Thinking Fast and Slow: A Confidentially Speaking Webinar with Simon Russell
Have you ever considered how risk appetite and manner of decision making can impact both the process and outcome of a negotiation? That was the subject of our webinar featuring Simon Russell, Director of Behavioural Finance Australia. Our discussion delved into the intricacies of decision-making, risk appetite, and the psychological tools that can influence negotiation outcomes.
Understanding risk appetite
Risk appetite is a fundamental concept in negotiations. Simon Russell explained that risk appetite can vary significantly between individuals, influenced by their financial standing and psychological factors. For instance, the perceived risk of losing $1,000 differs vastly between someone with substantial savings and someone for whom $1,000 constitutes a significant portion of their wealth. This highlights the need for negotiators to consider both the objective facts and the subjective psychological factors at play.
The power of anchoring
Anchoring is a potent psychological tool in negotiations. It involves setting a reference point around which negotiations pivot. Despite awareness of its influence, even experienced negotiators can be swayed by anchoring. For example, a high initial offer can set the stage for higher counteroffers, even if the initial number is acknowledged as unrealistic.
Simon illustrated this with the example of real estate agents who, despite being aware of an anchor (the seller's price expectation), can often still find their valuations influenced by it. This underscores the importance of being mindful of anchors and possibly countering them with alternative reference points to reframe the negotiation.
The importance of preparation
Preparation is crucial in negotiation, and thorough preparation involves more than just understanding market values and comparable transactions. It requires anticipating potential scenarios, understanding one's own and the counterpart's risk appetite, and being ready to adapt. Role-playing different negotiation scenarios in advance of a negotiation can be a highly effective preparation strategy, helping negotiators anticipate unexpected turns and refine their responses.
Psychological flexibility and broad framing
Negotiators must balance their focus between specific terms and the broader context of the negotiation. Broad framing involves considering the overall impact of a negotiation on long-term business relationships and objectives, rather than fixating solely on individual terms. This holistic approach can lead to more sustainable and mutually beneficial outcomes.
Practical tips for effective negotiation
Reframe anchors: if faced with an unrealistic anchor from your counterpart, refocus on your own researched value points and gradually introduce these into the conversation.
Bundle concessions: when making concessions, present them as a single package to minimize perceived losses. Conversely, when asking for concessions, break them into smaller, separate requests to maximize their psychological impact.
Scenario role-playing: regularly engage in role-playing exercises to simulate different negotiation scenarios, enhancing adaptability and response strategies.
Consider long-term implications: evaluate negotiation outcomes in the context of long-term business goals and relationships, ensuring decisions made today will positively influence future interactions.
Wrapping it up
Negotiation and mediation are complex processes that benefit greatly from understanding psychological factors, preparing thoroughly, and maintaining flexibility. By incorporating these insights, negotiators can navigate the challenges of decision-making and risk appetite more effectively, leading to successful and sustainable outcomes.