Summer School 7: Negotiating and the empathetic nibble

0:00Support for NPR and the following message come from Edward Jones. What does it mean to live a rich life? Maybe it's full of brave first leaps, tearful goodbyes, and everything in between. And with over 100 years of experience, your Edward Jones Financial Advisor can help. Edward Jones, member SIPC. This is Planet Money from NPR.

0:33Welcome back, everyone, to Planet Money Summer School, where you are only two lessons away from getting your totally free MBA. You get what you pay for. I'm Robert Smith. Normally in business school, as you're approaching graduation, you're being heavily courted by employers like banks and consulting firms. And I'm sure summer school listeners that Goldman Sachs is already blowing up your LinkedIn. Maybe McKinsey is PowerPointing in your direction. But friends do not accept their first offers, no matter how good they look, because today's lesson is about negotiations. You know, the old give and take, back and forth, haggle time.

1:13Whether you're selling your company, boosting your salary, or figuring out who will do the dishes tonight, life is one negotiation after another. By the end of this show, you'll have all the tools not just to get what you want, but perhaps make everyone better off. Usually, we invite one professor onto summer school to help lead the class, but how's this for negotiating? I'm going to throw in an extra professor for free, two for the price of one, both from Columbia Business School. We have Daniel Ames. Hello. And Malia Mason. Hello. Today on the show, we will talk about all sorts of tricks. Are we allowed to call them tricks?

1:52If you'd like. Sure. Tricks. Practices. Yeah, about negotiations, you know, how to get a deal, how to make more money. But before we start, what are the mistakes that people make walking into a negotiation? I mean, I think one mistake that they commonly make is that they're underprepared, right? They assume that all the action happens at the table and that they're just going to gather some information at the table and figure out what to do on the fly. And I think the best negotiators know how much more effective they are when they've taken the time to prepare. And I think a lot of people view negotiation as this win-lose endeavor.

2:27And some negotiations are like that, but a lot of them have this potential to grow the pie. I think it's often the case that my success in a negotiation doesn't require my counterpart's failure or humiliation and vice versa. And I think good negotiators come in with that mindset or they see that potential that maybe both of us could walk away with something that works for us. We're going to go into our first case study now. But before we do, I wanted to get one of our vocabulary words on the table. It's called the negotiator's dilemma. And Malia Mason, what is the negotiator's dilemma? The negotiator's dilemma is the idea that in any negotiation, you have two goals.

3:08You're simultaneously trying to compete with your negotiation partner and cooperate with them. You're trying to extract value with them. And at the same time, you're trying to cultivate a relationship. You're trying to get them to trust you. And the challenge is the pursuit of one often undermines your ability to do the other effectively. OK, so let's keep that dilemma in mind as we listen to three examples of negotiations in today's episode. We'll have stories about how to save money, how to get more out of a negotiation, and how to grow the pie. and our professors will return to help us analyze each one.

3:48First up, what happens when an FBI hostage negotiator goes to buy a new car? Tricks, tactics, and practices, all after the break. This message comes from Vanguard. Capturing value in the bond market is not easy. That's why Vanguard offers a suite of over 80 institutional quality bond funds, actively managed by a 200-person global team of sector specialists, analysts, and traders. They're designed for financial advisors looking to give their clients consistent results year in and year out. See the record at Vanguard.com slash audio. That's Vanguard.com slash audio. All investing is subject to risk.

4:34Vanguard Marketing Corporation Distributor. This message comes from Insperity. Excellence takes drive. Work. Perseverance. Tiger Woods brings it to the course. Insperity brings it to your business. Want to be the best? Work with the best. Insperity. How you HR matters. Learn more at insperity.com slash tiger.

4:58Welcome back to Planet Money Summer School. The very simplest kind of negotiation is about price. Later on, we'll talk about more complicated negotiations, building relationships, growing the pie, that kind of thing. But for our first case study, it's a zero-sum game. The buyer wants the price lower. The seller wants the price higher. Listen in this case study for the negotiator's dilemma and how the negotiator in question avoids getting in an argument. It was hosted by David Kestenbaum in 2012.

5:31This story comes from a hostage negotiator who wanted to buy a car. Not just any car. An SUV that I fell in love with. It was this gorgeous color. What color was it? Manufacturer calls it Salsa Red Pearl. That has to be the best name for a color I've ever heard of. It's sort of this sexy burgundy, great deep burgundy color. Just a great color. Chris Voss was a hostage negotiator with the FBI. Now he teaches at Georgetown. And here is the story of how he bought that Salsa Red Pearl SUV. He goes into the dealer on a Friday afternoon when he figures the salespeople will be kind of worn down. He meets the sales guy.

