Lone Gunman

When nego­ti­at­ing ensure that you make the first offer and make sure it’s an aggres­sive one: this is almost always the opti­mal nego­ti­a­tion strat­egy. That’s the con­clu­sion from a study look­ing at nego­ti­a­tion tac­tics and the anchor­ing effect (from the same researchers that dis­cov­ered the opti­mal start­ing prices for nego­ti­a­tions and auc­tions).

One of the researchers gives a good overview of the study’s find­ings in an arti­cle for Har­vard Busi­ness School’s Work­ing Knowl­edge that pro­vides suc­cinct nego­ti­a­tion tac­tics and rea­sons for why you should make the first offer. Top­iccs include: when you should not make the first offer, how to counter first offers, how to con­struct a reasonable—yet aggressive—offer, how to pro­tect your­self from the effects of anchor­ing, and more.

Some key points worth con­sid­er­ing (in no par­tic­u­lar order):

We might expect experts to be immune to the anchor­ing effect. Real estate agents, for exam­ple, should be able to resist the anchor­ing effects of a property’s list price because of their pre­sumed skill at esti­mat­ing prop­erty val­ues. Test­ing this the­ory, [it is clear that] anchors affect the judg­ment of even those who think they are immune to such influ­ence. But why?

Every item under nego­ti­a­tion (whether it’s a com­pany or a car) has both pos­i­tive and neg­a­tive qualities—qualities that sug­gest a higher price and qual­i­ties that sug­gest a lower price. High anchors selec­tively direct our atten­tion toward an item’s pos­i­tive attrib­utes; low anchors direct our atten­tion to its flaws. […]

The prob­a­bil­ity of mak­ing a first offer is related to one’s con­fi­dence and sense of con­trol at the bar­gain­ing table. Those who lack power, either due to a negotiation’s struc­ture or a lack of avail­able alter­na­tives, are less inclined to make a first offer. Power and con­fi­dence result in bet­ter out­comes because they lead nego­tia­tors to make the first offer. In addi­tion, the amount of the first offer affects the out­come, with more aggres­sive or extreme first offers lead­ing to a bet­ter out­come for the per­son who made the offer. Ini­tial offers bet­ter pre­dict final set­tle­ment prices than sub­se­quent con­ces­sion­ary behav­iors do.

There is one sit­u­a­tion in which mak­ing the first offer is not to your advan­tage: when the other side has much more infor­ma­tion than you do about the item to be nego­ti­ated or about the rel­e­vant mar­ket or industry. […]

How extreme should your first offer be? My own research sug­gests that first offers should be quite aggres­sive but not absurdly so. Many nego­tia­tors fear that an aggres­sive first offer will scare or annoy the other side and per­haps even cause him to walk away in dis­gust. How­ever, research shows that this fear is typ­i­cally exag­ger­ated. In fact, most nego­tia­tors make first offers that are not aggres­sive enough.

 

Drink­ing alco­hol — and the increased social cap­i­tal that it leads to — may not just be respon­si­ble for a pos­si­ble increase in life span; it may increase your earn­ings, too.

In an analy­sis of both the Gen­eral Social Sur­vey and the pub­lished lit­er­a­ture, researchers for the Rea­son Foun­da­tion show that alco­hol drinkers earn, on aver­age, 10% more than abstain­ers (pdf). This is known as the drinkers’ bonus.

Recent stud­ies indi­cate that drink­ing and indi­vid­ual earn­ings are pos­i­tively cor­re­lated. Instead of earn­ing less money than non­drinkers, drinkers earn more. One expla­na­tion is that drink­ing improves phys­i­cal health, which in turn affects earn­ings (Hamil­ton and Hamil­ton, 1997). We con­tend that there is an eco­nomic explanation. […]

Drinkers typ­i­cally tend to be more social than abstain­ers. As Cook (1991) explained, drink­ing is a social activ­ity, and one rea­son peo­ple drink is to be socia­ble. In the med­ical lit­er­a­ture, Skog (1980) showed that mod­er­ate drinkers have the strongest social networks. Furthermore, Leif­man et al. (1995) doc­u­mented a neg­a­tive rela­tion­ship between social inte­gra­tion and absti­nence. Whether abstain­ers choose not to be as social or whether orga­niz­ers of social occa­sions involv­ing drink­ing exclude abstain­ers is unclear. Abstain­ers may pre­fer to inter­act with other abstain­ers or less social peo­ple. Alter­nately, abstain­ers might not be invited to social gath­er­ings, work-related or otherwise, because drinkers con­sider abstain­ers dull.

