Without Sharp Negotiating Skills You Will Lose
Thursday August 30, 2007

So you believe you are a superior negotiator?  A new study says you're probably wrong.

“When you think that you have bargained for the best deal possible, chances are that you could have done better,” says School of Business professor Richard Larrick at Chicago's Duke University.

The professor found that both buyers and sellers believed that they did better and that they received much more of a concession from their opponents than they actually had. They believed that they had captured 72% of the monetary value available when they really had only captured 50% of what was available.

What can consumers learn from it?

Dean: What do you feel is the biggest factor contributing to people believing they negotiate better than they actually do?

Professor: It is well known that people think that they are above average in a number of skills, such as driving a car or being a parent.  But we think our specific result is due to something more fundamental and more difficult to correct.

The problem is that we rarely learn the truth about how far we could have pushed the price in a negotiation. Why is this true?  In addition to the fact that most people simply don't practice negotiating a better deal on a regular basis, here are just a few of the reasons people don't negotiate as well as they think they do.

If you're a buyer and are too optimistic about how low you can push a seller, at some point you'll figure out that your "ambitious" estimate was wrong. But if you incorrectly believe you won't be able to push the seller much at all, you begin the negotiation too modestly and give away too much, too easily. Your modest estimate becomes self-fulfilling through your modest actions.

It's this lack of feedback on the truth that really traps people into thinking that they have always pushed the price close to their opponent's limit.

Are there certain groups of people that are better at negotiating deals than others?

Some cultures -- both national cultures and "industry" cultures -- bring with them strong norms to ask for a lot at the beginning of a negotiation and expect to haggle.  Attorneys, as well as many business people, are often intensively trained in the art of debate and negotiation.

People with this experience are less likely to fall victim to the effect that we found.

If people were better at negotiating, how much money, at a minimum, would you estimate it would mean to their bank account -- both in purchasing items for less and selling items for more -- over a lifetime?

Certainly on big-ticket items such as houses, good negotiating skills can translate into tens, maybe hundreds, of thousands of dollars.  It makes sense to be well informed about the home's value and, as a buyer, for example, have a good rationale for a low price offer and then be more confident in actually delivering the offer.

If the seller's motivation is to get the highest price and the buyer's motivation is to get the home for the lowest cost, how does each side best prepare to negotiate?

Construct a favorable case for an aggressive opening offer -- rather than relying only on “comps,” "recent prices" or the like as a basis for setting one's own opening offer. For us, the key is to get an accurate picture of the range of prices, target the favorable end of the range, and then be a little more aggressive than that in setting your opening offer. It's only by doing this that one avoids the "self-fulfilling" cycle mentioned in the first question.

What are the most common mistakes a person makes when negotiating that hurt his or her chances of getting a better deal?

The most common mistakes are a) focusing either on one's own limit or the other side's offer and then making an opening offer based on it; and b) taking at face value some of the bluffs of the other side.

In the first case, if a buyer has privately decided he won't pay more than $520,000 for a home, and the asking price is $600,000, it's dangerous to let these numbers influence your opening offer. It's tempting to drop $20,000 and start at $580,000. But it is beneficial to be more aggressive than shaving relatively few dollars off.

In the second case, people too readily accept various claims -- "You're killing me," or "This is as far as I can go," or "My boss won't approve the deal," etc. -- much of which is strategic posturing. But as people accept this, they come to believe, "Wow, I really have squeezed every penny out of this poor guy."

Are there certain steps that people should take before they begin negotiating that will help when they are negotiating?

The key is getting any information one can about the market, recent transactions, and the partner's recent behavior -- and then being a little more ambitious than a "balanced" assessment of the facts would indicate.

Is it necessarily bad that both parties feel they did better than they really did in the negotiating? If both parties leave the transaction feeling like they won -- and are therefore satisfied with the outcome -- is that a bad result?

This is a great point. It is not necessarily bad. The fact that both parties are happy can be great for upholding the deal and for future negotiation. And it's good personally to feel confident about one's performance -- it helps us get out of bed in the morning.

Understanding our own research findings has made us "sadder but wiser" -- whenever we think we've bargained for 70% of the pie, we've probably only pocketed 50%. We do think that being sadder but wiser can encourage people to be more aggressive in the negotiation process, ask for more, and achieve better outcomes for oneself and one's firm.

What is the most important lesson that the average person should take away from this study?

I think the key take-away is that people have a choice about recognizing these effects -- and being sadder but wiser -- or ignoring them -- and being (very) satisfied with themselves.

What, if any, are the important questions that you feel this study doesn't answer that need to be addressed in further studies?

We studied the question in a controlled setting -- negotiation exercises with MBAs and executives in a classroom setting where we knew the "truth" about each side's limit. It would be interesting to study it in the field. We are confident that what we've done does match the real world.

When we have asked executives to report on their most recent house purchases, we find the same pattern that we see in the studies: They all think that they've claimed 70% or more of the surplus available in the deal. This number matches perfectly with what we observe in our own controlled studies.

There's only a very slim chance that they are as good as they say.  The best financial outcome is going to be very dependent on your ability to negotiate.  Like other skills in life, the ability to negotiate ever larger sums of money in your favor happens gradually with regular practice over many years.