We are all negotiators. Whether we’re buying a home or acquiring a company, we all face situations that require working with another party to set terms that we find advantageous. Doing so successfully means understanding our own objectives and anticipating the other party’s, finding solutions that make everyone better off, and analyzing the outcomes to assess whether we’ve actually walked away ahead. Chicago Booth’s George Wu explains some of the good and bad practices that can determine how a negotiation will go, and looks at some of the most common negotiation problems many of us face.
A successful negotiation starts with the proper preparation. George Wu says negotiators need to give themselves time to prepare, to understand what their objectives are and which are most important to them, and to anticipate what their negotiating counterparts hope to achieve. Also important, says Wu, is understanding the BATNA: the best alternative to a negotiated agreement, essential information for gauging whether or not a negotiated outcome is a positive one.
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George Wu: So one question I get asked a lot is: How do you prepare for a negotiation? And I think one of the things, of course, is that you need to set aside an ample amount of time to actually negotiate. So if you leave it for the last minute, if you are preparing in the car on the way to a negotiation, that’s probably not enough time.
Now, even if you have enough time, it doesn’t mean that you’re necessarily gonna prepare well, and so one of the things, of course, I think is important is to understand a little bit about what’s gonna happen at the negotiation table, to try to simulate in your mind what that conversation is going to be like, and to prepare yourself by getting the clarity of thought about what’s going to happen in that negotiation that will enable you to do well.
And I think there’s a few things that are absolutely critical in all negotiations. The first thing that is important is that people have to understand why they’re negotiating. And one of the reasons, of course, that they are trying to negotiate is they are trying to meet some kinds of objectives that they have.
So for example, in a job negotiation, obviously one of the things that you wanna do is get a good salary, but that might not even be the most important thing. It might be one of the many¬ things that you wanna negotiate. You might also wanna negotiate what your job title is, where you’re gonna be located, what kind of responsibilities you have, what access you’re gonna have to top management, whatever.
And so all those things in principle—and lots more—could be important in a negotiation. And one of the things that everybody has to do in order to understand how to be effective and negotiate it is understand what are the things that they’re trying to achieve in a negotiation. And then, probably even more than that, try to understand the relative priorities of one thing or the other. So it’s unlikely that in a negotiation you’re gonna get everything that you want, and to the extent that there’s inevitably gonna be trade-offs between getting one thing, or getting another thing, you have to understand how much of one thing you’re willing to give up in order to get something else.
I think the second part of it is that you’re also going to follow a process where you’re trying to get in the mind of the person you’re negotiating against. So what that means is that you also have to understand why they’re at the table. So they’re at the table also to meet objectives. Some of those objectives are the same as yours, and so that is gonna be, in some sense, a zero-sum game. So if they give more money to you, then that money comes out of their pocket. If, you know . . . but on a lot of other things, that your interest and their interest actually might be compatible.
(Instrumental music) One of the things, of course, that that suggests is that what you have to do is understand what their objectives are and then understand to the extent that your objectives and their objectives match, or your objectives and their objectives conflict.
One more thing that you need to do in order to be effective in preparation is you have to understand that negotiations aren’t always successful. So to the extent that a negotiation fails, something happens. In other words, that your job as a negotiator is to do better than you would by walking away. So in negotiation parlance, we call that a BATNA. A BATNA is a best alternative to a negotiated agreement. And what you have to do in every situation is understand what’ll happen if you don’t make the deal, and understand that what you’re trying to do in negotiation is do better than you would if you were walking away.
Success in a negotiation doesn’t have to be one-sided: George Wu explains that because each party typically has multiple objectives and different priorities, it’s often possible for both sides to come out ahead. In fact, Wu says, both sides usually do, which can help bring your counterpart back to the table for future negotiations. However, it also means that negotiators have to rigorously assess the outcomes of their negotiations to understand if they really did as well as it initially appeared.
