Our friends at the Harvard Negotiation Project and authors of books like Getting to Yes would have you believe that negotiations is or ought to be a perfectly rational process. We know from our lived experience and countless pop psych books that people are not perfect rational actors. Cognitive biases affect how we process information and therefore how we negotiate. It can make us hold something we ought to sell and can make something we want to buy more expensive. In this post we will learn how endowment bias can kill deals, how you can avoid dead deals and how you can use endowment bias to get what you need.
What is Endowment Bias?
Endowment bias is the cognitive tendency to value things you have more richly than things you don’t. Once we own something, we like it more.
How Does Endowment Bias Impact Negotiations?
When negotiating on behalf of others, it can be difficult to overcome endowment bias with your principals.
Years ago I led a union team in collective-bargaining that was seeking enhanced sick time. The current provision provided about 8 1/2 days of paid sick time per year. Throughout the negotiations my team was the able to increase the amount of total emergency leave to 10 days a gain of one and a half days for each person. The collecting agreement paid out any unused time. That meant that each employee saw an additional 1.5 days of wages whether or not they booked off sick. The trade-off of the employer insisted upon was for the union to give up the paid bereavement days in the collective agreement. Under the old language individuals who lost a close family member would be entitled to three days pay after the family member’s death. Our team reviewed the data and saw that very few total days of bereavement were taken each year with the average being about 0.2 days per person per year over the previous four years. The math seemed obvious.
The union team readily accepted the compromise seeing the increase as a win. When the time came for ratification, the union members were incensed. They saw the loss of bereavement leave as greater than the gain of 1.3 pairs of wages. Even after the team shared the past figures and the math with the union, the members remained upset. In this case, endowment bias contributed to the members valuing bereavement leave higher than it’s actual cost.
How Can You Use Endowment Bias in Negotiations?
When we own something, we get used to owning it and when we negotiate it away or we lose it we experience the feeling of loss. In this way the endowment effect is tied to loss aversion. We can use this phenomenon during negotiations by allowing temporary position of the item we are negotiating about. Clothing stores do this by allowing you to try a garment on; once you have possessed the fancy new pants, you are more likely to place a higher value on them. In the collective-bargaining context the employer knowing that wage gains are likely, may start the negotiation by offering a lump sum payment or some other cheaper enticement and then taking that away when other cost items are brought forth by the union.
We can also use the endowment effect to frame a negotiation. Auctions are essentially an invitation for a group to negotiate against each other to do a transaction with the seller. As one becomes the top bid they see the thing being auctioned as theirs and start to value it more. Auctions also rely heavily on loss aversion which, as i write this, I think is a great topic for a future post.
Have You Considered a Professional Negotiator?
Mediators by virtue of their training are negotiators. In fact, a large part of a mediators entry to practice focuses on negotiations. In my case, I became a mediator after significant experience negotiating settlements and collective agreements and then took more formal training both in my entry to practice training and at Harvard’s business school HBX. If you are getting ready for a big negotiation, Wakely Mediation offers collective bargaining negotiation services including team training, negotiation strategy sessions and can even take on the role of lead negotiator.
If you are developing strategies and positions without formal training, you could be leaving value at the bargaining table or your other could be leaving the table with it. Consider contacting me for a free consultation to see if I can help in your specific circumstances.