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Heuristics and Biases at the Bargaining Table
Russell Korobkin & Chris Guthrie*
Editors’ Note: So you still think that negotiation is based on “rational” thought? This chapter describes several key aspects of psychology and economics which impact our behavior—whether we like it or not and whether we know it or not. The authors summarize extensive work on how cognitive biases and other “non-rational” decision-making can be recognized, and then used to help reach the agreement you want.
This chapter is republished from the same editors’ Negotiator’s Fieldbook (American Bar Assoc. 2006). We appreciate the ABA’s courtesy in agreeing to this republication. Although this chapter was not updated for the NDR, we believe it continues to be a unique and valuable resource. Some formatting has been updated; the text of the chapter and co-author Korobkin’s bio are unaltered.
Negotiation is an inherently interpersonal activity that nonetheless requires each participant to make individual judgments and decisions. Each negotiator must evaluate a proposed agreement, assess its value and the value of alternative courses of action, and ultimately choose whether to accept or reject the proposal.
The interdisciplinary field of “decision theory” offers both a normative account (how individuals should act) and descriptive accounts (how individuals do act) of decision-making. According to the normative model, negotiators should compare the subjective expected value of an agreement to the subjective expected value of non-agreement, taking into account such factors as risks, differential transaction costs, and reputational and relational consequences of each possible course of action.[1] Once a negotiator has calculated the expected value of each course of action, the negotiator should then select the one that promises the greatest return.[2] [Senger, Risk]
There is less agreement about whether negotiators actually make decisions consistent with this approach. Proponents of descriptive or “positive” models based on “rational choice theory” assume that negotiators will invest optimally in the amount of information needed for decision-making, draw accurate inferences from the information they acquire, and then select the option that maximizes their expected utility. In short, proponents of the rational choice-based models assume that negotiators will make choices consistent with the normative model.
Skeptics of rational choice-based models argue that negotiators rarely behave this “demonically.”[3] Instead, negotiators routinely employ more intuitive approaches to judgment and choice that rely on a variety of “heuristics” or mental shortcuts to reduce the complexity and effort involved in the reasoning process.[4] While some researchers believe that negotiators intentionally employ such heuristics to economize on the time and effort required to make decisions, others believe that reliance on heuristics is unconscious. In all likelihood, there is truth in both perspectives; that is, negotiators rely on heuristics intuitively and unconsciously in some circumstances and consciously employ heuristics in others. Either way, negotiators should appreciate the important role that heuristics are likely to play in their decision-making—and in the decision-making of their counterparts—at the bargaining table.
In this chapter, we examine the role of heuristics in negotiation from two vantage points. First, we identify the ways in which some common heuristics are likely to influence the negotiator’s decision-making processes. Namely, we discuss anchoring and adjustment, availability, self-serving evaluations, framing, the status quo bias, and contrast effects.[5] Understanding these common heuristics and how they can cause negotiators’ judgments and choices to deviate from the normative model can enable negotiators to reorient their behavior so it more closely aligns with the normative model or, alternatively, make informed choices to take advantage of the effort-conserving features of heuristics at the cost of the increased precision that the normative approach offers. Second, we explore how negotiators might capitalize on the knowledge that their counterparts are likely to rely on heuristics in their decision-making processes. We consider, in other words, how negotiators can exploit heuristic reasoning on the part of others for personal gain.
Understanding Negotiator Judgment and Decision-Making
When deciding whether to accept or reject an actual or anticipated set of deal terms, a negotiator must perform two cognitive tasks. First, the negotiator must evaluate the content of the available options, a task we can loosely call “judgment.” For example, a negotiator contemplating the purchase of a particular business must try to evaluate the market value of the business’s assets, determine what percentage of the business’s current clients will be retained in case of a change of ownership, estimate how much profit the business will earn in the future, and evaluate the likelihood that the negotiator would find a similar business to purchase if the negotiator opted not to purchase this one. From this perspective, judgment involves a search for facts about the world.
….
For full contents please purchase The Negotiator’s Desk Reference.
Endnotes
*(from The Negotiator’s Fieldbook, ABA 2006) Russell Korobkin is professor of law at the University of California, Los Ange-les (UCLA), where he teaches Negotiation and Mediation, Contracts, and Health Care Law. He also conducts negotiation training workshops for lawyers and pro-vides mediation services. Professor Korobkin is the author of the textbook Negotia-tion Theory and Strategy (Aspen Law & Business, 2002), as well as more than 30 scholarly articles on negotiating in the transactional and dispute resolution con-texts and other topics that combine law, economics, and psychology. Before enter-ing law teaching, he received his B.A. and J.D. degrees from Stanford University, clerked for the Honorable James L. Buckley of the U.S. Court of Appeals for the District of Columbia Circuit, and worked as an associate at the law firm of Coving-ton and Burling in Washington, D.C.
