Deal or Better Deal: Using Game Theory at the Negotiating Table
There are plenty of tips for aspiring traders, but none have much resonance for underdogs. Harvard researchers will tell you to “control your emotions” and not appear anxious to the other party. Viral posts on Twitter echo, “negotiations are won by whoever cares least” and “harness the power of detachment” – which is much easier said than done when entering negotiations with little power of detachment. negotiation, especially as the founder of a startup. The birth of a startup means a negotiation can make or break your business: the difference between getting it all off the ground or packing it all up.
Game theory in negotiation
So how do you overcome being the party with the most to lose at the negotiating table? game theory is a theoretical framework that predicts human behavior in the context of cooperative dilemmas. Economics students will remember that game theory teaches us the importance of trust in negotiation. In the classic thought experiment, prisoner’s dilemma, two burglars are arrested by the police and held in separate interrogation rooms where they are forced to confess to a crime. There are a number of possible outcomes in this “game”. If a player makes a deal with the interrogators to confess, he will receive a shorter sentence, and the other, who refuses, a longer sentence. If both players confess, they will both have to serve their time, but if there is mutual silence regardless of the temptation, they will both be free.
What is the link with day-to-day business negotiations? After all, raising venture capital isn’t a crime, but human cooperative instincts are similar across all areas of the game – whether it’s business, robbery, or getting your roommate.
The key to cooperation in the prisoner’s dilemma is communication. If both parties can effectively communicate their intentions, they can coordinate an agreement that is the best option for everyone. This is called the “Pareto efficient outcome” in economic jargon, because there is no other possible outcome that sees an individual better off or worse off. However, if communication breaks down and either party doubts their partner’s intentions, they will choose the outcome that is most beneficial to them on the assumption that the other will act in their own best interests. By effectively communicating their position and intentions, a skilled negotiator can overcome the prisoner’s dilemma. Here are three tactics for effective communication:
1. Anticipate your weaknesses and turn them into strengths
Novice traders may be tempted to bluff in order to win over potential investors or business partners, but the age-old strategy of “fake it until you get it” probably won’t work here. A smart negotiator will sense when a person is exaggerating their success. Bluffing tends to set off alarm bells, warning that an individual is only acting in their own best interests and may mislead you.
As game theory has learned, coordination cannot be achieved without trust, and trust requires honesty. To be honest, you have to be aware of yourself. Evaluate your business plan, anticipate possible questions and criticisms, carry out adequate market research and brand analysis, and above all, know your weaknesses. Only then can you effectively communicate the strengths and weaknesses of your business and offer potential solutions before any difficult questions. Giving the other party information is your most powerful tactic as a beginner negotiator and the best way to foster lasting, mutually beneficial relationships.
2. Keep all communications brief and to the point
An effective communicator breaks down complex topics into brief information acceptable to others. Extraneous language won’t save you at the bargaining table, and that’s why all companies should have a well-defined mission statement and core message. These documents help founders prepare and present their business as accurately as possible, leaving little to no confusion for the listening party. Key messages, a mission statement, and the company’s vision all help demonstrate how the company is filling a market gap and solving real, tangible problems.
3. Know when to push back and when to back off
Flexible thinkers make good business partners because it can be hard to take criticism, especially when you’re running a startup after sacrificing your free time, job security, and sanity to pursue your calling. That said, receiving criticism is an opportunity to show your ability to adapt to new challenges. It can be tempting to immediately quash harsh criticism, but denying what the other party believes to be true can make you appear naive and careless. Although they may say things you might not want to hear, your investors, advisors and other key stakeholders will prove to be your best long-term support system. Instead, listening and providing solutions to the problems they identify makes a more persuasive argument and demonstrates that you are a solution-focused leader. The world is filled with enough stubborn people – if you can see things from another person’s perspective, you’ll stand out from the crowd. Instead of wishing the deal went smoothly, challenge yourself to find value in dissenting opinions.
End of Game
When you’re building a project from scratch, it can be hard to find people who share your vision. Entering into negotiations with an investor or business partner is a stressful business, and it can be tempting to exaggerate your strengths and dismiss criticism. However, the more you try to hide the stakes of your business, the more suspicious you will appear vis-à-vis potential collaborators, and the less likely you will be to establish a working relationship with them. Following the logic of game theory, effective communication is the key to forging lasting business relationships and closing favorable deals. Next time you’re at the negotiating table, remember this: keep it honest, brief, and most importantly, keep it real.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.