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George Wu: So people use the words win-win negotiation pretty loosely, and when we teach negotiation, we tell our students that win-win actually has a particular analytical meaning. And the idea is that joint gains in negotiation are created by a relatively simple recipe, or using a simple recipe, and the idea that both sides are going to engage in the following trade is they’re going to give up something that’s relatively cheap for them and get something that’s relatively valuable, and the other side is going to do the same thing.
So the idea of course is that you may negotiate, and there may be lots of issues. There may be price, there may be quality, there may be payment terms, lots of other kinds of things, and some of those issues you really wanna have, and some of the issues are relatively unimportant.
Now there’s a problem when both sides really want an issue, and that’s going to be a situation that we’re gonna say is mostly distributive because if one side wins, the other side loses. So price is usually something like that.
But inevitably there are issues that are different, in the sense that one side has a priority over one issue, and one side doesn’t. So you may care a lot about reputation, and so you may want a lot of publicity about a particular negotiation. That might be the thing that’s most important for you. The other side doesn’t care about it at all. They’re happy to let you write the press release however you want, and to the extent that they get something that they want more, which is maybe a longer contract, so that might be something that is really important for them, not so important for you, and in that particular case, it makes sense for them to maybe, again, write the press release that is advantageous to them, and you get the duration that is advantageous to you.
So one of the things that we’ve done in some of our research is we’ve shown that when people walk out of a negotiation, they typically think that they do better than they actually do. So the idea is that, in any given situation, in any given negotiation, there is 100 percent to split. Nevertheless, when we ask people after the negotiation is done to estimate how large a percentage of the pie that they took, they typically give numbers like 70 percent. So the buyer thinks that he got 70 percent of the pie; the seller thinks that she got 70 percent of the pie. So obviously if you add 70 and 70 together, you get about 140 percent. And the idea, of course, is that both sides are systematically overestimating how well they did in a negotiation.
There’s a difference between the perception of what people create and the reality. And so one thing that I think is important to always understand in negotiation is that perception is really all that people are largely gonna walk away with.
(Instrumental music) So to the extent that people walk away with a feeling that they’ve done well in a negotiation, that’s gonna bring them back to the table. On the other hand, we also know that perception oftentimes is off base. We think we did well for our organization, and maybe over time we’re gonna discover that we didn’t do so well. We’ll see the other organization keep on growing in terms of their market cap or share price, and we see our organization struggling. Presumably, one of the things that’s happened is that we haven’t been such great negotiators relative to them. And so it’s not just important to feel that you did well. It’s also important to understand whether you actually did well.
“So, what are you making now?” It’s a question that puts job applicants at such a disadvantage that it’s illegal for recruiters and hiring managers to ask it in many parts of the US. George Wu says that to some extent, there’s no perfect solution for this problem: if your salary isn’t very high (a common motivator for seeking a new job in the first place), a skilled recruiter can often use it to her advantage when negotiating your pay for a new position. Wu suggests that applicants who face this question try to steer the conversation away from what they’ve been making and toward the value they will provide for their new company—a strategy that, in survey results, was the best of a limited set of options.
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George Wu: A standard question that people are asked when they’re interviewing or negotiating for a job that oftentimes throws people off is: What are you making now? There are a number of reasons why this question is difficult. One of the reasons is that it’s not advantageous for you to tell the truth.
The second reason is that even if you don’t tell the truth, what a smart person on the other side is going to do is they’re gonna infer that the reason that you’re not forthcoming with an answer is presumably it’s because you’re not getting paid much. So even if you don’t tell the truth, they’re probably gonna conclude that you’re not making that much money.
The third reason is that the person on the other side of the table has done this a lot. So you, when you’re interviewing or negotiating for a salary, you’re doing this once every few years. They’re doing this once a week, maybe every day. And so, to the extent that they’re rehearsed and polished and scripted in terms of this conversation, they’re going to be much more fluent, much more knowledgeable than you are.
And, probably the last reason is that a lot of people fear—maybe irrationally, maybe rationally—that if they do something foolish, if they lie during this negotiation, if they seem less than forthcoming, if they seem oafish, or whatever, then even if they get the job, even if they get a salary, that perception, that reputation is going to carry forward in terms of their time with the company.
