I want to think about negotiator judgments and some judgment biases that might influence the negotiation process. Let me start with an exercise. Imagine I asked you to read words like R-E-D, and imagine I said, ignore the color of the text, just read the words. You might read words like red, yellow, brown, blue, and so on. The idea is as we do that, it's relatively easy. But now imagine I said, ''Hey, I want you to ignore the letters and just label the colors.'' This time we'd be reading the same words, but rather than just reading, I'd say, let's look at that first letter combination and say blue, green, gray, red, black, yellow. If you're like most people, that second time is actually much harder, and the reason why it's much harder is that we see a letter combination like R-E-D, and for those of us that have been reading for a while, it's very hard to say blue. That is, we have a first reaction, and then we've got to overrule, override that first reaction to get to that second reaction. I want to talk about that revision process that idea about overriding that first reaction. Because our judgment works pretty well in general, but we're constrained by the amount of memory we have, our computational ability, the information that we have, how much time we have to think through things. But it works pretty well, but we make mistakes because we have effectively two systems as we're thinking through things. We have this system that's quick and intuitive, that jumps to the R-E-D is red. But then we can have a second system that updates and overrules that. That gives us the blue when we're supposed to be saying blue. But when we're under time pressure, when we're cognitively loaded we have a lot on our minds, the judgment biases will emerge from that quick intuitive system. We're more likely to fall prey to anchoring. Somebody lists the price for something, we're far more likely to think, well, that's the right price. When we're under time pressure, we're under cognitive load, or we're tired. We start to think about it. When are you tired and in a hurry? Probably almost all the time, and when you're under some time pressure, pretty common, and their system one that's quick intuitive reaction is likely to emerge, and silver something like anchoring. We're seeing that list price. We're interpreting it as the right or reasonable price is far more likely to happen. There's an auction I run in my classes where I give people the following rules. I say, look, I'm going to auction off a $20 bill. Participation's voluntary. You can jump in or jump out anytime you like. It's going to be an actual auction we use real money. It helps to focus the mind. I say there's no discussion until we've completed the auction. The auction, this $20 bill only it's English style auction, we'll start off at $2 and go up in $1 increments like 2, 3, 4, 5. Every bid will go $1 above the next bid, and the highest bidder will get the $20 bill. But here's the twist, and I underline it and I say, look, here's what's different about this auction. Here's what you really need to pay attention to their with different about this auction has the highest and second highest bidder will pay their bids. What that means is the second highest bidder will pay their bid and get nothing, and I give them an example. Suppose bidding ends really early Abe, bids two Bob, bids three Cary bids four the bidding stops. Abe is the third highest, pays nothing, gets nothing. Bob is the second highest. Bob will pay $3 but get nothing. Cary is the highest, will pay $4 and get the 20. Now, it's easier to look at this and say, well, clearly, you'd like to be the highest bidder, but the second highest would be terrible. We don't have to really worry about this at only be the highest bidder or wouldn't bid at all. The problem is when we actually do this in practice, we have a failure of perspective-taking, people start jumping in thinking they're going to be the highest bidder, but then somebody else thinks they're going to be the highest bidder, and one of them is invariably the second highest. They face a choice either to stop and pay their money, knock at the 20, or to go higher and outbid the other person. Every time I've run this, the bids have gone too high. Where the amount of money people have agreed to pay exceeds $20. I notice in this auction was as soon as somebody gets to $11, a lot made money, but often will go past 20. Because once the bids are at 20, there's somebody at 19 who's thinking, I'd rather pay 19, or I could bid 21, and at least I'll get 20, so I'll only be out a dollar. Bids will almost always go past 20 and the class will laugh. Then the person at 20 be like, man, I got to pay 20, get nothing or go to 22, and the auction will just keep going. You see people failing to take that perspective because they get wrapped up taking their own perspective like, hey, can't this other person realize I'm going to be the highest bidder? We have this failure of perspective-taking. We have a failure to think ahead, like what's going to happen. We have competitive arousal once we're in an auction, people get excited to keep going. These are broad concerns want to think about for negotiation. The idea of competitive arousal and negotiation, we're trying to beat somebody else, where some negotiators have said, well, the number one concern in negotiation is too much