6:07And then he has to make an offer. The trick here, he says, is that you want to start with a low offer. Low, but not so low that they get up and walk away. If you're going to play the bargaining game, your first offer really needs to just start to make the other side mad. You don't want to offend them, but you want them to get a little annoyed. You want where they're still talking to you, but they let you know that clearly they're angry, they're a little upset, and then you know you've come in with a good price. Voss says his number, which is significantly below the sticker price. I threw out the price and the guy looked at me really, really hard.

6:42And he got up and walked away from the table. So then I started to get worried because at that point I thought, this is probably near their bottom line. But the guy comes back with a counteroffer. The counteroffer is more than Chris Voss wants to pay. And the normal way things play out in these situations is that you end up meeting at a price somewhere in the middle between your price and the other guy's price. Chris does not want to do that. So he needs to neutralize the other guy's argument, which is, hey, look, we came down from the sticker price. You know, the real trick to bargaining is get the other side to bargain against themselves.

7:18You just lay back and let them do all the work. But you have to be nice about it. You know, you can't make them feel like you're beating them up. So he came back to me and he said, you know, we're going to counter. This is the amount. He was trying to be really positive and upbeat. So I said, you know, I'm really sorry because I shouldn't have even offered you a low price. And this counteroffer you came back to me with, that's phenomenal price. The truck is worth that. It's worth more than that. It's worth everything that you're asking for. It's a gorgeous truck. It's beautiful. And I'm embarrassed to say this, but I just can't pay your price.

7:55And that leaves them nowhere to go, especially if you're being really nice about it. Is this all stuff that's straight out of the FBI hostage negotiation handbook? It's kidnap bargaining. I wouldn't say 101, but I would say it's kind of master's level kidnap bargaining. The people at the car dealership, they never went back in their office and Googled your name and found out you were a hostage negotiator? No, thank God they didn't do that. No. They just thought I was, you know, another poor guy coming in off the street trying to buy a truck. After Chris's little performance of kindness, the sales guy says, all right, let me go talk to my boss.

8:28He leaves the room, time passes, and then he comes back. Came back with another offer, and this time he had smiley faces written all over the offer sheet, and you win, underlined three, four times. You know, and if he'd had balloons, he'd have brought balloons out to me, I think. And I said, I just, I'm sorry, I can't do it. I just, I can't do it. I was being his, what we call, you know, disarming empathy. The smiley faces on the page are looking up at Chris. The eager salesman is patting him on the back. But again, Chris does not change his offer. He got up and walked away from the table about four times, came back with a lower offer every time until he came back with my price.

9:06He came back to the original price that you'd asked for? Yeah, I beat him all the way down. How did you feel at the end of that? Well, even at that point in time, I said, look, you know, I got to make sure that I can do this. And so you have to give me till Monday. It's always good, he says, to sleep on a decision like that. So he goes around to other dealers. No one can beat the price. So he comes back and writes the check. He still has the car. I do. I drove it here this morning. I love it. It makes me very happy. And every time you get in, do you think, I paid a good price for that? I do. I suppose, besides the fact that I love the color, I feel like I paid a really good price for it.

9:55That story aired on Planet Money in 2012. Since then, Chris Voss has left Georgetown University and has written an excellent book about negotiations called Never Split the Difference. Let's bring back in our professors Malia Mason and Daniel Ames. Hello. Hello. So the negotiator's dilemma, listening to that particular case study, it seems that Chris Voss went all in on the stubborn side of this, just wanting to get the best deal. He did, but I also think he makes points about being empathic, right? Trying to be nice about it. And I think some people feel like there's that trade-off between you can be nice, but that means you're going to give away the farm.

10:42And I think Chris is trying to show there that you can be warm, polite, even friendly, but still resist capitulating. And in the book that Chris Voss wrote, he has many chapters about how to sort of make the person you're negotiating with solve your problems for you. He does a lot of like, but how can I do that? I want to give you what you want, but how would I possibly do that? And he says that the person you're negotiating with will often start coming up with solutions themselves. Something that we've done some research on is called constraint rationales. When you basically say, I can't afford this or I can't, I'd love to.

11:20You deserve more. I'd love to give you everything you're asking for. I just can't. Does it work? You have to be careful to be credible about it. You can't start backing off. You can't say, I can't spend a penny more and then start putting more money on the table because you lose all your credibility. But if you really can credibly say, like, I can't do any better than this, sometimes your counterpart will, as you say, start to try to solve your problem for you. There are some things that Chris Voss in that negotiation is clearly doing that he doesn't quite articulate, which is he's clearly done research into exactly what this car can be obtained for, because he said that he made his offer just a little bit above what it probably cost the dealership.