So one of the things that we did recently is we did a survey in which we asked people, we actually posed people with this particular dilemma. In particular, they were making $105,000 now. They’d gotten a job offer for a job in which they were going to make more than that, maybe $115,000, maybe all the way up to $160,000. And the first question that the HR manager asked is: What are you getting paid now? And the way that the survey worked is that respondents produced a script, a set of words that they would say in that particular situation, and then they also rated other people’s answers. So the idea is that everybody who submitted answers also got rated on a 1–7 scale, with 7 being really high and 1 being low.
One of the things that’s interesting is that overall, when we have people rate responses on a 1–7 scale, none of these responses are rated all that favorably. So on average, the average response is rated 3.4 out of 7, which is not exactly very outstanding. Even the highest-rated responses are rated 5 out of 7, 5.2 out of 7. Responses that are in the top 10 percent are rated 4.8. So those aren’t exactly extremely compelling numbers, but they are rated as the best responses.
So what I think that reflects is the fact that this is just an enormously difficult situation. It’s a situation that’s very disadvantageous to most people, and so the best thing that you can do in these situations is pretty mediocre in a lot of ways.
(Instrumental music) And I think the best-rated responses really amount to something like this, which is they try to move the conversation to value. So if the conversation is about where you’re starting from, or the lowest that they can pay, that’s a losing proposition. If you can make the conversation about value, about what you bring to the company, what you’re worth, what you’re adding, then at least you have a chance of doing well.
Now the problem in that particular situation is it’s very, very easy for an HR manager to pivot the conversation back to salary or back to cost. And, to an extent, that’s going to be an inevitable anchor in a conversation. If they do that effectively, they’re probably going to do well in this negotiation.
Even for seasoned negotiators, a home purchase can be a challenging experience. George Wu says that’s in part because it’s often loaded with emotion: the long and difficult process of finding a property that meets your criteria and your price range can make it difficult to walk away if the sale becomes problematic. Wu says that buyers should consider negotiations ongoing until the sale is complete, and should continue looking at other properties even while moving forward with their first choice, to make it easier—mentally and materially—to walk away if necessary.
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George Wu: So you’re buying a house. Maybe buying your first house. So why is that kind of negotiation difficult? I get asked many times over the years for advice on that from people who have been successful in lots of other negotiations but find this particular negotiation difficult.
There’s a couple of reasons why that kind of negotiation is difficult. First of all, it’s going to be necessarily a very emotional kind of negotiation, so. It takes a lot of time. It’s very frustrating. There are lots of properties that you like, not very many that you like and that you can afford, and to the extent that you find something that you and your partner both like, then it’s understandable that what happens is sometimes you don’t actually—aren’t as thoughtful, let’s just say, about negotiating as you could be.
So one of the things, of course, that I think is important to do is to recognize psychologically that a negotiation isn’t over until there’s actually a sales contract, there’s actually an inspection, until you’re very, very far along in the process. And I think one of the mistakes that a lot of people make is that, when they find a house, when they find a house that they really like, that meets their criteria, and that meets some of the kinds of things that they really want to have, is in the price range in which presumably they can afford, if they can get the sellers to reduce the price a little bit, then inevitably what happens is they move in in their mind. And when you move in in your mind, then the idea is that it’s very, very hard to negotiate as hard as you would if, on the other hand, you said, maybe what I’m doing is until I actually have a sales contract, until I’m done with the inspection, I’m still looking.
(Instrumental music) So one of the things I always encourage my students to do—this irritates their real estate agents to no end—is that even if you find a house that you want to bid on, what you’re going to do is you’re going to tell your broker that you’re still looking around. That they should still be scouring the listings, that they should still be finding something that you might want to look at. And the idea, of course, is that those alternatives, whether or not you’re actually going to pursue them, that’s your strength in negotiation. It’s your strength psychologically. And it’s your strength materially.
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