Chris Guthrie is the Dean and John Wade-Kent Syverud Professor of Law at Vanderbilt Law School.
This chapter is adapted from Russell Korobkin & Chris Guthrie, Heuristics and Biases at the Bargaining Table, 87 Marquette Law Review 795 (2004).
[1] See, e.g., Russell Korobkin, Negotiation Theory and Strategy 43-50 (2002).
[2] See, e.g., id. See also Max H. Bazerman & Margaret A. Neale, Negotiating Rationally 1 (1992). The normative approach, while widely accepted, does have its detractors. See, e.g., Gerd Gigerenzer & Peter M. Todd, Fast and Frugal Heuristics: The Adaptive Toolbox, in Simple Heuristics That Make Us Smart 3, 5 (Gerd Gigerenzer, et al. eds., 1999) [hereinafter Simple Heuristics].
[3] Gigerenzer & Todd, supra note 2, at 5.
[4] Amos Tversky and Daniel Kahneman introduced the “heuristics and biases” program into the literature on judgment and decision-making. See, e.g., Thomas Gilovich & Dale Griffin, Introduction—Heuristics and Biases: Then and Now, in Heuristics And Biases 1 (Thomas Gilovich, et al. eds., 2002) [hereinafter Heuristics And Biases]. In their initial formulation, Tversky and Kahneman explained that “people rely on a limited number of heuristic principles which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations. In general, these heuristics are quite useful, but sometimes they lead to severe and systematic errors.” Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases, 185 Science 1124(1974) [hereinafter Tversky & Kahneman, Heuristics].
[5] In their initial formulation, Tversky and Kahneman identified three basic heuristics—representativeness, availability, and anchoring and adjustment. See Tversky & Kahneman, Heuristics, supra note 4. More recently, Kahneman and Frederick have argued that the three basic heuristics are representativeness, availability, and the affect heuristic. Daniel Kahneman & Shane Frederick, Representativeness Revisited: Attribute Substitution in Intuitive Judgment, in Heuristics & Biases, supra note 4, at 53, 56. Nonetheless, most decision researchers use the terms “heuristics and biases” loosely to include several mental shortcuts that decision-makers are likely to make. See, e.g., Heuristics and Biases, supra note 4; Judgment Under Uncertainty: Heuristics and Biases (Daniel Kahneman, Paul Slovic & Amos Tversky eds., 1982).
This chapter is republished from the same editors’ Negotiator’s Fieldbook (American Bar Assoc. 2006). We appreciate the ABA’s courtesy in agreeing to this republication. Although this chapter was not updated for the NDR, we believe it continues to be a unique and valuable resource. Some formatting has been updated; the text of the chapter and co-author Korobkin’s bio are unaltered.
Negotiation is an inherently interpersonal activity that nonetheless requires each participant to make individual judgments and decisions. Each negotiator must evaluate a proposed agreement, assess its value and the value of alternative courses of action, and ultimately choose whether to accept or reject the proposal.
The interdisciplinary field of “decision theory” offers both a normative account (how individuals should act) and descriptive accounts (how individuals do act) of decision-making. According to the normative model, negotiators should compare the subjective expected value of an agreement to the subjective expected value of non-agreement, taking into account such factors as risks, differential transaction costs, and reputational and relational consequences of each possible course of action.[1] Once a negotiator has calculated the expected value of each course of action, the negotiator should then select the one that promises the greatest return.[2] [Senger, Risk]
There is less agreement about whether negotiators actually make decisions consistent with this approach. Proponents of descriptive or “positive” models based on “rational choice theory” assume that negotiators will invest optimally in the amount of information needed for decision-making, draw accurate inferences from the information they acquire, and then select the option that maximizes their expected utility. In short, proponents of the rational choice-based models assume that negotiators will make choices consistent with the normative model.
Skeptics of rational choice-based models argue that negotiators rarely behave this “demonically.”[3] Instead, negotiators routinely employ more intuitive approaches to judgment and choice that rely on a variety of “heuristics” or mental shortcuts to reduce the complexity and effort involved in the reasoning process.[4] While some researchers believe that negotiators intentionally employ such heuristics to economize on the time and effort required to make decisions, others believe that reliance on heuristics is unconscious. In all likelihood, there is truth in both perspectives; that is, negotiators rely on heuristics intuitively and unconsciously in some circumstances and consciously employ heuristics in others. Either way, negotiators should appreciate the important role that heuristics are likely to play in their decision-making—and in the decision-making of their counterparts—at the bargaining table.
