Negotiating Your Investments Read online

  Gather Up All the Facts That They Are Willing to Share

  You will, at some point, turn from casual rapport-building conversation to exchanging substantive information. When you do, pay close attention to how you ask questions. Your counterparts are likely to be on their guard and fearful of giving away information about vulnerability. Seeking information on facts is far less likely to set off alarm bells than asking about their needs. You will get a more honest and useful answer if they don’t fear giving something away by providing it to you.

  As the other parties provide more factual information, ask questions that clarify and confirm what you’ve heard. Being attentive helps you avoid miscommunication, and it also gives the other side the satisfaction of being actively understood.

  It’s critical, however, to listen and absorb with discernment. The information you receive will not all be accurate. There is usually an incentive for the other parties to misrepresent certain needs or interests. As mentioned, you can preempt bluffing by asking questions of a factual nature; it is psychologically much harder to falsify numbers than it is to mislead about the severity of a situation or the importance of an issue. There is usually a way to check up on factual information. Asking others who have negotiated with these folks from a similar position and doing some rigorous research on the matter can help to clear up factual misstatements.

  Managing the Danger That They May Lie to Us

  Nevertheless, there is a danger we must deal with in taking in all we are told. As my students are quick to point out, they have a tremendous incentive to lie to us. How should we deal with that problem? Here is my suggestion. As we gather the data they are telling us, we sift it into two separate piles in our head. The first pile is labeled “no reason they should lie about this.” The other pile is marked “Here is what they said, but they had strong incentives to lie.” Although care is required, we may go forward assuming that all the information in the first pile was provided truthfully. As for the second pile, whose information may well be tainted, we analyze what they offered under the microscope of “here is what they said, but they had strong reasons to mislead.” Such information may not be useful as truth, but it is still full of information.

  For example, former baseball star Pete Rose was eventually banned from the sport for gambling on ball games. When directly confronted with this accusation, he is reported to have told investigators that he did indeed gamble but not on baseball games. This is very valuable information for anyone seeking to take the measure of Pete Rose. He told his inquisitors that he gambled and implied that he took risks, had impulse-control problems, and was not afraid to lose money. He didn’t tell the truth, but he did reveal a great deal about himself.

  One final note on the second stage of a negotiation: Most negotiators are impatient. They want to get to the bargaining dance. As soon as either party proposes a term or a price, the exchanging information phase comes to an abrupt end. Almost always, this happens too early—sometimes way too early. I urge all my students: Stay in this second negotiating stage much longer than your gut tells you to. Stay and learn about the situation, the other parties, and their point of view for as long as is humanly possible.

  Note as well that while the description of the four stages of negotiation is presented as a linear progression, you may want to go back and forth between them. Sometimes you learn something in one stage that significantly alters your understanding or your plans. Don’t hesitate to take a break and go back to the previous stage, adjust what you have done, and come back better positioned to continue. This is particularly true of the data-gathering opportunities afforded you by the information exchange phase.

  The more time and effort you spend exploring and understanding the other side’s perceptions—learning what makes them tick—the more momentum you build for the phases of the negotiation that still lie ahead.

  Chapter Summary

  The second stage of the negotiation allows you to gather information on a firsthand basis from your negotiating partner. Of course, your partner will seek the same from you

  The more you can get your partner to talk about himself, the more useful information you will be able to gather.

  Among other things, you want to learn what your partner knows, wants, and perceives to be fair.

  While exchanging information, you should be trying to build rapport. Getting-to-know-you conversations are very valuable. Creating a bond based on common interests, hobbies, or experiences, for example, can strengthen the relationship and make agreement more likely.

  Don’t try to present yourself as someone you are not. Let your own personality shine through. Sincerity has its own power.

  Not all information your partner shares will be true. As you collect data, assess whether your partner had an incentive to lie about each statement. Separate the reliable statements from those liable to be untrue.

  Work to avoid bringing the exchanging information phase to a premature close. Negotiators are anxious to move on to bargaining and often miss the opportunity to learn important facts. Try to keep gathering information, and refrain from bargaining, for as long as possible.

  Note

  1. N. Rackham and J. Carlisle, “The Effective Negotiator—Part 1: The Behaviour of Successful Negotiators,” Journal of European Industrial Training 2, no. 6 (1978): 6–11; N. Rackham and J. Carlisle, “The Effective Negotiator—Part 2: Planning for Negotiations,” Journal of European Industrial Training 2, no. 7 (1978): 2–5.

