Negotiation Tips

5 Ways Prospect Theory can Improve your Negotiations

by Erich Rifenburgh

Five examples of using Prospect Theory in your B2B negotiations.

Prospect Theory, developed by Daniel Kahneman and Amos Tversky, provides insights into how people make decisions under risk. By understanding these insights, you can become better negotiator.

Framing:. The way options are presented can impact people's choices. Try framing offers in terms of potential gains or losses to exploit loss aversion. We all  hate loss!

For example, present a salary offer as avoiding a loss, such as "You'll lose out on a $10,000 bonus if you don't accept this offer," to make it more appealing.

Risk Preference:. People are generally risk-averse when facing gains and risk-seeking when facing losses. Tailor your negotiation strategy accordingly.

If you want someone to take action, tell them what they have to lose rather than what they have to gain. The fear of loss is much more motivation than the promise of gain.  

Reference Points: Establishing reference points can shape perceptions of gains and losses. Set an anchor, like an initial offer or past agreement, to influence expectations and make subsequent offers more attractive. For example, a seller might start with a high price, making the subsequent lower price seem like a great deal. Anchor high, make a concession to what you wanted all along.  

Contingent Contracts: Utilize contingent contracts to capitalize on people's tendency to overweight small probabilities. There is a famous example where Arnold Schwarzenegger demanded a very small amount of money up front to make the movie Twins with Danny DiVito but demanded 20% of the back end. It netted him $35M!

Integrative Negotiations: Look for situations where both parties have different risk preferences, allowing you to allocate risks more efficiently. Exchange concessions on issues that are valued differently, resulting in agreements that benefit both sides.

For example, as a seller winning the deal may be a risky proposition given all of the competitors who have similar products and capabilities. For the buyer, not getting supply in time might be the riskier proposition. In this case, you can trade off risk preferences to land a deal with guaranteed delivery, making both sides satisfied.

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