In this chapter, we examine the role of heuristics in negotiation from two vantage points. First, we identify the ways in which some common heuristics are likely to influence the negotiator’s decision-making processes. Namely, we discuss anchoring and adjustment, availability, self-serving evaluations, framing, the status quo bias, and contrast effects.[5] Understanding these common heuristics and how they can cause negotiators’ judgments and choices to deviate from the normative model can enable negotiators to reorient their behavior so it more closely aligns with the normative model or, alternatively, make informed choices to take advantage of the effort-conserving features of heuristics at the cost of the increased precision that the normative approach offers. Second, we explore how negotiators might capitalize on the knowledge that their counterparts are likely to rely on heuristics in their decision-making processes. We consider, in other words, how negotiators can exploit heuristic reasoning on the part of others for personal gain.
Understanding Negotiator Judgment and Decision-Making
When deciding whether to accept or reject an actual or anticipated set of deal terms, a negotiator must perform two cognitive tasks. First, the negotiator must evaluate the content of the available options, a task we can loosely call “judgment.” For example, a negotiator contemplating the purchase of a particular business must try to evaluate the market value of the business’s assets, determine what percentage of the business’s current clients will be retained in case of a change of ownership, estimate how much profit the business will earn in the future, and evaluate the likelihood that the negotiator would find a similar business to purchase if the negotiator opted not to purchase this one. From this perspective, judgment involves a search for facts about the world.
….
For full contents please purchase The Negotiator’s Desk Reference.
Endnotes
*(from The Negotiator’s Fieldbook, ABA 2006) Russell Korobkin is professor of law at the University of California, Los Ange-les (UCLA), where he teaches Negotiation and Mediation, Contracts, and Health Care Law. He also conducts negotiation training workshops for lawyers and pro-vides mediation services. Professor Korobkin is the author of the textbook Negotia-tion Theory and Strategy (Aspen Law & Business, 2002), as well as more than 30 scholarly articles on negotiating in the transactional and dispute resolution con-texts and other topics that combine law, economics, and psychology. Before enter-ing law teaching, he received his B.A. and J.D. degrees from Stanford University, clerked for the Honorable James L. Buckley of the U.S. Court of Appeals for the District of Columbia Circuit, and worked as an associate at the law firm of Coving-ton and Burling in Washington, D.C.
Chris Guthrie is the Dean and John Wade-Kent Syverud Professor of Law at Vanderbilt Law School.
This chapter is adapted from Russell Korobkin & Chris Guthrie, Heuristics and Biases at the Bargaining Table, 87 Marquette Law Review 795 (2004).
[1] See, e.g., Russell Korobkin, Negotiation Theory and Strategy 43-50 (2002).
[2] See, e.g., id. See also Max H. Bazerman & Margaret A. Neale, Negotiating Rationally 1 (1992). The normative approach, while widely accepted, does have its detractors. See, e.g., Gerd Gigerenzer & Peter M. Todd, Fast and Frugal Heuristics: The Adaptive Toolbox, in Simple Heuristics That Make Us Smart 3, 5 (Gerd Gigerenzer, et al. eds., 1999) [hereinafter Simple Heuristics].
[3] Gigerenzer & Todd, supra note 2, at 5.
[4] Amos Tversky and Daniel Kahneman introduced the “heuristics and biases” program into the literature on judgment and decision-making. See, e.g., Thomas Gilovich & Dale Griffin, Introduction—Heuristics and Biases: Then and Now, in Heuristics And Biases 1 (Thomas Gilovich, et al. eds., 2002) [hereinafter Heuristics And Biases]. In their initial formulation, Tversky and Kahneman explained that “people rely on a limited number of heuristic principles which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations. In general, these heuristics are quite useful, but sometimes they lead to severe and systematic errors.” Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases, 185 Science 1124(1974) [hereinafter Tversky & Kahneman, Heuristics].
[5] In their initial formulation, Tversky and Kahneman identified three basic heuristics—representativeness, availability, and anchoring and adjustment. See Tversky & Kahneman, Heuristics, supra note 4. More recently, Kahneman and Frederick have argued that the three basic heuristics are representativeness, availability, and the affect heuristic. Daniel Kahneman & Shane Frederick, Representativeness Revisited: Attribute Substitution in Intuitive Judgment, in Heuristics & Biases, supra note 4, at 53, 56. Nonetheless, most decision researchers use the terms “heuristics and biases” loosely to include several mental shortcuts that decision-makers are likely to make. See, e.g., Heuristics and Biases, supra note 4; Judgment Under Uncertainty: Heuristics and Biases (Daniel Kahneman, Paul Slovic & Amos Tversky eds., 1982).