  Chapter 9

  The Bargaining Phase

  Having done everything possible to plan, prepare, learn, gather information, and try to see things from our negotiating partners’ vantage point, we proceed toward the next step. We have planned and set a tone for the interaction that we believe will contribute to the creation of a good outcome. Much thought has gone into improving communication to facilitate understanding, reduce miscommunication, and permit good work and good feelings. That thought encompasses a sophisticated consideration of relationship that considers not only the interaction within this negotiation but well beyond that to the long term. What might the bond between these parties have the potential to become? It assumes, as well, that we have considered and are familiar with our strengths. This means knowing our BATNA and having made educated guesses about it relative to what their BATNA might be. We have considered how badly they may need this deal and how burdensome it would be for us to just walk away. Finally, having gathered from the other parties as much information, clarification, and perspective as possible, it is time to move into the third phase of a negotiation.

  G. Richard Shell calls this third stage “opening and making concessions.”1 In lectures, I have sometimes teased my audience by referring to it as that which, only an hour ago, they would have called “negotiating.” This is the phase where offers are considered, counteroffers are made, and the outlines of an agreement take shape.

  Work to Increase the Pie—and to Claim a Fair Slice

  This third phase involves two distinct types of bargaining that we examined in earlier chapters. Negotiation scholars call these two strategies integrative bargaining and distributive bargaining. The former is about creating more value. We often refer to it as making the pie bigger. It involves trading interests in a way that generates value and leaves all parties better off. The latter, on the other hand, is about dividing whatever value there is between the negotiators. It is the search for acceptable divisions of the value that exists. We take the pie and divide it into the various slices that each party will receive. Both integrative bargaining and distributive bargaining are essential to reaching agreements that create real value for all involved.

  To say it another way, the bargaining phase of a negotiation is about both creating value and claiming a fair share of the value that has been created. Good negotiators work continuously to sharpen their skills at doing both things simultaneously.

  The idea behind integrative bargaining may sound familiar to you. It is the same concept as
creating options that we discussed in Chapter 2. To review briefly, the premise behind inventing options is that there are certain things you need that cost me little to give you, and there are things I want that you could give me easily. There exist opportunities to trade and benefit us both. When we exchange information and perspectives in the second phase of a negotiation, these opportunities are what we are looking for.

  At the very nadir of the 2008 financial crisis, Goldman Sachs was in trouble, and they badly wanted a deal. At the very least, they needed a capital infusion to shore up their balance sheet. Beyond that, though, they would benefit from some public display that reinforced confidence in their solvency. They wanted a big vote of confidence from a source that mattered. Someone who could offer all of that was one of their best customers, Warren Buffett of Berkshire Hathaway. Buffett, however, is a shrewd negotiator who does not give something precious without getting a thing of great value in return. He knew that while any cash investment would help Goldman in its time of need, such an investment from the most admired investor of our times would be worth dramatically more to them. Buffett offered to make a $5 billion investment in Goldman Sachs but required a custom-made and extremely favorable structure for the deal.2 In exchange for the money, Berkshire received $5 billion in preferred shares and a warrant that would allow them to purchase an additional $5 billion in shares at a price of $115, even though the shares were trading at $125 at the time. For the preferred shares, Goldman agreed to pay Berkshire a yearly 10 percent dividend, with an option of buying back the stock at any time for 10 percent more than Berkshire had paid. As for the warrants, they were valuable enough that in March 2013 Goldman agreed to buy them back for $1.4 billion in Goldman Sachs stock. All told, Berkshire made a $3.2 billion of profit on their 4.5-year-old investment in Goldman for a return of 64 percent. It was a magnificent integrative deal because both sides got what they valued most. Goldman got an infusion of cash at the moment of their greatest danger from the most admired—and deepest pocketed—investor in the United States. Buffett got a sweetheart deal, structured by the master himself, which was almost sure to make a handsome return with relatively little risk.

  Use Conditional Language to Explore Trades That May Create Value

  The process of inventing options in the third stage begins with conditional terms. We explore possible trades without committing to anything. Good negotiators are continuously looking for a trade that might exist and then testing to see if it is achievable. This process is creative and should be treated as such—all possibilities are worth considering. Even bad ideas often give rise to good ones. What trades or deals can we come up with that build on the interests we share, or interests that are different but compatible? Eventually, we work together to package the best trades into viable options.

  How can we explore such trades without getting locked into proposals? How might we, as Fisher, Ury, and Patton suggest, separate inventing from deciding?3 A simple but effective way to structure a trade, and to indicate to the other party what you’re doing, is to use the formulation: If you consider A, then we might be able to do B. For example, if you consider reducing the price by 10 percent, then we might be able to buy three bushels instead of one. When you identify an area of high value to you where they can move, that is your if. Link that to something they value highly, and you have your then. The two together form a potential trade.

