Intuition vs. Reality in Negotiations

How many of us believe we can trust out intuition in a negotiation?  In reality for something that really does not matter, such as where to go to lunch with co-workers today, intuition works out well.   However, if we are involved with something serious like a major business deal, or a significant issue with the IRS, then it can be shown that intuition does now work out very well.  In these instances we need to conduct due diligence and move slower, think it out and make a real effort to construct a logical conclusion.  Let’s look at what neuroscientific research has to say about the topic.

In an article from the Harvard Business Review by Max Bazerman entitled “Essential Negotiation Skills for Effective Negotiation: Limiting Cognitive Bias in Negotiation Scenarios” he offers essential business negotiation strategies and tactics to create value in a negotiation.  I supplement his key points with some experiences I have working with clients and some insights, when working with the IRS.

Most negotiators believe they have what it takes and that they know when they can use their intuition vs. conducting a methodical systematic and logical approach considering relationships and logic to negotiations, but as the author points out they are wrong.

In this article he summarizes research by

“Keith Stanovich of the University of Toronto and Richard F. West of James Madison University (who) have distinguished between what they call System 1 and System 2 thought.

– System 1 thought describes our intuition: quick, automatic, effortless, and influenced by emotion.
– By comparison, System 2 thought is slower, more conscious, effortful and logical.”

System 1 relies on intuition and System 2 relies on logic and preparation having thought out the process with due diligence.

As introduced System 1 works very well in social settings.   That is one reason we want to make the negotiation as relationship oriented as possible.   On the other hand, we also want to make sure we complete due diligence having prepared extremely well to ensure a very thorough venting of our interests during the negotiation.  When we are very busy we tend to rely on System 1.   Think of how busy you are and you can tell that you rely on System 1 a lot to the detriment of System 2.  If there is a major negotiation, this can be to your detriment.

The article makes three very good recommendations as I have interpreted the article with three numbered points. 

1.       Identify the negotiations that are more significant, when System 2 should be applied.  This is critical.  It is suggested these be completed approximately monthly.  Set aside the time to work on this when you and your team will be fresh.

2.       Set aside more time than necessary. 

When I am working with clients I ask them how long they believe the negotiation should take.  Whatever they tell me I ask them to double the amount of time to work more on developing relationships during the negotiations and to ensure there are not time pressures being applied for anyone involved.  If there are time pressures we tend to fall back to System 1.  If it is necessary to postpone a decision it is generally fine to do so.   Closure is important, but generally not immediate.  Don’t succumb to time pressures to the detriment of logically considering the alternatives, the impact of alternatives and the evaluation of the alternatives to reach the best logical conclusion based on the interests of the parties.

3.       Plan to negotiate over multiple sessions. 

For example you may have one meeting up front with technical personnel.  Another session may be with technical personnel and key management decision makers.  A third session may strictly be with key management decision makers. 

Form my experience both working at the IRS and now in the private sector this is how many decisions are made with the IRS related to issue resolution.  The agent in the Large Business and International Division (assets greater than $10 M) working with technical specialists, such as business valuers or engineers, works the issue technically.  Once thoroughly vetted there typically is a second meeting with key technical personnel and their managers.  The ultimate decision maker is the IRS case manager.  After this second meeting the third meeting is often with the IRS case manager (with possible key personnel) and the taxpayer to resolve the issue.  Similarly in Small Business Self Employed (assets less than or equal to $10 M) as well as all estate and gift tax issues regardless of dollar amount, the initial discussions are for example with an IRS agent or an estate tax attorney and a specialist (for example a business valuer or a real property appraiser) with the taxpayer.   For an estate or gift tax case the second meeting is generally with the same parties and the estate and gift tax manager.  A third meeting may take place if needed with the taxpayer’s representative and the estate and gift tax manager.

This process allows each party to evaluate and organize before the next session.

“Why are we typically unaware of our own biases in negotiations, yet at the same time, capable of accurately pinpointing the biases that influence others?

Psychologists Daniel Kahneman of Princeton University and Daniel Lovallo of the Australian Graduate School of Management have argued that we make decisions using two different lenses: the insider lens and the outsider lens.”

An outsider typically uses System 2 to evaluate the situation but an insider typically uses System 1.    This is one reason I am often consulted to assist a taxpayer with an IRS issue, or with another negotiation with a third party.

Have you ever experienced this yourself, feeling pretty confident intuitively without necessarily taking the time to work through a logical analysis?  The outsider typically is better at integrating multiple episodes.   If for example the issue is with the IRS the client wants closure and so does the IRS, but it is important to step back and look at the entire scenario.

“Yet overconfidence remains the norm; in a study by Arnold Cooper of Perdue University, Carolyn Woo of Notre Dame University, and Wiliam Dunkelberg of Temple University,
• More than 80% of entrepreneurs estimated their personal chances of success to be 70% or higher;
• One-third of them described their success as certain.

If these entrepreneurs adapted the outsider lens, as Kahneman and Lovallo suggest, they easily would find out that the five year survival rate for new businesses is only about 33%.”

For critical negotiations this article recommends hiring a true outsider when the negotiation is complex or emotionally charged.  If not then you need to consider stepping back and making a very conscious effort to explore the situation from an outsider’s perspective rather than an insider’s perspective.

The article concludes with a summary of the key points introduced above.  It offers some very interesting commentary for your consideration.

About the author

Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at mg@mikegreg.com and at (651) 633-5311. Mike has written 12 books (and co-authored two others) including his latest book, The Collaboration Effect: Overcoming Your Conflicts, and The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]