CHAPTER 1

Introduction to Rational Thinking in Negotiation

Everyone negotiates.

While many people think of negotiation as something that takes place only between a buyer and a seller or a union and management, in its various forms, negotiation is used every day to resolve differences and allocate resources. It occurs between all sorts of people -- colleagues, spouses, children, neighbors, strangers, corporate entities, even nations negotiate. Some negotiations are face-to-face; others take place over time through sequential decisions between competitors. In business, millions of negotiations happen every day, often within the same company.

Think of all the times you negotiate. What could be more central to business than negotiation? And what could be more central to successful negotiation than casting off your illusions about it and, henceforth, negotiating rationally and effectively? This book will teach you how to do just that.

Negotiating rationally means making the best decisions to maximize your interests. However, we are not concerned with "getting to yes." Our work shows that in many cases, no agreement at all is better than "getting to yes." What we've learned from thousands of executives will help you decide when it's smart to reach an agreement and when it is not.

Negotiating rationally means knowing how to reach the best agreement, not just any agreement. What we've learned will help you avoid decisions that leave both you and those you negotiate with worse off.

All executives have pervasive decision-making biases that blind them to opportunities and prevent them from getting as much as they can out of a negotiation. They include the following:

1. Irrationally escalating your commitment to an initial course of action, even when it is no longer the most beneficial choice

2. Assuming your gain must come at the expense of the other party, and missing opportunities for trade-offs that benefit both sides

3. Anchoring your judgments upon irrelevant information, such as an initial offer

4. Being overly affected by the way information is presented to you

5. Relying too much on readily available information, while ignoring more relevant data

6. Failing to consider what you can learn by focusing on the other side's perspective

7. Being overconfident about attaining outcomes that favor you

Keep these seven factors in mind as you consider the following example.

In 1981 American Airlines introduced its frequent-flier program, arguably the most innovative marketing program in the history of the airline industry. Business fliers (or anyone else who flew frequently) could earn miles for the flights they took and redeem those miles for travel awards. While the incentive plan -- designed to encourage loyalty for American -- may have seemed like a brilliant marketing strategy, it was a miserable decision from a negotiations standpoint and soon proved disastrous from a marketing and financial standpoint.

Following American's lead, every airline in the industry soon launched its own frequent-flier program. Increasing the competition further, each company soon offered double miles to their most frequent passengers and even more miles for hotel stays, car rentals, etc. Soon, the benefits required to remain competitive inflated out of control and resulted in tremendous liabilities. By December 1987, when Delta announced that all passengers who charged tickets to their American Express card would get triple miles for all of 1988, analysts estimated that the airlines owed their passengers between $1.5 and $3 billion in free trips. How could the airlines get out of this mess?

One possible answer comes from a similar competitive war that took place in the United States auto industry in 1986. All three U.S. auto companies were engaged in rebate programs designed to increase their sales volume and market share. The rebate each company offered swiftly escalated. As soon as one manufacturer raised its offer, the rest followed, and the profits of all three companies plummeted. Each then added the option of discount financing for their customers as an alternative to a rebate. Again, the competition was fierce. It reached a point where U.S. auto makers were, on the average, losing money on every car sold. It takes no business sense to know that selling more can't make up for selling at a loss!

How could any one company escape this deadly spiral without losing market share to the other two?

Lee Iacocca, the CEO and chair of Chrysler, came up with a solution. He told the press that all three companies' programs were scheduled to expire in the near future and Chrysler had no plans to continue; however, if either of the other two continued their programs, Iacocca would meet or beat any promotion offered. What was his message to Ford and GM? Chrysler was proposing a cease-fire if the others cooperated, but threatening to retaliate if they continued to fight. Ford and GM got the message, and the rebate/financing program stopped.

What if United or American Airlines had made an announcement like Iacocca's before Delta announced triple miles? Delta would most likely have realized there was nothing to gain by the triple-mile promotion. Yet, the airlines failed to negotiate rationally because, unlike Iacocca, they did not consider the possible decisions of their competitors, Iacocca developed a negotiation strategy that explicitly attempted to manage his competitor's decisions. In contrast, the airlines ignored the decisions of their competitors, and airline debt went up significantly, with some estimates placing it as high as $12 billion. Mark Lacek, director of business-travel marketing at Northwest Airlines lamented the triple-mileage promotions in 1988: "It's suicide marketing. Insanity." According to Fortune, "In the annals of marketing devices run amok, few can compare to the airlines' wildly popular frequent flier plans."

You will find that this book analyzes why many executives make mistakes like the airlines did, how some -- like the auto companies -- avoid disastrous pitfalls, and, most important, how you can solve your own negotiating problems. From big negotiations between companies to tough personal ones between you and a colleague or someone you love, we'll help you learn to solve them rationally -- and more effectively. We will guide you through a variety of thought processes to minimize the type of "competitive irrationality" just described in the airline example.

Now let's be honest. There are lots of books on negotiation. Some are smart; some are not. Our book, however, is not based solely on our academic experience -- it's based on our working with and observing closely thousands of executives and bringing together information from similar studies done with working executives who must make countless decisions involving negotiations every day.

This book is not ivory-tower theory. It is information from the trenches for use by real managers who want to be more effective. (If you are interested in learning more about the theory behind the studies, however, the endnotes will refer you to the right sources.)

Many bright and successful people make mistakes in negotiation. And no book can make you a flawless negotiator. However, a clearer understanding of rational negotiation will make you a far more effective one. To that end, we introduce two strategies to increase your effectiveness. The first helps you see the common mistakes made in negotiation. The second identifies ways to eliminate those mistakes and offers a straightforward framework to help you become a more rational negotiator.

The aspect of negotiation that an executive can control most directly is how s/he makes decisions. The parties, the issues, and the negotiation environment are often beyond your control. Rather than seeking to change them, you must improve your ability to make effective, more rational decisions -- to negotiate smarter.

There are psychological limits to a negotiator's effectiveness. A psychological perspective is also required to best anticipate the likely decisions and subsequent behavior of the other party. In the following chapters, we will show you how various factors -- such as how you structure problems, process information, frame the situation, and evaluate alternatives -- can influence your judgment as a negotiator and limit your effectiveness.

Negotiation is challenging and exciting. It should also be one of the most honed and effective tools in your arsenal. The ideas presented in this book will go a long way toward putting you on a level with the best negotiators we've seen.

Copyright © 1992 by Max H. Bazerman and Margaret A. Neale