testosterone. When I think about as competitive arousal, people thinking about winning, not realizing what it means to win. This failure to think ahead and the failure of perspective-taking are broad lessons beyond this one example. I often do a second example, which is imagine I had a jar of pennies. I pass it around. I say, look, everybody is going to write a sealed bid on a card, or they just submit electronically. The highest bidder is going to win, they're going to pay their bid to me. I'll give them the value of the jar. We can run this auction and here's the problem. Here's what happens. When we're bidding in an auction like this, there's uncertainty about the amount of money or the value of the jar, as there is in almost everything that we're going to bid on. We might bid on rights to certain airways. We might bid on rights for a contract. We might bid on a property. We're not sure what things are worth. Here's the tricky part, we can end up biding too much. Now why? The idea is that if you submit a bid, it only matters if you're the very highest person. Suppose that I said, look, I'm passing around a jar of pennies, we're going to pass it around and everybody is going to make their estimates. All we're going to look at is the estimates. Suppose I came back to you and said, hey, you know what, out of all the people in this room, you have the very highest estimate. What could you guess about that estimate? The idea is, if you're the very highest, perhaps you're too high. If you're too high and you translate that into a bid, you may overpay. Every time I've run this, people overpay. Here's part of the problem, we want to think about is it public versus private. If it's public, we're getting feedback from other people and other people start dropping out or learning. The contingent thinking this if I'm the highest, then what does it mean? That if and thinking is a challenge. Paradoxically, we got to bid less when we have less information and there are many bidders. Because if there are many other bidders, we should be more concerned about being the outlier that's too high. We also want to think about it when we're bidding for something, do we have something special, something idiosyncratic, that makes us a great fit? If I'm bidding for a contract, is there a reason why I should be the one to win it? Do I have slack resources or special characteristics or do I know something that other people don't? Is there some reason why I should be the one to win this? If I don't have any special skills or not located in a specially advantageous way, then I should be careful about winning. Because often in witting, we can lose money. People have documented this in bidding, say for the rights to broadcast the olympics. People first documented this in the rights to drill for offshore oil. When companies would go out, they would drill in a few places. They'd make their own private estimate of how much oil is somewhere. Invariably the one who bid the very highest, happened to drill in places that were full of oil, other places that were barren of oil, that's where other people bid and they dropped out. Here we might have different information. We might be sampling it, but our sample may be unrepresentative and we want to be careful in those environments, where even if we did things in an ex-ante objective way, what our observation is, could suggest that man, this place has lots and lots of oil and I end up overbidding and then losing money. This is the winner's curse they want to be thinking about. Let me talk about a couple of more judgment areas that are common in negotiations. One is anchoring, which I've mentioned. Where the classic examples of anchoring have been from things like home prices where Maggie Neale run a study. She actually had realtors go through a home and she just changed the list price of the home and then ask them how much the home was worth, what they advise them into offer for it, what they thought it would sell for. They found that these realtors, who said, yeah, the list price doesn't affect me. I look at the quality of the home, then comparable and everything else. Even if they were influenced by the list price, she did it with people who weren't realtors and they were also influenced by those list prices. Those list prices really influenced people and they anchor their judgments. You can think about a simple example. If think about what is eight factorial and I describe it to you one of these two ways. Remember eight factorial's, 8 times 7 times 6 times 5, all the way down to one. Or I say, hey, eight factorial is 1 times 2 times 3, all the way up to eight. Describing those two ways, what happens is, we start doing the math. We do the first couple of multiplication problems. Then we quit early. Then we just guess from there. The average numbers you get when people started with eight, are really high. The average number of people when they start 1, 2, 3 are low and they end up giving very different values. We're anchored by what we started with and we don't fully adjust from there. Now I'd also add that in both cases, they tend to give you a number that's too low relative to the actual eight factorial number, but that's a separate issue. Anchoring this idea that we're typically influenced by a value and often too much. The first study that did it, they asked people to guess the percentage of African