Cor­co­ran et al. (1980), Mont­gomery (1991), and Put­nam (2000) each made con­vinc­ing cases that social net­works are impor­tant for find­ing jobs and earn­ing pro­mo­tions. Mont­gomery (1991) explained that com­pa­nies pre­fer acquain­tances of employ­ees because employ­ees screen poten­tial can­di­dates and thereby reduce the cost of search. Approx­i­mately half the work­ers sur­veyed in the Panel Study of Income Dynam­ics found their job through friends or rel­a­tives, and one-third reported help from acquain­tances in obtain­ing their job (Cor­co­ran et al., 1980). There­fore, a per­son with more con­tacts will have more labor mar­ket options (Burt, 1997). Gra­novet­ter (1995) suggested that a large quan­tity of weak ties or friends-of-friends may be most impor­tant to gar­ner­ing the best job offers.

Thus, if social drink­ing enables greater social net­works, it will also increase earn­ings. In terms of search the­ory: the more one drinks, the more peo­ple one knows, and the more peo­ple one knows, the lower the mar­ginal costs of search.

The study is packed full of excel­lent ref­er­ences to pub­lished stud­ies (as you can tell from the above excerpt), so I sug­gest read­ing the acces­si­ble (and very short!) report. It’s also worth not­ing foot­notes four and five, describ­ing how this is just like all invest­ments in cap­i­tal, in that an opti­mal level exists: “you must drink more than 21 drinks per week to earn as lit­tle as a non-drinker”.

via @phila_lawyer

Prais­ing Mau­rice Allais as the father of behav­ioural eco­nom­ics rather than Kah­ne­man and Tver­sky,  John Kay intro­duces us to some of Allais’ ideas while simul­ta­ne­ously pro­vid­ing one of the finest argu­ments against the sim­plis­tic view of behav­ioural eco­nom­ics as the study of irra­tional­ity:

The skill of piec­ing together sense from frag­mented and inac­cu­rate infor­ma­tion is a cen­tral attribute of human intel­li­gence. Lit­eral inter­pre­ta­tion, and insen­si­tiv­ity to con­text, are not marks of ratio­nal­ity but men­tal disorders. […]

The [behav­ioural eco­nom­ics] experimenter’s trick is to con­struct an arti­fi­cial sit­u­a­tion in which nor­mally sen­si­ble behav­iour gives what he thinks is the wrong result. The “mis­take” is detected in a mean­ing­less prob­lem designed solely to elicit the “mistake”. […]

Allais was less con­cerned to show that our behav­iour was irra­tional than to argue that the premises of ratio­nal­ity itself were irrational. […]

Allais’ most famous exper­i­ment showed that we often treat very high prob­a­bil­i­ties very dif­fer­ently from cer­tain­ties, although “ratio­nal” indi­vid­u­als would regard them as almost the same thing. But very high prob­a­bil­i­ties often are dif­fer­ent from cer­tain­ties: very high prob­a­bil­i­ties are usu­ally derived from cal­cu­la­tions whose rel­e­vance and valid­ity are them­selves uncertain. […]

Irra­tional­ity lies not in fail­ing to con­form to some pre­con­ceived notion of how we should behave, but in per­sist­ing with a course of action that does not work. Some­times in mod­ern eco­nom­ics and polit­i­cal life, there is a big difference.