12:02And he goes and he looks, even after he has this fantastic deal, he goes and he looks at other dealerships. Exactly. And I think this is part of what Malia was talking about in terms of preparation being really critical to negotiation success. So he's gone in with sort of a kind of a first and final offer. I'm not going to move. But he hasn't done that randomly. He's done some homework to think about, like, what is a place where they could actually agree to? Because if he's put out a completely implausible number, then it's just going to be kind of a staring contest. And he's not going to land the deal there.

12:33So some of this is that he's done that homework. And then he's also understood kind of what his leverage is. What are his alternatives to this dealer? He went out and looked at other dealers and looked at other trucks and got other price points and is able to say, well, I've got a deal that's better than this one. I can go back and push harder. Or I can't find a deal that's better than this one. I don't want to let it slip away. And Chris Voss has this leverage because he doesn't need this car. I mean, he wants it, but he doesn't need it. And he can always walk away from the deal. And I should say that leverage that you talk about has a name that they teach you in business school.

13:09In fact, using this term is the universal proof that you've actually been to business school. And the term is BATNA. B-A-T-N-A, BATNA. And Malia, tell us what that means. What does it stand for? BATNA stands for Best Alternative to a Negotiated Agreement. It's your plan B. Power comes from being able to walk away from the table, not being dependent on your negotiation partner. And it would be easy for you to do that if you had an amazing alternative to them, if you had an amazing BATNA. So I feel like I'm getting two different messages here. One is you need to research and be flexible and give all these reasons for what you do.

13:47But then there is a value for sort of having a secret number inside you, you know, and knowing for sure that you might walk. Yeah, I think if you don't have, haven't done the research and you haven't worked out that number, that limit for yourself in advance, a good looking, nice smelling, charming counterpart can just mop the floor with you, can push you into a deal that you should say no to. People who have that discipline in advance to say, this is my limit. This is my internal tripwire. And I may not ever say that number out loud, but I know it's the number I won't go beyond. And they find a way to honor that.

14:22And that number, it's not arbitrary, right? That tripwire, It's based on your budget or it's based on the value of your no-deal alternative. What else do you have on the table? What else do you have on the table? Is there a term for this number, this tripwire thing? There are a couple terms for this. Sometimes we say reservation price or... Resistance point. Or walkaway point. They all basically mean your limit. The point at which you will say, no thanks. Now, I should say all of this is easier with things you want to buy, like cars, because there's multiple car dealerships. There's a lot of cars out there.

14:55Maybe you can go a couple extra months with the car you have. Coming up after our next case study, we'll talk about something that feels a little higher stress, which is salary negotiations. Let's do it.

15:12Getting someone to offer more after the break.

15:24This message comes from Capital One with the Capital One Saver Card. Earn unlimited 3 % cash back on dining and entertainment. Capital One. What's in your wallet? Terms apply. Details at CapitalOne.com. This message comes from the International Rescue Committee. Co-founded with help from Albert Einstein, the IRC has been providing humanitarian aid for more than 90 years. The IRC helps refugees whose lives are disrupted by conflict and disaster, supporting recovery efforts and responding within 72 hours of crisis. Donate today by visiting rescue.org slash rebuild. All right, MBA students, take your seats.

16:06I know you'll want to hear this next section because we'll be talking about making more money. Our case study isn't explicitly about salary. It's about getting more benefit out of a negotiation. but think about how the negotiator asks for more and how you can use that in a work context. This story is also hosted by David Kestenbaum from 2012.

16:33Adam Glinski teaches negotiation at Columbia, and his story takes place just after Thanksgiving. He's at an airport in North Carolina waiting to fly home, and a woman makes this announcement over the PA system. We are overbooked. We are looking for volunteers who can fly home tomorrow instead of today. If you think about it, this is a negotiation. I mean, on one side of the table, you've got the airline that needs some people to give up their seats. On the other side are the passengers who will be willing to give up their seats if there's a good offer on the table. In negotiations, one side has to go first.

17:04In this case, it's the airline. The woman over the PA system says we're looking for people willing to be bumped. And Adam says she offers a voucher toward a future flight. It was way overbooked. And so they started out at about$300. And I didn't really want to do it because you have to go the next day and stuff like that. Over the PA system, the amount keeps going up. $500. Adam does not have a lot of money, so that's tempting, but not tempting enough. Then it goes up again. $700. And eventually they're offering a$1 ,000 voucher for a flight that I paid$180 for. This, Adam thinks, this I can do.

