In this unit on negotiation, we've looked at the importance of getting to know the other side at the beginning of the negotiation. We've also discussed various concepts of power. And especially the role that the plays in establishing your leverage in a negotiation. We're now ready to look at some psychological tools that you can use during a negotiation. But these are also traps, that when used by other parties you want to avoid. In thinking about these tools and traps we're going to be looking at some research by people who focus on decision making. And these people fall within two camps. Some of the researchers are prescriptive. They try to prescribe how we as human beings should make decisions. The other camp focuses more on descriptive research, or behavioral research. They try to look at how we act as human beings, and then they build on that knowledge in providing advice for negotiators. We've already looked at an example of prescriptive or sometimes called normative decision making and that's the use of decision trees. We looked, for example, at how you can use a decision tree in evaluating a decision as to whether to acquire Company A or Company B. So our focus is going to be on descriptive decision making or behavioral decision making. Now researchers in this area have discovered that you and I as human beings use certain rules of thumb to simplify our decisions. These rules of thumb are called heuristics. Let me give you an example. This is from a great book by Max Bazerman, called Judgment in Managerial Decision Making which is cited at the bottom. So here's the example. Let's assume that your company has decided to hire an MBA graduate to work in finance at your company. Your company has also decided that it is only going to recruit at the top ten business schools. So that's your heuristic. That's your rule of thumb that you'll use in making this decision. If you had to criticize the use of that heuristic, what would your criticism be? You might want to hit pause and think about that for a second. What's wrong with recruiting only at the top ten schools? Your answer might be if you come up with a variety of reasons but you might point out that by recruiting only at the top ten schools you might miss the very best candidate for your position. There are a number of very talented people who don't attend top ten schools for a variety of reasons. And some of them might have experiences that would be a perfect fit for your company. So that's a problem with the heuristic. Now let me ask you if you wanted to defend the heuristic, how might you defend it? Think about that for a second. Again, you might want to hit pause. In defending heuristic, you might think of factors such as the cost of recruiting, the cost of visiting more than ten campuses. You also might think of the quality of the candidates. As a general rule, the schools have already pre-screened the candidates for you and generally the more talented people are going to be at the better schools. So all of us goes through this kind of internal class benefit analysis in using heuristics which help us navigate through a very complicated and uncertain world. And there's some good news and bad news with our use of heuristics. The good news is that these heuristics are mostly helpful in making decisions. The bad news is that occasionally they can result in serious error. And this is where we are going to focus. Where does our use of Heuristics result in serious error that can cause problems during negotiation, it can cause you to fall into traps or these errors can be beneficial when you're using them as a tool during your negotiations. So, what we're gonna do is to look deep into the human mind and try to determine how these errors can be used as tools to use, or traps to avoid. Now before we dive into these heuristics, let me ask you a trivia question. And the question is, who is probably the most successful investor in the world? That answer is Warren Buffett. Now let me ask you a tougher trivia question. Over the years, when Buffet has faced serious financial decisions, there's always one person he goes to for advice. And who is that person? Tougher question. The answer to that is a man by the name of Charlie Munger. Mr Munger attended the University of Michigan, he never graduated. He then talked his way into Harvard Law School and after law school, he started a very successful law firm in Los Angeles. Over the last couple of years, it's been named the top law firm in the country. However, fairly early on, he decided that he wanted to focus on investments, and so he became Buffett's partner. Now, he hasn't been quite as successful as Buffett. He's only worth about a billion dollars, but still, he has been very successful. And somebody told me once that whenever Munger faces a difficult financial decision, he pulls a checklist out of his pocket and he goes through the list to make sure that he doesn't fall into any trap. I'm not sure if this stories true or not but somebody relayed that to me. So when we're done with this session you're going to have your own check list that you can use. And this check list of psychological tools and traps will be useful not only in negotiation but also in financial decision making and leadership decision making. So this session I think is possibly the most important in the whole course. As we go through the various tools and traps, I'm going to use actual experiments that were used by the decision researchers in coming up with these tools. So you'll have a chance to experience why and how these tools work. So let's start with something called the Mythical Fixed Pie Assumption. This is an assumption you and I make during a negotiation. We automatically assume that our interests are in direct conflict with the interests of the other side. Let's try a quick experiment. Let's assume that you are going to arm wrestle with someone else. And if you're in a room with somebody else, please try this. Otherwise, just think about what the results might be. So what I'm going to do is to ask you to arm wrestle for ten seconds, and you will receive a point for every time you can push the other person's hand to the table. And I want you to try to score as many points as possible within ten seconds. So if you're in a room with somebody, press, pause and try this for ten seconds, ten second limit. And if you're not in a room, just think about this for a second. What do you think the score will be? When I do an exercise like this in class, what I discover is that for most of the students in the class, assuming they're paired up with somebody who's fairly equal physically, the scores tend to be three to two, or four to four, in that range. That's for most of the class. But for some of the students in the class, the scores turn out to be 20 to 20, 25 to 25, 30 to 30. So what's going on? How do you explain the difference between the scores? The difference is that most of the students in the class fell into the mythical fixed pi assumption trap. They assumed that this was a competition and they tried to beat the other side. Did I say try to score more points than the other side? No, I said try to score as many points as possible. The people who scored the most points and in fact built a larger pie realized it was not a competition and that there was no conflict in interest and so they would simply go back and fourth and score a lot of points. So that's a physical illustration of this mythical fixed pie assumption that we all face in negotiation. Now one piece of psychology that's related to the mythical fixed pie assumption is something called reactive devaluation. And these words mean pretty much what they say. During a negotiation, because we think of the other side as a competitor, we tend to react to their proposals by devaluing them. So for instance, several years ago, a researcher did a study that went something like this. It was during the Cold War era. And this researcher took an arms reduction proposal to a group of subjects and said, this is an arms reduction proposal from President Gorbachev of Russia, what do you think of it? And these subjects were all Americans, basically said that's a bad proposal. Then the researcher took the same proposal to another group of American subjects and said this is an arms reduction proposal from President Reagan, what do you think of it? Oh, this is a very good proposal. Same proposal but they reacted to it differently because one group devalued it, thinking it came from Russia, the other group accepted it as it was. So very important to keep in mind this tendency toward reactive devaluation. [COUGH] When you fall into this trap, you lose the opportunity to consider what might be a great proposal that would satisfy your interests. I see this especially when I do exercises involving dispute resolution. I do one exercise, for instance, where the students represent a plaintiff who has sued a licensee, and the licensee comes in with a pretty good settlement offer. And what's the reaction of the students who are playing the role of the plaintiff? Often they will not even consider that proposal. They think, well, this person must be making the proposal because of weakness in their case. They react to it by devaluing it because they consider the other side a competitor.