The exam­ple Kay uses is a bit glib but does serve its purpose.That last para­graph, how­ever, is the crux of it all. As you may have guessed, this is the Allais that designed the Allais para­dox — an exper­i­ment in behav­ioural eco­nom­ics that shows the above wonderfully.

The recent reces­sion saw sales of con­doms, guns and bur­glar alarms soar. This is because, when fear enters our mind in terms of los­ing our job or of not being able to pay bills, we focus on two of our most basic dri­ves: fear and sex.

The key to sell­ing and build­ing a brand dur­ing finan­cial crises, there­fore, is sim­ple: man­age fear. Under­stand how it works and how it affects pur­chas­ing behav­iour. This advice on brand-building dur­ing a reces­sion comes from Mar­tin Lind­strom, ex-advertising agency exec­u­tive, author of Buy­ol­ogy, and one of TIME’s 100 Most Influ­en­tial Peo­ple in the World, 2009.

First, there’s always good news in bad times. A stan­dard approach in this sit­u­a­tion is to address con­sumers’ prob­lems. And peo­ple always have prob­lems. The fact is we rarely know what we want, but we have no trou­ble point­ing out our dif­fi­cul­ties. For exam­ple, no one knew they wanted an airbag, but every­one agreed they wanted safer cars.

It’s there­fore impor­tant to ask your­self what sort of prob­lems are con­sumers fac­ing dur­ing this eco­nomic reces­sion? There are many. […] Con­vert prob­lems into assets for your brand.

Sec­ond, add a prac­ti­cal dimen­sion to an irra­tional deci­sion. No mat­ter how much money you may have in the bank, or how secure your employ­ment may be, it’s now fash­ion­able to save your money and buy every­thing at a dis­count. What can a brand owner do? Par­tic­u­larly in light of the fact that a dis­counted brand typ­i­cally takes seven years to recover!

The answer is sim­ple. Add a prac­ti­cal dimen­sion to the equation. […]

Third, you have to sys­tem­at­i­cally remove fear. Hyundai did it. And a stream of new banks are doing it. Both have suc­ceeded in iden­ti­fy­ing why con­sumers are reluc­tant to spend. Once this is under­stood, then you can har­ness it and build a bet­ter prod­uct by address­ing the fear and find­ing a way to elim­i­nate it. Your sales may be down. But do you know why? Peo­ple are cer­tainly buy­ing less, and expla­na­tions like, “Well, there’s a reces­sion going on out there,” are not help­ful. What’s impor­tant is to under­stand the fun­da­men­tal role of fear, and then turn it around to strengthen your brand. Some of the world’s most endur­ing gro­cery brands were built on the back of the Great Depres­sion. Each one turned the threat into an opportunity.

The more unequal a society’s income dis­tri­b­u­tion, the more health and social prob­lems ail both the rich and the poor.

With this the­ory brought to his atten­tion through the “quite fas­ci­nat­ing book” The Spirit Level, Nico­las Bau­mard dis­plays the evi­dence to sup­port the the­ory that eco­nomic inequal­ity is bad for all inhab­i­tants of a coun­try before con­sid­er­ing some pos­si­ble expla­na­tions, and look­ing at what this means in terms of poverty and cli­mate change.

It is com­mon knowl­edge that in rich soci­eties the poor have shorter lives and suf­fer more from almost every social prob­lem. In [The Spirit Level], [the authors] demon­strate that more unequal soci­eties are bad for almost every­one — the well-off as well as the poor […]. The remark­able data the book lays out and the mea­sures it uses are like a ‘spirit level’ which we can hold up to com­pare the con­di­tions of dif­fer­ent soci­eties. The dif­fer­ences revealed, even between rich mar­ket democ­ra­cies, are strik­ing. Almost every mod­ern social and envi­ron­men­tal prob­lem — ill-health, lack of com­mu­nity life, vio­lence, drugs, obe­sity, men­tal ill­ness, long work­ing hours, big prison pop­u­la­tions — is more likely to occur in a less equal society.

Base­ball fan? Bau­mard also points out that “the more equal the salaries in a base-ball team are, the bet­ter its performance”.