In that scenario, our negotiation partners will probably not give us any indication that we have made an error.

“When people have conservative estimates, they typically make offers that can be taken by the other side right away— thus, they get little opportunity to learn that their guesses were wrong,” notes Wu.

Because negotiation partners are likely to push back and insist on a better deal even when overly modest demands are made of them, the person making the demand will often exit the negotiation completely unaware that they could have asked for much more. Wu explains that overly modest estimates create a negotiation that is played out in a very narrow zone with a very small range of prices, whereas if people make overly ambitious mistakes, they will end up talking about a much bigger range of prices.

Negotiators exhibit what Larrick and Wu call the “small-pie bias” when they underestimate the amount they could gain from a negotiation. If a person accurately estimates these two bottom-line boundaries, they get a completely accurate view of the possible value to get from the negotiation. Any deal inside those boundaries will meet their own needs acceptably, and if they can push for a deal near their opponent’s bottom line (e.g., if the buyer can force the seller to give up their product at their minimum price), they can walk away with nearly all of the pie. The “small-pie bias” occurs when one or both parties underestimate the other’s bottom line, thus underestimating the size of the pie—that is, the amount of value—that they can gain for themselves in the negotiation.

As a consequence of the small-pie bias, Larrick and Wu explain that negotiators also are susceptible to what they call the “large-slice bias.” Having underestimated the amount that it was possible to gain in the negotiation, whatever each person ends up winning is seen as a larger slice of pie than it actually is. In comparison to the true, larger pie, each negotiator’s gains are relatively humble in reality, though they (and their constituents and superiors) may fail to realize it.

Why We Think We Got More When We Got Less
Larrick and Wu designed three experiments to show how negotiators tend to have their overly ambitious errors corrected, generally fail to correct their overly modest estimates, and thus tend to leave negotiations with the impression that they have taken a large slice of a small pie.

In the first experiment, the authors asked 136 pairs of MBA students to negotiate the sale of a batch of headlamps. Some negotiators were given information that would provide ample room to meet their partner's demands—since their bottom lines were far apart, each pair had an extremely large bargaining zone. Other negotiators were given a much smaller zone, such that each person would find it much harder to stay within his or her partner’s bottom line. With the large bargaining zone, negotiators could hardly help but underestimate the size of the pie from the beginning and therefore make overly modest estimates of what their partners were willing to concede. As expected, these negotiators made modest first offers and were not able to correct their mistaken estimates, leaving the negotiation with substantial small-pie and large-slice biases. In contrast, negotiators given the small bargaining zone—who naturally tended to make overly ambitious estimates of their partner’s bottom line—did have their overestimates corrected over the course of the negotiation, sometimes even ending up with overly conservative estimates (and consequently, small-pie and large-slice biases) at the end of the negotiation.

In the second experiment, the authors directly manipulated negotiators’ expectations of their partners. When the negotiators were given overly ambitious expectations of each other’s willingness to concede value, their negotiation experience tended to correct their expectations, and actually led many to underestimate the size of the pie at the end of the negotiation. Even people given accurate expectations of their partner had this experience, suggesting that the haggling habits that people bring into a negotiation are designed to lower even reasonable estimates of what they can come away with. As before, the process of negotiation did not successfully revise the views of people who started out with excessively modest expectations; they started and ended the negotiation underestimating the size of the pie and hence believing that they had bargained more effectively than they had.

In the third experiment, the authors provided the negotiators with financial incentives for accuracy, hoping to direct attention to the importance of correctly estimating their partners’ bottom line. These efforts, however, did not diminish the extent to which negotiators continued to end negotiations with small-pie and large-slice biases.

More Pie, Please
Larrick and Wu’s findings also have important implications outside of formal negotiations. In everyday interactions, and certainly in the workplace, the different fates of ambitious and modest mistakes may lead us, over time, to maintain less optimistic attitudes about other people and opportunities than is deserved.

“A manager who makes the mistake of overestimating an employee’s trustworthiness might give that person too much leeway,” says Wu. “The employee will have many opportunities to violate that trust, and may eventually show himself or herself to be untrustworthy. On the other hand, a manager who makes the opposite mistake and doesn’t trust a trustworthy employee is likely to suffer because the employee may never have a chance to prove that he or she deserves more.”

The only pattern we are likely to actually see, therefore, is that people can disappoint us—an impression that encourages us to be even more pessimistic about others. However, we may remain nearly blind to the potentially numerous instances in which our overly cynical expectations of others either discouraged or prevented them from proving us wrong. Every well-meaning colleague that we wrongly assume is nosy, or every exceptional job candidate that we mistakenly underestimate and dismiss, are all likely to pass out of our lives underappreciated.

“There are many people who are capable of thriving, but aren’t given the opportunities to do so. No one finds out that they could, in fact, flourish,” says Wu. “People should think about whether they are judging others too harshly. We are never going to be 100 percent accurate when we size up people, but we need to try to correct our overly negative mistakes just as much as our overly positive ones.”

“Claiming a Large Slice of a Small Pie: Asymmetric Disconfirmation in Negotiation.” Richard P. Larrick and George Wu. The Journal of Personality and Social Psychology, 2007.