Apr 16, 2021

Bend their reality

Effective negotiators know how to frame an offer so that it looks fair to their counterpart. You can take the same person, change one or two variables, and $100 can seem like a win or a total insult.

The best theory for describing the principles of our irrational decisions is prospect theory, created in 1979 by psychologists Daniel Kahneman and Amos Tversky. Two important ideas of prospect theory are:

  1. Certainty effect: People are drawn to sure things over probabilities, even when the probability has a greater expected return.
  2. Loss aversion: People will take greater risks to avoid losses than to achieve gains.

These two principles lead to inconsistent decision-making. Consider this: a person who’s told they have a 95% chance of gaining $100 or 100% chance of gaining $94 will avoid risk and choose the safe option of $94. But, if you flip it so that the same person has a 95% chance of losing $100 or 100% chance of losing $94, they will make the opposite choice and risk losing $100 to try and avoid the loss altogether. The chance for loss increases a person’s risk appetite over the possibility of an equal gain.

There are tactics using these principles to give you an edge in a negotiation that I will discuss over the next few days. In a tough negotiation, it’s not enough to show the other party that you can deliver what they want. To get real leverage, you have to persuade them that they have something to lose if the deal falls through.