17:39And most people in his shoes, they would say, okay. They probably wouldn't even see this as a negotiation. But Adam does. He goes up to the airline desk. He has a counteroffer. So I went up there and I said, so if I get bumped off this flight, will you put me in first class tomorrow? Yeah, we can do that. Now he's got a$1 ,000 voucher and he's going to fly first class. Then he says something else. I need to stay somewhere tonight since it's tomorrow. Will you put me in a hotel? I didn't want my parents to drive back and pick me up and stuff. And they said, yeah, we can do that. Voucher, first class seat the next day, hotel.

18:13The boy's got to eat, so will you pay for my dinner tonight? And they said, yeah, we can do that. And I said, now someone's supposed to pick me up in a car tonight. Can you get a car service, take me home tomorrow? And they said, yes, we can do that. This, this is the nibble. That's the technical term. You reach a general agreement,$1 ,000 is good for me. And then you say, oh, one more thing, one more thing. Asking the other side to throw in something small. In this case, these were things the airline probably did not care that much about. Probably had meal vouchers, probably had deals with the hotel, and probably had a first-class seat that was just going to be given as a free upgrade to some frequent flyer.

18:49And no one else got this. They all got the$1 ,000 voucher. It was about 10 of us who got bumped. But I was the only one to get first class, the only one to get the hotel, the only one to get the dinner, and the only one to get the car service. If you don't ask for something, you can't get it. The moral here? Always be negotiating. Even if it looks like you have a deal, you can often get more.

19:13David Kestenbaum from 2012. Here with us, listening along to the story, are this week's professors, Danielle Ames and Malia Mason. This was a story from your Columbia University colleague, Adam Galinsky. What did Adam do right in this negotiation? I think one thing he did right here that's a little bit of a contrast with the initial story, which was really just about price, Adam found ways to grow the pie. So I think he pushed as far as he could on the voucher value. But then he started to think, what are some other things that would be useful for me that might be within their power to give? They could put me up in a hotel.

19:47They could give me dinner. And so he started adding issues to the negotiation. And I think this is a great move. It makes me feel greedy when I do this. I just can't. I can ask for a little bit more, but asking for 10 servings, it just feels like too much. Am I wrong to feel that way? One of the questions I know I am asked all the time by my students is, can you give me a formula for how extreme or how pushy or how aggressive I should be in negotiations? And, you know, there is no formula that you can apply across the board. I think the reality is it should be conditioned on your definition of success.

20:25Sometimes you're trying to squeeze every last penny out of your negotiation partner. Sometimes you have to implement the deal with them, right? The point is that your strategy, including how assertive you are, should be conditioned on what success means for you in this particular negotiation with this person. Yeah, because sometimes negotiation is a one-time thing. You probably won't have to deal with that particular gate agent ever again. But often in a negotiation, you have to continue to work with the person every day. So you should care what they think about you. I don't think Adam was trying to be impolite or rude to the gate agent, but I don't think he was trying to build a long-term relationship.

21:03When you go into negotiate your compensation package with your manager, I think then that relationship looms larger in your definition of success. Sure, you want to walk away maybe with as much income or bonus as possible, but you also want to leave on reasonable terms with your colleagues. And so that's part of your definition of success. It shapes maybe how much you'll ask for, how hard you'll push. Let's talk about salary negotiations next. There are certainly things we've already talked about that apply to salary negotiations. Things like doing a lot of research, knowing what other people are being paid, having maybe a walkaway number, and certainly having other options is great, another job offer.

21:42Those are all things we talked about in the last segment. But what else, as you're coming into the salary negotiation, should we think about? Well, one thing that I think of, especially in light of the airline negotiation with Adam Galinsky, is this idea of potentially adding other things onto the table. I think what's critical here is to think of what are things that your counterpart can do for you that have value for you that are within their power to give. And then to flip that around and think, are there things that I could do cheaply, easily, that have value for my counterpart? Sometimes we call those lopsided priorities.

22:15It's an issue that matters more to one side than the other in a negotiation. Give us an example. Well, if I can say, you know, Malia, I'd like to hire you to come work for my company. and I put salary on the table and we're going back and forth and maybe we're at an impasse. We're not able to land on the right term. But then we realize... Well, would you let me work from home four days a week? And to be honest, I'd rather not, but it's within my power to give that to her. I can't go any higher on salary, but here's something I could cheaply give to her that doesn't, you know, maybe it's not ideal for me, but it doesn't hurt me that much.

22:51But for her, it has real value. So keep going. Ask for more. What else can you ask for, Malia? Is there a budget for me to attend a conference or to take a leadership course? Is that something you do at your organization? In fact, this is something we enthusiastically support. And actually, this is a great example that Malia's tapped into here because this is what we sometimes call compatible or aligned issues in a negotiation where we both want, get ready for it. The same outcome. So it's like we're negotiating and she wants a higher salary and I want to give her less. And she wants more days at home and I want to give her fewer.