I had my second class in Business Negotiation yesterday. This one got more interesting as we talked through the psychology of negotiation. Particularly anchors which are the initial high offer and low offer in a negotiation. These anchors are often set arbitrarily and yet people have the tendency to split the difference without questioning the bounds. We went through an exercise where we paired up and went through a negotiation for a parts supplier and even though we had just talked about it everybody pretty much followed that exact pattern. If the seller suggested $60 and the buyer $20, they would settle at $40ish. If the buyer happen to offer $30 at first, they would settled at $45ish. It was fascinating. The professor’s point was to pay very close attention to these anchors and make sure there is logic behind where they are set. Don’t let them get set if there isn’t solid reasoning behind them.

We talked about a really cool study by Tversky and Kahneman called the “Asian Disease” study. It focused on risk profiles and really brings out how important presentation is to a concept. There is a good write up of the study over at working psychology.

Another interesting one was the psychology of round number prices. They studied this by buying a bunch of used cars that were all the same. They posted the first batch for $4,500. The best offers they got were around $4,000. Then they posted the same cars for $4,477 and they got asking on many of them. It seems people subconsciously feel non-round numbers must have some sort of basis as if there is a formula behind them where round numbers must have been set arbitrarily by the seller.

Terry also told a great story of his first negotiation with a Korean firm. The firm contacted the hotel he was staying at and asked when he was checking out. The wined and dined him the first 2.5 days he was there and then presented him with an offer in the last 1/2 a day. He had to scramble and complete the deal before he left and ended up screwed. In all future negotiations he made 2-3 reservation blocks.