nations, the United Nation. They said Yeah, but first, let's spin a wheel. They spun, say a 65 percent or they spun 10 percent and they said, look, is it more or less than this number? With a 65 percent like look there a lot of African countries but less than 65. They said, we'll tell me what is it? They went down from 65 but only went down to like 45. Will they spun 10? They're like, oh, no, it's more than 10 percent. Like okay. Well, how much is it? They go up from 10 but they stop at 25. Here with the high anchor, that was just ridiculous. That it's just spin of a wheel. The high anchor leads to high guesses, the low anchor leads to low guesses. The idea is that these first prices are weighing down our judgment. They're pulling us to values that we know are too high or too low. Anchoring is very powerful. With that means for negotiation is the list price, that first price, is really a powerful influence on what we end up doing. A couple more related to perspective taking. One is reactive devaluation. When somebody makes a concession, we tend to devalue it. We assume it must not have been that hard for them to have made, some theory made it. Reactive devaluations are common problem in negotiations. Another problem is this mythical fixed pie bias. Imagine I said look, I want you to assume an arm wrestling position with your counterpart and you get one point every time you put their hand against the table. People start off and they're exerting a lot of energy trying to get the most points, pushing against their partner. As opposed to saying, "Hey, look, maybe there's a way for us to flip our arms back and forth," because we've adopted a competitive posture, we assume that what's good for us must be bad for their side and vice versa. Or this classic story about two sisters, they have a bushel of lemons and they decided to split the lemons in half, only to realize one of them wants to make lemonade and needs the juice, and the one wants the lemon peels and wants to be baking with the lemon peels. They could have reached a more integrative outcome but we assume too much that our interests are in opposition and we need to step back, challenge those assumptions, and figure out if there are ways for us both to do better. Two more here. One is egocentric perceptions. If we think about the most interesting thing in the whole world, I already told you what that is and that's anything related to me. These egocentric perceptions mean that we're focused on ourselves. What that means is we tend to have blinders on. For example, in lawsuits, people are so focused on their own arguments, there are so sure that could be persuasive, they assume a judge is going to favor their side and so they're ready to go to trial. It takes a really persuasive counselor to say, "Look, hey, wait a minute, the judge might end up or the jury might end up favoring the other side." It's hard to imagine we think about how persuasive and how right we are, but that's a really egocentric perception, it's hard to take that outside of you. We also see this with relative judgments where we focus in on ourselves. People will start businesses like a restaurants because they're thinking, "Hey, I'm really good at this. I can cook really well, I can run a restaurant, it's not that hard for me to do." There's this use of me, me, me, so hard for me to do. What I'm not realizing is, hey, it's pretty easy for everybody else too, so running a restaurant is an incredibly competitive business, because it's not hard for anybody to do. There's so much competition, we end up finding ourselves in a really tough competitive landscape. The relative judgment matters. If we focus only on ourselves, we fail to appreciate what the competition out there is going to be like. Another related problem is the fundamental attribution error. When we think about other people, we know that their behavior is driven by their personality and the context. Personality and context environment, that's what drives all of our behavior, we're quick to realize how important the environment is and changing our own behavior, but we tend to make personality attributions for other people. We're driving on the highway, we accidentally cut somebody off, it's because we're in a hurry, that's the context. Somebody else cuts us off on the highway, it's because they're a jerk. We're making the personal attribution. Now the same thing happens in negotiations. We are too likely to make personal rather than contextual attributions, when we're judging other people. We want to make sure we take a step back to think about how important context is and avoid making those personal attributions that we should not. One other idea about judgment as relates to negotiations and this is about memory. Our memory is fallible, and what we do is we construct memories rather than just recall things from a hard drive. We're likely to misremember things or remember things that seem likely or seem easily available in memory. A key prescription here is to take notes. If a negotiation goes on for a long period of time, take good notes, if there are questions you need answered, take notes because you'll want to look back to make sure that things happen, things were said or not said, you've got answers to your questions or you didn't because our memory is fallible and it isn't as great at recalling things as we often assume that it is.