  For example, a client of mine was getting married and needed floral arrangements. Her florist had a wonderful aesthetic sense, but her work was quite costly, and the planned reception was large. My client knew that carnations were in season and tended to be less expensive. In fact, she was very fond of carnations. Her proposal to the florist was “If you would be able to make more bouquets within our budget, then we’d consider replacing some of the more expensive flowers with, say, carnations. What do you think?” From there, the open structure of the trade left room to settle on the exact number of bouquets and the exact proportion of carnations.

  Trades structured this way derive legitimacy from the norm of reciprocity. There’s an implicit fairness in the if–then formulation; by using it, we signify that this exchange is good for both parties: “If you make dinner, I’ll do the dishes.” “If you’ll work in the satellite office, we’ll give you a higher signing bonus.” “If you call right now, we’ll double this offer!” These statements imply mutual concession and mutual benefit, each contingent on the other. You are saying to the other person that if you can give me this (high priority for me and not that important to you), I’ll give you that (low priority for me and rather important to you).

  Consider the problem if my client had said to the florist, “I like carnations! I’d love for you to use more of them instead of the peonies.” In this formulation, she has made no indication that this is a concession of value. Consequently, the florist would feel no reciprocal obligation to make a concession of his own. In fact, the florist may even try to charge extra for accommodating her personal flower preferences.

  Typically what happens during successful integrative bargaining is that a period of brainstorming is followed by each party expressing interest in different possible options for structuring the deal. Each then proposes an ideal set of trades. To reconcile these, the parties use a series of if–then proposals to indicate their most important interests and discern those of others.

  Even if the integrative trading is very successful, however, there will come a point at which some distributive bargaining is required to settle on specific terms. This is the back-and-forth of offers and counteroffers that we know so well. Haggling at an open-air market, bargaining over souvenirs in a touristy port of call, and wrangling with my son about his bedtime all come to mind. How do we go about opening up the numbers game?

  Propose Terms Favorable to You—But Defensible as Fair

  Research tells us that the best approach is to propose the most optimistic offer that does not harm our basic credibility. In other words, start out with an ambitious first offer but not a wild one. Begin with a proposal that can be justified by some reasonable standard. It may not be the very fairest standard, but it allows you to defend the offer as arguably legitimate. From there, expect to make concessions.

  Why start high and concede, as opposed to making a more moderate offer and holding fast to it? A recent study compared three concession strategies. In the first, negotiators started high and didn’t budge; in the second, they started moderately and didn’t budge; in the third, they started high and gradually conceded to a moderate point. The last strategy was significantly more successful.4 “Concessions are the language of cooperation,” explains Shell.5 Every time you concede something, you acknowledge the legitimacy of the other party’s demands. The value derived from this social exchange is a powerful factor in reaching agreement. In the study, not only did the third, high-concession strategy yield more agreement and better outcomes for the negotiators but also “the people facing the negotiators . . . reported much higher levels of satisfaction with their agreements than did people who faced those who refused to move.”

  Make Small Concessions Slowly and Deliberately—and Insist on Fairness

  Make concessions, but make them slowly and carefully. What we obtain too cheaply, we esteem too lightly. Do not make sweeping, magnanimous concessions without comment. The other side will actually think less of a concession that you’ve made easily or casually. Give things up little by little, and every time you do give up something, talk about it. Be sure that the other side recognizes your concession and ascribes to its due value; that’s the only way they’ll feel pressure to reciprocate in kind.

  Finally, as you approach agreement, try not to concede solely because the other side is digging in their heels. Concede only on principle and for a reason; constantly substantiate your position, and ask for justification of theirs. Haggling tends to degenerate quickly into a tug-of-war that ends, often bitterly, with one side exerting sheer power over the other. To avoid a contest of wills, d
efer to objective standards and norms of fairness wherever possible.

  For example, we can imagine that the florist preparing bouquets for the wedding might have been slow to agree to a smaller flower budget. Her profit was probably proportional to the amount spent on bouquets. The bride’s proposal to use less expensive carnations was initially rebuffed. She held her ground, though, while bringing in outside measures of fairness. “Several of my friends have had large numbers of carnations in their wedding arrangements; in fact, you did one of those weddings. Furthermore, Bride Magazine, which I know you think highly of, has featured them twice this year.” Rather than create a power play, the young woman is inviting the florist into the “if–then” conversation with standards of fairness from outside this conversation.

  We should stop here to note that this process is not easy. Lax and Sebenius refer to the tension between creating value and claiming it as “the negotiator’s dilemma.”6 Few negotiators want to make concessions easily, and many are defensive and fearful of giving out too much information. The challenge, faced by each negotiator, might be put as simply as these two thoughts: “How can I possibly give you what you want if you won’t tell me what it is? On the other hand, if you do tell me what you want, I may well raise the price for it.”